5 ms·

After not paying attention to cryptocurrency for a few years and then opening a Coinbase account earlier this year, I was SHOCKED how fast and easy everything w

by rory 6y ago

After not paying attention to cryptocurrency for a few years and then opening a Coinbase account earlier this year, I was SHOCKED how fast and easy everything was. From what I can discern as a user, they've made a great platform. My one worry-- it seems like they use a similar pattern to Robinhood where upon purchase they grant an asset immediately (synthetically?), and then settle up actual holdings after the fact. What kind of risk does that open them up to in an asset class as volatile as crypto?

BenoitP 6y ago
Was looking for the same kind of information. Do they publish proof of ownership of underlying assets? Or are they going naked for some amounts? Do they consider themselves as a bank, and vie for a 8% non-naked rate? In the MTGox days, the discrepancy could be viewed in the delay to take out one's coins; as well as in their market, which was displaying a very different prices than on other exchanges. Scary stuff I'm sure some HNers here will remember.
- throwaway192874 6y ago
  There's a 1:1 backing of crypto funds, there is no fractional reserve stuff going on. But lots of internet people like to speculate there due to technical issues that happen from time to time. A delay to take out coins != a fractional reserve. Exchanges operate with hot wallets that have limited throughput, there's a ton of reasons that particular withdrawals may be delayed that don't have anything do with having those assets. One of the more common scenarios you would see is the hot wallet running low of funds, and there's a delay before more funds can be sent from cold storage to the hot wallet to service more transactions. If more people are taking crypto off of Coinbase than sending it in, the hot wallet trends downwards. If whales make large withdrawals, it can take a huge leap downwards. Funny antecdote, whales see significantly more delays than your typical consumer but are used to it and have some lines of communication to get insight if they have concerns. The process to move funds from cold to hot starts, but it's intentionally slow and takes time. So sometimes withdrawals can be delayed until that process completes.
  - BenoitP 6y ago
    > There's a 1:1 backing of crypto funds Well, this isn't difficult to prove. Do they have a public process to display that 1:1 backing? Google is failing me, I can't find anything but this: https://blog.coinbase.com/a-behind-the-scenes-look-at-the-biggest-and-quietest-crypto-transfer-on-record-682ff4a6d9e4 https://blog.coinbase.com/a-behind-the-scenes-look-at-the-bi...
    - throwaway192874 6y ago
      For individuals this isn't hard, but for large institutions it's very non-trivial. There's a reason that none of the major exchanges do this, it's not just incompetence or lack of desire. Coinbase, and various other exchanges are regulated in the US so they undergo regular audits where having to prove funds is part of it. Some exchanges, I think it was Kraken, has published some version of those results, but the problem with these is at that point you're saying you trust the auditor and the process, which is another thing people would complain about anyways. Technically, it's also very nontrivial to prove ownership of millions of addresses when they are also constantly changing (due to new address generation). Proving ownership of addresses stored in cold storage is even more involved, and would actually put the funds at risk because you would need to us bring the key out of cold storage to do so. Furthermore, people would likely not be satisfied with a one-time proof, so you need to operationalize this and do it on some regular basis. Lastly, while this would be nice to have, it's frankly not something I expect any major exchange to do because it's simply not worth the investment. Most customers don't care and are happy to trust the government and regulations to ensure they are good enough. While I understand people are concerned because of what happened with MtGox, that doesn't mean that every other company after is involved in some big conspiracy about lying how much crypto they have. It's just FUD/conspiratorial thinking without real evidence to back it up. The exchange going down at key moments (read: when the app is seeing peak traffic at new milestones regularly) is basically expected for a young fast growing SV startup, and doesn't support the argument that they are nefarious things going on
loceng 6y ago
Interesting since the platform seems to go down, be unaccessible to users, most times that the price of Bitcoin starts to skyrocket - preventing many from impulse selling.
- throwaway192874 6y ago
  That's also the time when the system has to scale the most, so it's not exactly surprising to see this. Unfortunate and something that should be improved yes, but doesn't really support an argument of them trying to prevent people from selling since that is exactly when you'd expect the system to fall over.
  - loceng 6y ago
    Yes indeed that's an easy excuse for plausible deniability - yet this person I'm responding to has stated they've greatly improved speed, so why wouldn't they also have improved concurrency, redundancy, etc? We recently know that Coinbase has had bad behaviour of manipulating the price and find a measly $6 million for market manipulation, so it seems not outside their character.
    - throwaway192874 6y ago
      OP said this: > After not paying attention to cryptocurrency for a few years and then opening a Coinbase account earlier this year, I was SHOCKED how fast and easy everything was. I read this as having just created the account and impressed by the platform, not a comparison between the past and now shrug They've definitely done tons of work to try and address scaling problems, have solved many and will continue to do so, but it's not like you just "solve" scaling once and never have to think about it again. The scale they are seeing now is nothing like they saw in previous runs, so it's always new milestones, something new breaks and then something else to fix. There's also been a lack of a clear vision from engineering leadership at the top for many years which hasn't helped either. > We recently know that Coinbase has had bad behavior of manipulating the price and find a measly $6 million for market manipulation, so it seems not outside their character. My understanding of this is that a couple of internal systems accidentally interacted in a way that was later deemed bad, not an intentional manipulation. And when the COO noticed this action was taken to replace the system with a version that fixed this issue [0]. This was in 2015-2018 when they company was significantly smaller with less expertise on that front. If this had had a significant impact on consumers I would expect to see a larger fine, but I'm not at all well informed on the topic. Having worked at various startups, the old adage of "don't ascribe malice to what can be explained by incompetence" resonates with me. You so regularly see wild speculation happening on the outside when inside you're just like "wtf that was just a bug, not some grand conspiracy". I expect that this issue falls under that category, lack of knowledge rather than part of their "character" [0] https://decrypt.co/62155/coinbase-fined-6-5-million-over-trading-irregularities https://decrypt.co/62155/coinbase-fined-6-5-million-over-tra...
throwaway192874 6y ago
Fraud is a big part of any business with payments, but particularly crypto since if a fraudster can use a stolen credit card to acquire crypto and send it off platform before it's reversed, and Coinbase cannot reverse that loss like you can do with traditional financial systems. To make up for this, the risk & fraud team at Coinbase does incredible work to have very low fraud rates compared to other tech companies and has specific product features to help mitigate this too. For example, one of those is that when you buy with certain types of payment methods, you can't actually remove the asset from the platform until after some computed period of time. That value is based on a variety of factors powered by some fancy ML stuff and other things to help reduce the risk of loss. Actually recently an ex-Coinbase employee founded a new startup offering fraud-prevention as a service (https://www.sardine.ai/ https://www.sardine.ai/). In short, Coinbase is very good at reducing fraud on the platform and invests a lot in improving that.
tigger0jk 6y ago
I believe coinbase holds a lot of crypto - in the robinhood analogy, coinbase is their own clearing house. So they don't have to post collateral to themselves, but if crypto movement was all in one direction on a given day, they might rely on the market instead of the liquidity they themselves provide. Maybe in such a scenario they would be clever enough to NOT resolve all the trades instantly.
- rory 6y ago
  Got it, so in general, they are _actually_ fronting you the asset (although you can't take it out of their control until you've paid up), as opposed to an IOU.
  - throwaway192874 6y ago
    Yeah, they already have the asset when you click buy. On "consumer", the blue one, when you click buy it literally does a direct market order off of Coinbase Pro to purchase the asset, and since it's on Pro they already have the crypto on platform.

