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Anybody have any resources on how an exchange runs out of money. I thought being a market it can only facilitate demand and supply matching. So how does it run

Anybody have any resources on how an exchange runs out of money. I thought being a market it can only facilitate demand and supply matching. So how does it run out of money ?

bhawks 4y ago
You need to think along the dimension of time. A centralized exchange (or really any entity that has the concept of an account) has a liability to each user of that user's account balance. (The contents of those balances are assets for the user not the exchange). Now in crypto (and finance in general) users tend to leave their assets with the exchange and trade between different assets over time. The temptation for the centralized exchange becomes - well our users aren't gonna come claim their assets all at once, so let's make their trading notional and put the customer asset to work for our own interest. If someone wants a withdrawal we'll figure out how to make it happen. Now this is how a bank can offer a savings account but also underwrite mortgage, business and auto loans using the savers capital. Thru numerous failures the traditional financial system has been regulated to a point where banks usually don't blow up too badly (they totally still do though.) FTX ramped up putting users money to work to insane levels. At some point user funds were used to bail out a margin call that Alameda Research (Sam bankman fried's other company - a hedge fund) faced. At this point both companies became zombies and once a balance sheet leaked to the press, the crypto community realized their money was long gone.
- unmole 4y ago
  > (and finance in general) users tend to leave their assets with the exchange At least in the normal exchanges that I'm familiar with, traders post collateral with brokers who then present it to the exchange. The assets themselves are held with depositories and trades are settled by clearing houses. Crypto exchanges subsume the roles of what should be independent entities. When temptation strikes, this makes misappropriation much easier.
- BoiledCabbage 4y ago
  > Now this is how a bank can offer a savings account but also underwrite mortgage, business and auto loans using the savers capital. Thru numerous failures the traditional financial system has been regulated to a point where banks usually don't blow up too badly (they totally still do though.) Specifically through laws that say entities that hold customers money in certain ways can't arbitrarily then use that money to speculate on risky investments. Namely because they can cause huge losses (especially via bubbles that burst) leaving the customers SOL.
BoiledCabbage 4y ago
> I thought being a market it can only facilitate demand and supply matching. Who exactly is regulating that assumption?
ffggvv 4y ago
because instead of just holding the customers money and not touching it, they took it and loaned it to alameda trading, and then when people asked for their money it was tied up in alamedas trades.

Anybody have any resources on how an exchange runs out of money. I thought being a market it can only facilitate demand and supply matching. So how does it run out of money ?

bhawks 4y ago

You need to think along the dimension of time. A centralized exchange (or really any entity that has the concept of an account) has a liability to each user of that user's account balance. (The contents of those balances are assets for the user not the exchange). Now in crypto (and finance in general) users tend to leave their assets with the exchange and trade between different assets over time. The temptation for the centralized exchange becomes - well our users aren't gonna come claim their assets all at once, so let's make their trading notional and put the customer asset to work for our own interest. If someone wants a withdrawal we'll figure out how to make it happen. Now this is how a bank can offer a savings account but also underwrite mortgage, business and auto loans using the savers capital. Thru numerous failures the traditional financial system has been regulated to a point where banks usually don't blow up too badly (they totally still do though.) FTX ramped up putting users money to work to insane levels. At some point user funds were used to bail out a margin call that Alameda Research (Sam bankman fried's other company - a hedge fund) faced. At this point both companies became zombies and once a balance sheet leaked to the press, the crypto community realized their money was long gone.

unmole 4y ago
> (and finance in general) users tend to leave their assets with the exchange At least in the normal exchanges that I'm familiar with, traders post collateral with brokers who then present it to the exchange. The assets themselves are held with depositories and trades are settled by clearing houses. Crypto exchanges subsume the roles of what should be independent entities. When temptation strikes, this makes misappropriation much easier.
BoiledCabbage 4y ago
> Now this is how a bank can offer a savings account but also underwrite mortgage, business and auto loans using the savers capital. Thru numerous failures the traditional financial system has been regulated to a point where banks usually don't blow up too badly (they totally still do though.) Specifically through laws that say entities that hold customers money in certain ways can't arbitrarily then use that money to speculate on risky investments. Namely because they can cause huge losses (especially via bubbles that burst) leaving the customers SOL.

BoiledCabbage 4y ago

> I thought being a market it can only facilitate demand and supply matching. Who exactly is regulating that assumption?

ffggvv 4y ago

because instead of just holding the customers money and not touching it, they took it and loaned it to alameda trading, and then when people asked for their money it was tied up in alamedas trades.