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Premise: proving that you are solvent using cryptographic means Answer: let's re-invent accounting. Look the problem is this, as an "exchange", to be profitab

Premise: proving that you are solvent using cryptographic means Answer: let's re-invent accounting. Look the problem is this, as an "exchange", to be profitable you either need to charge fees, or do some sort of fractional reserve, using deposited value as capital for your Exchange's investments. If you go for option one, then you will be undercut by someone doing option two. The tradeoff being, number two is more likely to loose all your customer's cash. The value of something is more often than not irrational. This means that there is subjectivity in the value of assets. You can't technology your way out of that. This means that its perfectly possible to prove that you have liquid assets that will cover your present position. However thats expensive to maintain. So you start buying longer term more illiquid assets (think property, commodities, companies, etc) some of these are liquid in a day, others months. Worse still the value of them depends on how and when you sell them. So sure you can have assets that cover all your liabilities one day, then due to a re-valuation, not have enough. Thats not the same as solvent though. But, all of this neatly misses the point of crypto. If its a practical payment system, rather than an investment, you wouldn't hold your crypto at an exchange. You hold it your self and move it when you need to convert/liquidate.

dmak 4y ago
Serious question. Why didn't accounting help discover the solvency issues for FTX?
- edf13 4y ago
  Because they had no accounts... their record keeping was not there. They didn't know where funds were, who was using them and what for.
  - hef19898 4y ago
    In short, they didn't have accounting. Nor where their books audited. FTX is a great example of ehy banks, and every other company, has regular audits of their books. As is Wirecard, but they didn't steal customers money. Just compare the "balance sheets" SBF prepares to a proper audited one, and the differences are clear as day. One can grab any audoted balance sheet from any publicly traded US company of the SEC website, I'd pick one from a financial insitution.
    - chrisco255 4y ago
      They of course did have accounting and they were audited: https://thedeepdive.ca/ftxs-auditors-apparently-could-see-no-holes-in-the-failed-crypto-exchanges-story/ https://thedeepdive.ca/ftxs-auditors-apparently-could-see-no... They also had every license they could get: https://help.ftx.com/hc/en-us/articles/360056976411-Jurisdiction-regulations-licensing-and-practices https://help.ftx.com/hc/en-us/articles/360056976411-Jurisdic... But given their complex corporate structure that involved a number of offshore entities, it was possible for the CEO to play a shell game. Also audits are merely snapshots in time.
      - shawabawa3 4y ago
        They were audited, but by an unknown auditing firm called "Prager Metis" who bragged about being the first auditing firm with a metaverse headquarters They were likely corrupt and paid off by FTX to not audit properly
        smcl 4y ago
        I don't know if we need to assume corruption here. It's probably more likely they didn't fully understand what they were doing, had a few spreadsheets waved in front of them and didn't really look into any of it particularly closely.
        hef19898 4y ago
        So, FTX choose the right auditing firm for the job.
        smcl 4y ago
        Oh yeah whether it was corruption or inexperience, it was a match made in heaven
      - hef19898 4y ago
        Ah, yeah, those "audits". Done on only a small portion of FTX and by one auditor that the guy who cleaned up Enron doesn't know anything about (forgot which one of those two, but I think Armanino was called out in the Chapter 11 finding as being kind of suspicious; EDIT: the called out one was Prager Metis, see the other sister comment). So, these "audits" are basically worthless, and in a different category like, say, a properly conducted SOX audit. Seriously, read the Chapter 11 filing from the new CEO. It explains a lot of those topics. And yes, my answer to all those crypto related shenanigans is proper government oversight. If you act like a bank, you have to be regulated like a bank. If you act as a securities trader, same thing. As an investment bank / fund? Likewise. That you made up the securities and assets you trade in and manage by yourself and literally out of thin air (and some electricity and some GPUs) shouldn't change that.
