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I admit, I did not read that in detail. Can someone explain how the "proof of liabilities" is proving that it contains all liabilites of an exchange? for exampl

I admit, I did not read that in detail. Can someone explain how the "proof of liabilities" is proving that it contains all liabilites of an exchange? for example the electricity bill that is coming to be paid next week or the off-book loan of x billion cryptocoin from your fellow exchange that you need to pay back also next week? Awfully lot of trust you seem to need in this fancy world of trustless money of the future.

Yizahi 4y ago
If you close your eyes and ears, then it is possible to imagine that such filthy thing as offchain liabilities doesn't exist. At least when Kraken posts about their "proof of liabilities" without actual audit of offline liabilities on Reddit r/cc, they readily eat that claim, no one challenges it. And then in every single post about this new trend, they will write that Kraken is somehow solvent due to this. I guess this was the point - if people already believe in something, it doesn't need to be real :) .
capableweb 4y ago
All benefits of cryptocurrencies goes out the window when you introduce centralized exchanges. "trustless" is referring to the protocols, not the ecosystems.
darawk 4y ago
The idea is that the exchange publishes a sum of their liabilities, and each individual user can check that their balance was uniquely included in the sum, cryptographically.
- beefield 4y ago
  Unfortunately this does not prove in any way that the exchange has included all liabilities in the sum, it only proves your deposit is included. A very, very different thing.
  - darawk 4y ago
    Of course. But it lets every individual check this, which means if any individual's balance is not included, they can publish that. It is a vast improvement over the current state.
    - beefield 4y ago
      The problem is not the ones who want to publish if their balance is missing. The problem is the ones who want to hide their balance is missing.
      - nwah1 4y ago
        For instance, if Alameda owes FTX billions of dollars, but both are owned by the same people.
      - darawk 4y ago
        This is addressed in the article.
- lottin 4y ago
  Users could falsely claim that their balance is wrong.
  - darawk 4y ago
    This would be easy to cryptographically certify, this is not a problem.
petesergeant 4y ago
I don't think it solves that at all, but, as I understand it, that's not been the problem _so far_. If someone has lent an exchange assets against its users' assets then it's not at all clear that they have the superior claim to those assets if the exchange goes bankrupt can't repay those liabilities.
- beefield 4y ago
  What? I just checked news last week and there was a small thing about an exchange called FTX that seemed to have exactly this problem.
  - petesergeant 4y ago
    My understanding is that FTX lent customer deposits to Alameda, who lost them, not that FTX owes money to Alameda. In that scenario, FTX wouldn't have been able to prove they held customer deposits.
    - giaour 4y ago
      Didn’t FTX just hold the customer deposits in a scam token after some financial shenanigans? You would still need auditors to determine what assets on a company’s books were worth their stated value and attest to their liquidity.
      - petesergeant 4y ago
        Right, but "hold the customer deposits in a scam token" means they no longer hold them in the real tokens, which would be obvious using the method in the linked article.
        giaour 4y ago
        Wouldn't this effectively reduce the role of the custodian from "bank-ish entity" to "safe deposit box operator"? The custodial entity would need to hold on to the exact assets provided by the customer (the equivalent of your bank holding on to the exact $ bills you originally deposited), which means they couldn't be used for revenue generating activities like investing or lending, which in turn means the custodian could only make money through user fees. Once the custodian is allowed to do anything that causes the exact tokens a customer deposited to be exchanged for another asset, that opens the door to FTX-style malfeasance.
pa7x1 4y ago
It's not necessarily about covering all liabilities of an enterprise nor all its assets. It's about building a proof that you hold your customer assets and you are not running a fractional reserve. You may still run an unprofitable business and perhaps at some point you go bankrupt. But at least all the customer assets are there and segregated from the business assets and you cannot use them as the piggy bank for your business.
- beefield 4y ago
  So, lets imagine you have been running this continuously from the beginning and there is absolutely nothing fishy on the chain of the events of the ledger that makes this proof. All customer deposits (1B worth of coins) are backed by respective assets (1B) in the portfolio. Unfortunately the business has been run badly, and in addition to this portfolio, the exchange has assets of one worthless laptop, but there are some tax liabilities worth 2B and an just found loan payable to Italian Mafia worth also 2B. Tax authorities file for bankruptcy. 1. How does the exchange ensure money is paid to the customers instead of Mafia or tax authorities? 2. If/when it can't, how these liabilities are included in the proof of liabilities? (note: this is a real and difficult problem. That's why there are laws, regulations and deposit insurances around customer funds in finance, which, yes, fail occasionally. I just do not see how that can be solved by blockchain.)
  - pa7x1 4y ago
    You make good points, this by itself is not sufficient. That doesn't mean it's not useful, though. For Centralized Exchange you need additional regulation to ensure that level of customer protection. And yet, regulation itself is not enough, as you can still defraud in a regulated entity. You need that the weight of criminal punishment is hard enough to disincentivize it. And you possibly need insurance (FDIC and equivalents) too. Hence why proponents argue to do things on-chain, where we have built-in guarantees and this issue disappears entirely.
- rsj_hn 4y ago
  > But at least all the customer assets are there and segregated from the business assets and you cannot use them as the piggy bank for your business. Why would they be segregated? The priority of creditors in a bankruptcy proceeding is controlled by courts that will order assets handed over to senior creditors whether they are holding "on chain" liabilities or not. It is the disclosure of such a contract that is the problem of understanding all liabilities, both on and off chain, as bankruptcy court doesn't care about the distinction.
stevedewald 4y ago
It doesn’t cover any off-chain liabilities. Note that for most exchanges a material portion (most?) of their liabilities will be off-chain—e.g. fiat customer deposits.

