1. Interfacing with the traditional (fiat) banking system: today this can be done with regulated fiat-backed stablecoins like Paxos USD, Gemini USD or Circle's USDC. It's critical that these institutions be carefully regulated by government entities to ensure the deposits are protected, but this is feasible (Paxos and Gemini are regulated by NYDFS, Circle's regulation story is more complex but there is one.) This regulation is crucial to ensure that "the assets are in the bank", but you only need a few such issuers to be regulated. This is much more scalable than trusting every two-bit crypto exchange in the world.
2. Custody of signing keys: this can also be technically managed by centralized institutions. Anchorage Digital and Fireblocks are examples of this. These centralized solutions can't ever perfectly eliminate risk (they are centralized, after all), but they can make you much resistant to rubber hose attacks. The actual technology is based on hardware security modules and MPC, plus lots of excellent security engineering.
In theory once you have reliable building blocks for these two components, the rest can be achieved using smart contracts without the need for further centralization or trust risk. (You will, of course, risk bugs in the smart contract. But this is a technical problem that we can potentially solve using technical means, not a fundamental problem of human trust.) In general the idea here is to optimize your "trusted human base" so that it is as small as possible (and have those parts carefully regulated), and then you can covert the rest into problems that have purely technical solutions.
Obviously this story only works if you're doing fiat-crypto conversion and storage of assets. The minute you start lending assets to people then you're back to trusting human beings to actually pay you back, so you'd better make good judgements about their (possibly illiquid) collateral.
Their is no business plan to account for such swings. The thing we've been saying for ten years on IRC is Bitcoin loans are gifts, because that's what they are. I've had enough loans defaulted on to definitely tell you and agree with this premise: once lending enters the picture, your money is just another row in a database.
2. If you're using an exchange for exchanging currencies (as opposed to speculation) you can send your money there, exchange it, and immediately send it back out. You're only exposed for at most an hour or two. If you've chosen a well-reputed exchange that's been around for 10+ years, chances are effectively nil that it suddenly disappears during that small window with no warning signs beforehand.
Which exchange does this? I'm not talking about finding some mom and pop accounting shop to issue a 1 page report stating they checked on a certain date and the reserves were there, where the majority of the 1 page was a disclaimer stating that this wasn't technically an "audit" and should not be relied upon as such.
More info:
> They only verify BTC and ETH
Click the link and you see this isn't true: "ADA ADA.S BTC BTC.M DOT DOT.S DOT.P etc etc"
> they don't audit liabilities at all
All liabilities were verified by the auditors and included in the merkle tree, and as mentioned, all users can independently verify that their specific liabilities are present. What more would you expect?
> the audit they did last December was the second in 8 years
Their most recent audit was end of Q2 this year. They do audits semi-annually.
Where in the report do they verify off-chain liabilities?
> 14) Compare the total liabilities from the Client Liability Report extracted from Kraken’s production database as observed within Procedure 5 to the total assets controlled by the Kraken custodied addresses (the “In-Kind Assets”) as of the specified date and time of the assessment time and calculate the collateralization ratio based on the In-Kind Asset-to-Client Liability mapping provided by Kraken Management
Ex: I am Kraken. Someone deposits 1 BTC with me. I then sign a contract with someone else saying "You give me 1 BTC now, I will give you 1.2 BTC in a year". I then sell 1 BTC. In my wallet, I will have 1 BTC, exactly matching my client liabilities. But my total liability is 2.2 BTC. And if those contracts start calling in early (IE, margin calls), I'll end up in a liquidity crisis.
Or more simply, what if Kraken just uses the BTC as collateral for normal loans from a bank? If they fail to pay them, then they'll fork over the client BTC.
Your defense against these tail risks is to remember, "not your keys, not your coins", and self-custody when you're not actively exchanging. In the end you do have to hope that the < 1 hour it takes you to exchange your coins and transfer them back to your own wallet doesn't overlap with the moment they decide to torpedo their 10+ year old business with no prior warning or red flags. But these are infinitesimally small tail risks.