- sschueller 4y ago
  Because no one wanted to look at it. Softbank, Sequoia and many others that would have had access didn't do their job.
  - huijzer 4y ago
    > Because no one wanted to look at it. Softbank, Sequoia and many others that would have had access didn't do their job. According to John J. Ray on the 17th of November in filings to the U.S. Bankruptcy Court [1]: "The audit firm for the WRS Silo, Armanio LLP, was a firm with which I am professionally familiar. The audit firm for the Dotcom Silo was Prager Metis, a firm with which I am not familiar and whose website indicates that they are the 'first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland' 56. I have substantial concerns as to the information presented in these audited financial statements, especially with respect to the Dotcom Silo. As a practical matter, I do not believe it appropriate for stakeholders or the Court to rely on audited financial statements as a reliable indication of the financial circumstances of these Silos. 57. The Debtors have not yet been able to locate any audited financial statements with respect to the Alameda Silo or the Ventures Silo." That isn't to say that the behavior of Softbank et al isn't questionable. They probably knew very well that things looked fishy, but also probably knew that they would likely see very handsome returns in the short-term. [1]: https://pacer-documents.s3.amazonaws.com/33/188450/042020648197.pdf https://pacer-documents.s3.amazonaws.com/33/188450/042020648...
  - foobarbecue 4y ago
    Ugh softbank strikes again. They sure are great at sure diligence...
- giaour 4y ago
  It did? The whole collapse was kicked off by someone looking at the books and raising an alarm. If you’re instead asking why financial audits paid for by FTX didn’t publicize the company’s solvency issues, well, we’ll all find out during the upcoming bankruptcy proceedings.
  - dmak 4y ago
    It was kicked off be someone leaking the balance sheet, but no prior audits and due diligence from ventures were able to discover it.
    - toomuchtodo 4y ago
      Then due diligence wasn’t done. This was not a complicated fraud. Someone competent simply needed to ask the right questions.
Seanambers 4y ago
Vitalik doesn't seem to be very smart. His blog postings are just useless rambles. He's a snake oil salesman.
- helloooooooo 4y ago
  Literally read any of his other blog posts to know that it is not true. He has done some significant work in advancing ZKPs
  - Seanambers 4y ago
    Oh, yeah i'm not arguing against his technical knowledge. But thats where he should stay as well.
- Keyframe 4y ago
  Care to share any examples?
  - hef19898 4y ago
    Like trying to reinvent accounting principles and solutions using a blockchain?
- pixelpoet 4y ago
  > Vitalik doesn't seem to be very smart. Now there's an opinion which betrays an overwhelming anti-crypto bias.
fredgrott 4y ago
Note, there could be option 3 whereas its fractional but a gov-owned central bank entity. Where pure crypto exchanges get into problems with fractional reserves is loaning out, etc. via their own invented tokens. Why? Because then they are setting up themselves as Central Bank with their own Reserve without the power of printing money and other gov things to counter Bank runs. FTX could have done less than stellar legal trading of FTT in bull market and would have still blown up as evidenced by some of the firms it acquired. We are still at the original economic problem when a crypto exchange sets it self up as Federal Reserve
- imtringued 4y ago
  Yeah exactly, fractional reserve does not work without a well developed inter banking network provided by a central bank. That just means that fractional reserve banking is inherently instable and requires periodic bailouts.
aww_dang 4y ago
Presumably there would be value for users in knowing that their deposits are covered. Therefore, users who perceive value in this way would be willing to pay a premium. There's also the possibility of exchange insiders trading against user's on-platform stop losses to profit. >So sure you can have assets that cover all your liabilities one day, then due to a re-valuation, not have enough. I understood this as a proposal to verify customers could withdraw their deposited coins. If they have traded into another asset, then they would still be able to withdraw. Not sure what you meant here? >But, all of this neatly misses the point of crypto. If its a practical payment system, rather than an investment, you wouldn't hold your crypto at an exchange. You hold it yourself and move it when you need to convert/liquidate. Agree about the speculative nature. It would still create more trust for traders or frequent users of an exchange. Keeping coins off-exchange eliminates the risk entirely. However if users expect to trade on a CEX, they would still have to expose themselves to that risk for the duration of their trade.