by rory 6y ago

BenoitP 6y ago

Was looking for the same kind of information. Do they publish proof of ownership of underlying assets? Or are they going naked for some amounts? Do they consider themselves as a bank, and vie for a 8% non-naked rate? In the MTGox days, the discrepancy could be viewed in the delay to take out one's coins; as well as in their market, which was displaying a very different prices than on other exchanges. Scary stuff I'm sure some HNers here will remember.

throwaway192874 6y ago
There's a 1:1 backing of crypto funds, there is no fractional reserve stuff going on. But lots of internet people like to speculate there due to technical issues that happen from time to time. A delay to take out coins != a fractional reserve. Exchanges operate with hot wallets that have limited throughput, there's a ton of reasons that particular withdrawals may be delayed that don't have anything do with having those assets. One of the more common scenarios you would see is the hot wallet running low of funds, and there's a delay before more funds can be sent from cold storage to the hot wallet to service more transactions. If more people are taking crypto off of Coinbase than sending it in, the hot wallet trends downwards. If whales make large withdrawals, it can take a huge leap downwards. Funny antecdote, whales see significantly more delays than your typical consumer but are used to it and have some lines of communication to get insight if they have concerns. The process to move funds from cold to hot starts, but it's intentionally slow and takes time. So sometimes withdrawals can be delayed until that process completes.
- BenoitP 6y ago
  > There's a 1:1 backing of crypto funds Well, this isn't difficult to prove. Do they have a public process to display that 1:1 backing? Google is failing me, I can't find anything but this: https://blog.coinbase.com/a-behind-the-scenes-look-at-the-biggest-and-quietest-crypto-transfer-on-record-682ff4a6d9e4 https://blog.coinbase.com/a-behind-the-scenes-look-at-the-bi...
  - throwaway192874 6y ago
    For individuals this isn't hard, but for large institutions it's very non-trivial. There's a reason that none of the major exchanges do this, it's not just incompetence or lack of desire. Coinbase, and various other exchanges are regulated in the US so they undergo regular audits where having to prove funds is part of it. Some exchanges, I think it was Kraken, has published some version of those results, but the problem with these is at that point you're saying you trust the auditor and the process, which is another thing people would complain about anyways. Technically, it's also very nontrivial to prove ownership of millions of addresses when they are also constantly changing (due to new address generation). Proving ownership of addresses stored in cold storage is even more involved, and would actually put the funds at risk because you would need to us bring the key out of cold storage to do so. Furthermore, people would likely not be satisfied with a one-time proof, so you need to operationalize this and do it on some regular basis. Lastly, while this would be nice to have, it's frankly not something I expect any major exchange to do because it's simply not worth the investment. Most customers don't care and are happy to trust the government and regulations to ensure they are good enough. While I understand people are concerned because of what happened with MtGox, that doesn't mean that every other company after is involved in some big conspiracy about lying how much crypto they have. It's just FUD/conspiratorial thinking without real evidence to back it up. The exchange going down at key moments (read: when the app is seeing peak traffic at new milestones regularly) is basically expected for a young fast growing SV startup, and doesn't support the argument that they are nefarious things going on