But there is a very easy way to prove that there are not contracts external to the blockchain.
That's the whole point of an audit.
And it's very telling that they don't want their books audited, but repeatedly point to a clearly incomplete (from the perspective of someone who is concerned that the business might go under) as proof of solvency.
>Administered by Armanino LLP, the Proof of Reserves audit is the second of its kind conducted on our exchange since 2014, and it affirms that more than $19 billion worth of client bitcoin and ether is safely – and provably – on our platform. This includes the $3.5 billion worth of ether held in Kraken’s secure on-chain staking service, the industry’s leading ETH2 validator.
Though the audit covers just two of the over 100 assets available for trading on our exchange, it adheres to, and seeks to advance, recommended standards for new cryptographic audits that we hope will become widely embraced in the digital asset sector.
Nevertheless, from the most recent "audit" report:
>"We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respectively, related to the platform account liabilities and asset balances represented by Kraken. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported."
So once again, they're not saying anything al all about Kraken's overall assets or liabilities, merely confirming that the customer accounts have the correct number of coins in them at a point in time.
> The procedure cannot identify any hidden encumbrances or prove that funds had not been borrowed for purposes of passing the audit.
In other words, this is a fancier version of the kind of attestation that Tether makes, the ones that leave loopholes you can drive dump trucks through.
100% and this just drives me bonkers. I'm not entirely unsympathetic to wanting to avoid financial regulation, like while I disagree it's a good idea, I can understand wanting to build a system that is built on math and not people. Fine.
But isn't the whole point of crypto radical transparency? As in: you know at all times where all the coins are and the details of every transaction that has ever occurred? Shouldn't this meet 100% of your auditing needs? Why are audits even useful? Well, they're really helpful if you want to run a shell game off chain, but still assure customers that you're not gambling with their money so they keep giving you more of it.
Like, arguing in good faith here, this is just a worst of both worlds situation. You have an extremely slow financial transaction system that you still have to hand audit.
If I can passively generate wealth by doing nothing but waiting, so can everyone else. Only suckers would work.
This is basic macroeconomics but for some reason crypto believers just choose to live in an alternative reality.
Also, it worked for thousands of years with gold. Whole civilisations have run on gold, for thousands of years.
Every time in history when some innovation comes up people doing the old way were saying "that's not possible. it will never work. you don't understand the basics of X". History surely rimes.
Would lending be allowed in your model? If so, what makes it different from the status quo (fractional reserve banking and ultimately debt becoming money itself)? If not, how do I start a business or purchase a home without the lump sump required to do so under my pillow?
How do you adapt the monetary base to increased or decreased production capacity in a world based on the Bitcoin standard?
Not every fundamentally broken economic model is an innovation, and just because everybody tells its proponents so does not make this idea some kind of underdog stroke of genius.
The same thing that incentivizes people to spend their USD today instead of passively getting rich using VTSAX
You have to have a lot of institutional checks and balances and almost unshakable faith in those institutions for things to functions. That really doesn't exist in reality.
I will give you that a perfectly managed currency (with cycles of inflation and deflation) is better than a deflationary currency for economic activity. But, you have to see that no such thing exists. The US dollar central management have been reasonably good - but that's the exception, not the rule.
TIL nobody uses the euro, pound, yen or renminbi.
Basic here means fundamental, not surface-level.
It's like saying carbon is a basic building block of life. It doesn't mean that if you dig deeper, it's actually something else. It means that carbon is where everything starts, and you go from there.
I personally have a bit more than a single undergrad econ class under my belt.
Sure, no eating, heating, transport, comms, but you can do that. Also very ecological. Plus you safe like 0-2% per year on prices.
> This is basic macroeconomics
What do they say happens when you have 2% deflation?
LocalMonero https://localmonero.co/?language=en
Even exposure to improperly run crypto exchanges and OTC desk is so limited, when using them properly.
I don't understand how this is still so foreign a decade plus later.