- hef19898 4y ago
  >> Presumably there would be value for users in knowing that their deposits are covered. Therefore, users who perceive value in this way would be willing to pay a premium. Like banks which have to ensure, where I live up to 100k €, customer deposits?
  - aww_dang 4y ago
    Private insurance schemes could offer another layer of protection and financialization. Under that scenario, fractional reserves could be used and insurers could be on the hook for mishaps. The article describes a technical solution for verifiable full reserves. Generally bank deposits are insured by the government. The central bank pledges to bail out customers for that minimum amount. Can't speak to the specifics of your area, but that is the common practice.
ramijames 4y ago
It's not reinventing accounting. It's making sure that the accounting you do is public because that allows for trust. I think it would be cool if we, as a society, had easy API access to everything our governments spend their money on. Wouldn't you say that would be for the greater good? That's exactly what Vitalik is proposing.
- indymike 4y ago
  Making something public doesn't solve the problem. Deceiving the public is easy and the public is duped frequently. Making accounting public doesn't solve the problem at all.
  - CharlieDigital 4y ago
    You're right that making it public alone doesn't solve the problem since it is easy to "cook the books". But if it's public and the results are the side effect of each transaction (e.g. the accounting is rules-driven and automatic as part of the system itself), I think it can change the game.
    - hef19898 4y ago
      In which case cryoto would even be less private than traditional banking, I guess.
    - giaour 4y ago
      So, all we need for this to succeed is for the ethereum blockchain to be the ultimate source of truth for all finance. So long as “off chain” assets of variable liquidity exist, it seems like you could absolutely cook the books.
  - viscanti 4y ago
    It's not making accounting public. It's making accounting public in a way that you can't dupe the public. There's a question if that's possible, but you're arguing against a straw man here. I'm skeptical that they'll come up with something that convinces everyone that their new version of public accounting can be trusted, but maybe there's something novel they can come up with that will convince the skeptics.
astoor 4y ago
Looking for a cryptographic solution to this is certainly missing the point - it presupposes cryptocurrency coins and tokens are assets in the traditional sense, which they are not. At best they are like casino tokens - they have no intrinsic value, no legal entitlement to anything, and their use is entirely at the discretion of the issuing casino. That works fine for casinos because everything operates within the casino. The problem is that cryptocurrency wants to go outside the cryptocurrency sphere and into the real world, which is something that it is simply not designed to do. As we have seen, this leads to endless exploits, e.g. VCs and exchanges printing up billions of dollars worth of tokens, claiming they are actual assets (imagine a real casino printing chips with a total face value of $1.6 billion and claiming they had $1.6 billion in assets), convincing retail "investors" to exchange real money for those "assets", and then using that real money to gamble in different casinos.
- hef19898 4y ago
  You are aware that casinos, and their "tokens", are pretty well regulated? Not the least becasue they are great way to launder money?
  - astoor 4y ago
    Yes, casinos are pretty well regulated in most countries, which is why I wrote "At best they [cryptocurrency coins and tokens] are like casino tokens". Although casinos don't have a spotless record, e.g. US$63 million from the 2016 Bangladesh Bank cyber heist is suspected to have been laundered via casinos in Manilla.
- naasking 4y ago
  > they have no intrinsic value There is no such thing beyond food, water and shelter.
  - syzarian 4y ago
    Intrinsic is not the right word to use but the overall point that was made is correct. A $1 U.S. bill has “intrinsic” value that comes from the backing of the United States government and an accompanying set of laws regarding usage.