Yizahi 4y ago

If you close your eyes and ears, then it is possible to imagine that such filthy thing as offchain liabilities doesn't exist. At least when Kraken posts about their "proof of liabilities" without actual audit of offline liabilities on Reddit r/cc, they readily eat that claim, no one challenges it. And then in every single post about this new trend, they will write that Kraken is somehow solvent due to this. I guess this was the point - if people already believe in something, it doesn't need to be real :) .

capableweb 4y ago

All benefits of cryptocurrencies goes out the window when you introduce centralized exchanges. "trustless" is referring to the protocols, not the ecosystems.

darawk 4y ago

The idea is that the exchange publishes a sum of their liabilities, and each individual user can check that their balance was uniquely included in the sum, cryptographically.

beefield 4y ago
Unfortunately this does not prove in any way that the exchange has included all liabilities in the sum, it only proves your deposit is included. A very, very different thing.
- darawk 4y ago
  Of course. But it lets every individual check this, which means if any individual's balance is not included, they can publish that. It is a vast improvement over the current state.
  - beefield 4y ago
    The problem is not the ones who want to publish if their balance is missing. The problem is the ones who want to hide their balance is missing.
    - nwah1 4y ago
      For instance, if Alameda owes FTX billions of dollars, but both are owned by the same people.
    - darawk 4y ago
      This is addressed in the article.
lottin 4y ago
Users could falsely claim that their balance is wrong.
- darawk 4y ago
  This would be easy to cryptographically certify, this is not a problem.

petesergeant 4y ago

I don't think it solves that at all, but, as I understand it, that's not been the problem _so far_. If someone has lent an exchange assets against its users' assets then it's not at all clear that they have the superior claim to those assets if the exchange goes bankrupt can't repay those liabilities.

beefield 4y ago
What? I just checked news last week and there was a small thing about an exchange called FTX that seemed to have exactly this problem.
- petesergeant 4y ago
  My understanding is that FTX lent customer deposits to Alameda, who lost them, not that FTX owes money to Alameda. In that scenario, FTX wouldn't have been able to prove they held customer deposits.
  - giaour 4y ago
    Didn’t FTX just hold the customer deposits in a scam token after some financial shenanigans? You would still need auditors to determine what assets on a company’s books were worth their stated value and attest to their liquidity.
    - petesergeant 4y ago
      Right, but "hold the customer deposits in a scam token" means they no longer hold them in the real tokens, which would be obvious using the method in the linked article.
      - giaour 4y ago
        Wouldn't this effectively reduce the role of the custodian from "bank-ish entity" to "safe deposit box operator"? The custodial entity would need to hold on to the exact assets provided by the customer (the equivalent of your bank holding on to the exact $ bills you originally deposited), which means they couldn't be used for revenue generating activities like investing or lending, which in turn means the custodian could only make money through user fees. Once the custodian is allowed to do anything that causes the exact tokens a customer deposited to be exchanged for another asset, that opens the door to FTX-style malfeasance.

pa7x1 4y ago

It's not necessarily about covering all liabilities of an enterprise nor all its assets. It's about building a proof that you hold your customer assets and you are not running a fractional reserve. You may still run an unprofitable business and perhaps at some point you go bankrupt. But at least all the customer assets are there and segregated from the business assets and you cannot use them as the piggy bank for your business.

beefield 4y ago
So, lets imagine you have been running this continuously from the beginning and there is absolutely nothing fishy on the chain of the events of the ledger that makes this proof. All customer deposits (1B worth of coins) are backed by respective assets (1B) in the portfolio. Unfortunately the business has been run badly, and in addition to this portfolio, the exchange has assets of one worthless laptop, but there are some tax liabilities worth 2B and an just found loan payable to Italian Mafia worth also 2B. Tax authorities file for bankruptcy. 1. How does the exchange ensure money is paid to the customers instead of Mafia or tax authorities? 2. If/when it can't, how these liabilities are included in the proof of liabilities? (note: this is a real and difficult problem. That's why there are laws, regulations and deposit insurances around customer funds in finance, which, yes, fail occasionally. I just do not see how that can be solved by blockchain.)
- pa7x1 4y ago
  You make good points, this by itself is not sufficient. That doesn't mean it's not useful, though. For Centralized Exchange you need additional regulation to ensure that level of customer protection. And yet, regulation itself is not enough, as you can still defraud in a regulated entity. You need that the weight of criminal punishment is hard enough to disincentivize it. And you possibly need insurance (FDIC and equivalents) too. Hence why proponents argue to do things on-chain, where we have built-in guarantees and this issue disappears entirely.
rsj_hn 4y ago
> But at least all the customer assets are there and segregated from the business assets and you cannot use them as the piggy bank for your business. Why would they be segregated? The priority of creditors in a bankruptcy proceeding is controlled by courts that will order assets handed over to senior creditors whether they are holding "on chain" liabilities or not. It is the disclosure of such a contract that is the problem of understanding all liabilities, both on and off chain, as bankruptcy court doesn't care about the distinction.

stevedewald 4y ago

It doesn’t cover any off-chain liabilities. Note that for most exchanges a material portion (most?) of their liabilities will be off-chain—e.g. fiat customer deposits.