4 ms·

Proof of reserves != proof of liabilities. Proof today != proof tomorrow.

xlbuttplug 4y ago
The proof of reserves can be done in such a way that each user can verify that their balance is backed: https://www.kraken.com/proof-of-reserves https://www.kraken.com/proof-of-reserves > Proof of reserves today != proof of reserves tomorrow. You should be able to detect large outflows/inflows from/to their wallets and demand an explanation.
- danuker 4y ago
  Coffeezilla demanded explanations from Tether. None were offerred. https://www.youtube.com/watch?v=-whuXHSL1Pg https://www.youtube.com/watch?v=-whuXHSL1Pg
  - xlbuttplug 4y ago
    Providing a proof of reserves is about putting user/investor minds at ease. If you're not willing to go all the way, why bother doing it at all? Though I guess post FTX, all exchanges are scrambling to avoid losing a large chunk of their userbase. Claiming to have a proof of reserves, even if it was done in a half-assed and non transparent way, is probably good enough for the non-scrutinous user.
- beefield 4y ago
  How does Kraken/proof of reserves ensure that in case of bankruptcy there are no creditors with higher privileges?
  - xlbuttplug 4y ago
    That's a good point. The exchange's remaining liabilities outside user deposits are still an unknown. (Or at least can't be verified in a trustless manner.)
    - skinnymuch 4y ago
      Doesn’t that make it borderline worthless?
      - vkou 4y ago
        Correct. There is no on-chain way to prove that my exchange doesn't actually owe some third party a trillion dollars.
      - xlbuttplug 4y ago
        It does prove that the exchange is in possession of "liquid" assets matching user deposits, which I don't think is worthless, especially if the userbase is large. I agree that it's far from a comprehensive proof though. Perhaps exchanges need to stick to the bigger auditors for now.
      - lottin 4y ago
        Yes, but it's probably good enough to fool the average crypto investor.
danuker 4y ago
Indeed. An exchange can borrow loads of assets, have an "attestation" that the assets are in their accounts, then pay them back.
- jacquesm 4y ago
  Unless those assets devalue or are not easily liquidated.
  - danuker 4y ago
    Exchanges are in the business of "liquifying". But, indeed, it can go wrong, with severe consequences.
    - jacquesm 4y ago
      Anything they hold a position in creates risk, the typical exchange business model is that they are fast enough and good enough that they can operate out of the excess through various arbitrage options but with extremely volatile assets the bottom can drop out pretty quickly and once you start borrowing and leveraging it can happen a lot faster still. Essentially they are operating as banks sans regulatory oversight. It's a recipe for disaster.
- imhoguy 4y ago
  Exactly. Exchanges are important to exist. The problem is that some crypto exchanges became ordinary but unregulated banks and they sell "printed" crypto asset giving illusion the user owns crypto on blockchain.

The proof of reserves can be done in such a way that each user can verify that their balance is backed: https://www.kraken.com/proof-of-reserves https://www.kraken.com/proof-of-reserves > Proof of reserves today != proof of reserves tomorrow. You should be able to detect large outflows/inflows from/to their wallets and demand an explanation.

danuker 4y ago
Coffeezilla demanded explanations from Tether. None were offerred. https://www.youtube.com/watch?v=-whuXHSL1Pg https://www.youtube.com/watch?v=-whuXHSL1Pg
- xlbuttplug 4y ago
  Providing a proof of reserves is about putting user/investor minds at ease. If you're not willing to go all the way, why bother doing it at all? Though I guess post FTX, all exchanges are scrambling to avoid losing a large chunk of their userbase. Claiming to have a proof of reserves, even if it was done in a half-assed and non transparent way, is probably good enough for the non-scrutinous user.
beefield 4y ago
How does Kraken/proof of reserves ensure that in case of bankruptcy there are no creditors with higher privileges?
- xlbuttplug 4y ago
  That's a good point. The exchange's remaining liabilities outside user deposits are still an unknown. (Or at least can't be verified in a trustless manner.)
  - skinnymuch 4y ago
    Doesn’t that make it borderline worthless?
    - vkou 4y ago
      Correct. There is no on-chain way to prove that my exchange doesn't actually owe some third party a trillion dollars.
    - xlbuttplug 4y ago
      It does prove that the exchange is in possession of "liquid" assets matching user deposits, which I don't think is worthless, especially if the userbase is large. I agree that it's far from a comprehensive proof though. Perhaps exchanges need to stick to the bigger auditors for now.
    - lottin 4y ago
      Yes, but it's probably good enough to fool the average crypto investor.

danuker 4y ago

Indeed. An exchange can borrow loads of assets, have an "attestation" that the assets are in their accounts, then pay them back.

jacquesm 4y ago
Unless those assets devalue or are not easily liquidated.
- danuker 4y ago
  Exchanges are in the business of "liquifying". But, indeed, it can go wrong, with severe consequences.
  - jacquesm 4y ago
    Anything they hold a position in creates risk, the typical exchange business model is that they are fast enough and good enough that they can operate out of the excess through various arbitrage options but with extremely volatile assets the bottom can drop out pretty quickly and once you start borrowing and leveraging it can happen a lot faster still. Essentially they are operating as banks sans regulatory oversight. It's a recipe for disaster.
imhoguy 4y ago
Exactly. Exchanges are important to exist. The problem is that some crypto exchanges became ordinary but unregulated banks and they sell "printed" crypto asset giving illusion the user owns crypto on blockchain.