dmak 4y ago

Serious question. Why didn't accounting help discover the solvency issues for FTX?

edf13 4y ago
Because they had no accounts... their record keeping was not there. They didn't know where funds were, who was using them and what for.
- hef19898 4y ago
  In short, they didn't have accounting. Nor where their books audited. FTX is a great example of ehy banks, and every other company, has regular audits of their books. As is Wirecard, but they didn't steal customers money. Just compare the "balance sheets" SBF prepares to a proper audited one, and the differences are clear as day. One can grab any audoted balance sheet from any publicly traded US company of the SEC website, I'd pick one from a financial insitution.
  - chrisco255 4y ago
    They of course did have accounting and they were audited: https://thedeepdive.ca/ftxs-auditors-apparently-could-see-no-holes-in-the-failed-crypto-exchanges-story/ https://thedeepdive.ca/ftxs-auditors-apparently-could-see-no... They also had every license they could get: https://help.ftx.com/hc/en-us/articles/360056976411-Jurisdiction-regulations-licensing-and-practices https://help.ftx.com/hc/en-us/articles/360056976411-Jurisdic... But given their complex corporate structure that involved a number of offshore entities, it was possible for the CEO to play a shell game. Also audits are merely snapshots in time.
    - shawabawa3 4y ago
      They were audited, but by an unknown auditing firm called "Prager Metis" who bragged about being the first auditing firm with a metaverse headquarters They were likely corrupt and paid off by FTX to not audit properly
      - smcl 4y ago
        I don't know if we need to assume corruption here. It's probably more likely they didn't fully understand what they were doing, had a few spreadsheets waved in front of them and didn't really look into any of it particularly closely.
        hef19898 4y ago
        So, FTX choose the right auditing firm for the job.
        smcl 4y ago
        Oh yeah whether it was corruption or inexperience, it was a match made in heaven
    - hef19898 4y ago
      Ah, yeah, those "audits". Done on only a small portion of FTX and by one auditor that the guy who cleaned up Enron doesn't know anything about (forgot which one of those two, but I think Armanino was called out in the Chapter 11 finding as being kind of suspicious; EDIT: the called out one was Prager Metis, see the other sister comment). So, these "audits" are basically worthless, and in a different category like, say, a properly conducted SOX audit. Seriously, read the Chapter 11 filing from the new CEO. It explains a lot of those topics. And yes, my answer to all those crypto related shenanigans is proper government oversight. If you act like a bank, you have to be regulated like a bank. If you act as a securities trader, same thing. As an investment bank / fund? Likewise. That you made up the securities and assets you trade in and manage by yourself and literally out of thin air (and some electricity and some GPUs) shouldn't change that.
sschueller 4y ago
Because no one wanted to look at it. Softbank, Sequoia and many others that would have had access didn't do their job.
- huijzer 4y ago
  > Because no one wanted to look at it. Softbank, Sequoia and many others that would have had access didn't do their job. According to John J. Ray on the 17th of November in filings to the U.S. Bankruptcy Court [1]: "The audit firm for the WRS Silo, Armanio LLP, was a firm with which I am professionally familiar. The audit firm for the Dotcom Silo was Prager Metis, a firm with which I am not familiar and whose website indicates that they are the 'first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland' 56. I have substantial concerns as to the information presented in these audited financial statements, especially with respect to the Dotcom Silo. As a practical matter, I do not believe it appropriate for stakeholders or the Court to rely on audited financial statements as a reliable indication of the financial circumstances of these Silos. 57. The Debtors have not yet been able to locate any audited financial statements with respect to the Alameda Silo or the Ventures Silo." That isn't to say that the behavior of Softbank et al isn't questionable. They probably knew very well that things looked fishy, but also probably knew that they would likely see very handsome returns in the short-term. [1]: https://pacer-documents.s3.amazonaws.com/33/188450/042020648197.pdf https://pacer-documents.s3.amazonaws.com/33/188450/042020648...
- foobarbecue 4y ago
  Ugh softbank strikes again. They sure are great at sure diligence...
giaour 4y ago
It did? The whole collapse was kicked off by someone looking at the books and raising an alarm. If you’re instead asking why financial audits paid for by FTX didn’t publicize the company’s solvency issues, well, we’ll all find out during the upcoming bankruptcy proceedings.
- dmak 4y ago
  It was kicked off be someone leaking the balance sheet, but no prior audits and due diligence from ventures were able to discover it.
  - toomuchtodo 4y ago
    Then due diligence wasn’t done. This was not a complicated fraud. Someone competent simply needed to ask the right questions.

Seanambers 4y ago

Vitalik doesn't seem to be very smart. His blog postings are just useless rambles. He's a snake oil salesman.

helloooooooo 4y ago
Literally read any of his other blog posts to know that it is not true. He has done some significant work in advancing ZKPs
- Seanambers 4y ago
  Oh, yeah i'm not arguing against his technical knowledge. But thats where he should stay as well.
Keyframe 4y ago
Care to share any examples?
- hef19898 4y ago
  Like trying to reinvent accounting principles and solutions using a blockchain?
pixelpoet 4y ago
> Vitalik doesn't seem to be very smart. Now there's an opinion which betrays an overwhelming anti-crypto bias.

fredgrott 4y ago

Note, there could be option 3 whereas its fractional but a gov-owned central bank entity. Where pure crypto exchanges get into problems with fractional reserves is loaning out, etc. via their own invented tokens. Why? Because then they are setting up themselves as Central Bank with their own Reserve without the power of printing money and other gov things to counter Bank runs. FTX could have done less than stellar legal trading of FTT in bull market and would have still blown up as evidenced by some of the firms it acquired. We are still at the original economic problem when a crypto exchange sets it self up as Federal Reserve

imtringued 4y ago
Yeah exactly, fractional reserve does not work without a well developed inter banking network provided by a central bank. That just means that fractional reserve banking is inherently instable and requires periodic bailouts.