loceng 6y ago

Interesting since the platform seems to go down, be unaccessible to users, most times that the price of Bitcoin starts to skyrocket - preventing many from impulse selling.

throwaway192874 6y ago
That's also the time when the system has to scale the most, so it's not exactly surprising to see this. Unfortunate and something that should be improved yes, but doesn't really support an argument of them trying to prevent people from selling since that is exactly when you'd expect the system to fall over.
- loceng 6y ago
  Yes indeed that's an easy excuse for plausible deniability - yet this person I'm responding to has stated they've greatly improved speed, so why wouldn't they also have improved concurrency, redundancy, etc? We recently know that Coinbase has had bad behaviour of manipulating the price and find a measly $6 million for market manipulation, so it seems not outside their character.
  - throwaway192874 6y ago
    OP said this: > After not paying attention to cryptocurrency for a few years and then opening a Coinbase account earlier this year, I was SHOCKED how fast and easy everything was. I read this as having just created the account and impressed by the platform, not a comparison between the past and now shrug They've definitely done tons of work to try and address scaling problems, have solved many and will continue to do so, but it's not like you just "solve" scaling once and never have to think about it again. The scale they are seeing now is nothing like they saw in previous runs, so it's always new milestones, something new breaks and then something else to fix. There's also been a lack of a clear vision from engineering leadership at the top for many years which hasn't helped either. > We recently know that Coinbase has had bad behavior of manipulating the price and find a measly $6 million for market manipulation, so it seems not outside their character. My understanding of this is that a couple of internal systems accidentally interacted in a way that was later deemed bad, not an intentional manipulation. And when the COO noticed this action was taken to replace the system with a version that fixed this issue [0]. This was in 2015-2018 when they company was significantly smaller with less expertise on that front. If this had had a significant impact on consumers I would expect to see a larger fine, but I'm not at all well informed on the topic. Having worked at various startups, the old adage of "don't ascribe malice to what can be explained by incompetence" resonates with me. You so regularly see wild speculation happening on the outside when inside you're just like "wtf that was just a bug, not some grand conspiracy". I expect that this issue falls under that category, lack of knowledge rather than part of their "character" [0] https://decrypt.co/62155/coinbase-fined-6-5-million-over-trading-irregularities https://decrypt.co/62155/coinbase-fined-6-5-million-over-tra...

throwaway192874 6y ago

Fraud is a big part of any business with payments, but particularly crypto since if a fraudster can use a stolen credit card to acquire crypto and send it off platform before it's reversed, and Coinbase cannot reverse that loss like you can do with traditional financial systems. To make up for this, the risk & fraud team at Coinbase does incredible work to have very low fraud rates compared to other tech companies and has specific product features to help mitigate this too. For example, one of those is that when you buy with certain types of payment methods, you can't actually remove the asset from the platform until after some computed period of time. That value is based on a variety of factors powered by some fancy ML stuff and other things to help reduce the risk of loss. Actually recently an ex-Coinbase employee founded a new startup offering fraud-prevention as a service (https://www.sardine.ai/ https://www.sardine.ai/). In short, Coinbase is very good at reducing fraud on the platform and invests a lot in improving that.

tigger0jk 6y ago

I believe coinbase holds a lot of crypto - in the robinhood analogy, coinbase is their own clearing house. So they don't have to post collateral to themselves, but if crypto movement was all in one direction on a given day, they might rely on the market instead of the liquidity they themselves provide. Maybe in such a scenario they would be clever enough to NOT resolve all the trades instantly.

rory 6y ago
Got it, so in general, they are _actually_ fronting you the asset (although you can't take it out of their control until you've paid up), as opposed to an IOU.
- throwaway192874 6y ago
  Yeah, they already have the asset when you click buy. On "consumer", the blue one, when you click buy it literally does a direct market order off of Coinbase Pro to purchase the asset, and since it's on Pro they already have the crypto on platform.