aww_dang 4y ago

Presumably there would be value for users in knowing that their deposits are covered. Therefore, users who perceive value in this way would be willing to pay a premium. There's also the possibility of exchange insiders trading against user's on-platform stop losses to profit. >So sure you can have assets that cover all your liabilities one day, then due to a re-valuation, not have enough. I understood this as a proposal to verify customers could withdraw their deposited coins. If they have traded into another asset, then they would still be able to withdraw. Not sure what you meant here? >But, all of this neatly misses the point of crypto. If its a practical payment system, rather than an investment, you wouldn't hold your crypto at an exchange. You hold it yourself and move it when you need to convert/liquidate. Agree about the speculative nature. It would still create more trust for traders or frequent users of an exchange. Keeping coins off-exchange eliminates the risk entirely. However if users expect to trade on a CEX, they would still have to expose themselves to that risk for the duration of their trade.

hef19898 4y ago
>> Presumably there would be value for users in knowing that their deposits are covered. Therefore, users who perceive value in this way would be willing to pay a premium. Like banks which have to ensure, where I live up to 100k €, customer deposits?
- aww_dang 4y ago
  Private insurance schemes could offer another layer of protection and financialization. Under that scenario, fractional reserves could be used and insurers could be on the hook for mishaps. The article describes a technical solution for verifiable full reserves. Generally bank deposits are insured by the government. The central bank pledges to bail out customers for that minimum amount. Can't speak to the specifics of your area, but that is the common practice.

ramijames 4y ago

It's not reinventing accounting. It's making sure that the accounting you do is public because that allows for trust. I think it would be cool if we, as a society, had easy API access to everything our governments spend their money on. Wouldn't you say that would be for the greater good? That's exactly what Vitalik is proposing.

indymike 4y ago
Making something public doesn't solve the problem. Deceiving the public is easy and the public is duped frequently. Making accounting public doesn't solve the problem at all.
- CharlieDigital 4y ago
  You're right that making it public alone doesn't solve the problem since it is easy to "cook the books". But if it's public and the results are the side effect of each transaction (e.g. the accounting is rules-driven and automatic as part of the system itself), I think it can change the game.
  - hef19898 4y ago
    In which case cryoto would even be less private than traditional banking, I guess.
  - giaour 4y ago
    So, all we need for this to succeed is for the ethereum blockchain to be the ultimate source of truth for all finance. So long as “off chain” assets of variable liquidity exist, it seems like you could absolutely cook the books.
- viscanti 4y ago
  It's not making accounting public. It's making accounting public in a way that you can't dupe the public. There's a question if that's possible, but you're arguing against a straw man here. I'm skeptical that they'll come up with something that convinces everyone that their new version of public accounting can be trusted, but maybe there's something novel they can come up with that will convince the skeptics.

astoor 4y ago

Looking for a cryptographic solution to this is certainly missing the point - it presupposes cryptocurrency coins and tokens are assets in the traditional sense, which they are not. At best they are like casino tokens - they have no intrinsic value, no legal entitlement to anything, and their use is entirely at the discretion of the issuing casino. That works fine for casinos because everything operates within the casino. The problem is that cryptocurrency wants to go outside the cryptocurrency sphere and into the real world, which is something that it is simply not designed to do. As we have seen, this leads to endless exploits, e.g. VCs and exchanges printing up billions of dollars worth of tokens, claiming they are actual assets (imagine a real casino printing chips with a total face value of $1.6 billion and claiming they had $1.6 billion in assets), convincing retail "investors" to exchange real money for those "assets", and then using that real money to gamble in different casinos.

hef19898 4y ago
You are aware that casinos, and their "tokens", are pretty well regulated? Not the least becasue they are great way to launder money?
- astoor 4y ago
  Yes, casinos are pretty well regulated in most countries, which is why I wrote "At best they [cryptocurrency coins and tokens] are like casino tokens". Although casinos don't have a spotless record, e.g. US$63 million from the 2016 Bangladesh Bank cyber heist is suspected to have been laundered via casinos in Manilla.
naasking 4y ago
> they have no intrinsic value There is no such thing beyond food, water and shelter.
- syzarian 4y ago
  Intrinsic is not the right word to use but the overall point that was made is correct. A $1 U.S. bill has “intrinsic” value that comes from the backing of the United States government and an accompanying set of laws regarding usage.