Proof of solvency and beyond
vitalik.ca
vitalik.ca
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.
They didn't know where funds were, who was using them and what for.
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.
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-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.
They were likely corrupt and paid off by FTX to not audit properly
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.
So SBF was making the same argument, argued in front of Congress for it, and was using his customer's billions to lobby for favorable legislation that would carve out expensive, exclusive licensing agreements that only him and a few others would be able to afford.
Even if you pass draconian legislation in the U.S., it does not affect what happens off-shore. FTX's core business was based in the Bahamas.
Bahamas or not, if you operate in the US, US rules apply for your US business.
> Bahamas or not, if you operate in the US, US rules apply for your US business
That's just it, isn't it? FTX.us was in US jurisdiction, but FTX.com was an international organization where the vast majority of FTX's trading activity took place. They wouldn't have had to uphold U.S. laws or regulations at FTX.com, even if onerous measures were to pass.
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/33/188450/042020648...
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.
But thats where he should stay as well.
Now there's an opinion which betrays an overwhelming anti-crypto bias.
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
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.
Like banks which have to ensure, where I live up to 100k €, customer deposits?
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.
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.
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.
So long as “off chain” assets of variable liquidity exist, it seems like you could absolutely cook the books.
This will not solve human moral turpitude that leverages technology to self-enrich at the expense of others.
There is a huge incentive to do things that people don’t actually want you doing, so someone can actually make money.
Accounting is just a word for tracking money.
It can be opaque, or obvious, detailed, or vague. And it can also be fake.
Knowing which is which, and if it is appropriate or not, is almost always specific to the circumstances and the goals of whoever is doing it, and that’s pretty fundamental.
GAAP is a generally acceptable list of practices for public entities, but there are still a ton of judgement calls going on there, and have to be, for what is a pretty ‘standard’ way to operate pretty standard businesses.
There is no automated way to do it that won’t allow manipulation.
Attempts at automating it are more likely to provide something like bank account statements, than a balance sheet. Which is something, but it’s not enough. That’s what is generally referred to as book keeping (aka transactions are recorded, but not necessarily characterized or organized correctly), but may even fall short of that.
They can make plenty of money through volume (fees), while holding the crypto 1:1. Sounds relatively easy to me.
That’s the baffling thing about FTX/Alameda. FTX on its own could be a nice profitable business, yet it seems they got greedy by lending customer funds to the hedge fund-y sister company.
And fees get competitive, it’s inevitably a race to the bottom, where firms need to spend a lot of money competing on things like long term reputation.
Meanwhile if they screw up in their security, they’re also liable for huge multiples of those fees in losses.
And if someone pops up that charges less fees, and seems ok enough, a lot of the money moves there quickly, until there is a scandal anyway.
It requires a mature organization who has strong controls and bulletproof working processes to avoid losing multiple years in fees by accident too.
Not saying you’re wrong - it’s where things inevitably end up when it’s heavily regulated and watched so all the other alternatives are hard (and result in major prison time). Usually.
But it should be noted that brick and mortar banks gave up on that model a very long time ago, favoring explicitly loaning out customer funds (fractional reserve banking) because it’s more sustainable for them.
Not really. Their tech stack was too slow so other Market Makers weren't willing to come over (the price can change and leave them fulfilling sales at bad prices too frequently). So they had Alameda be their market maker and they were constantly burning money doing that. Maybe they believed there would be enough liquidity if they scaled more and it was an investment in their future (a very charitable view) and it was fine to borrow funds in the short term and then that got away from them. But from what we've heard of their tech stack, they weren't ever going to be viable because they couldn't support what HFT would need.
You can only do that if you are holding exclusivly onto one asset. The relative values of different tokens change over time. So if you want 1:1, you need to have a robust mechanism for doing that.
But you won't want to because that'll burn through transaction fees for no real gain.
> FTX on its own could be a nice profitable business
That requires fees, and given the number of exchanges that do it for free, so long as you keep your wallet with them, its not going to make you money.
Sure you can do market making, or arbitrage, but that's still risky and you don't make that much money doing it. <0.1% on each transaction.
(Before that was available though, both lived entirely on fees, unless they've been committing massive fraud.)
We don’t know what Coinbase and Kraken are doing internally.
Coinbase does seem to be mostly off fees (which are sky high), and does seem not sketchy. It doesn’t appear overly easy for them even then (hence the ‘it’s hard’) despite folks being itching to put money in on the way up to the point they’ll mostly ignore high fees.
They’re definitely playing the long game, compared to the others that have looted billions elsewhere.
As the main on/off ramp in the US, they have a pretty nice position from it too.
That it was possible to do it differently earlier, and some folks did start transitioning, doesn’t change the fact that we don’t have much track record with it yet as ‘the way it is done’.
It usually takes decades for these things to stabilize into anything predictable.
So there are still a lot of unknown unknowns, including ‘what will the ecosystem look like when it is the majority’.
It might be lower on fraud. Or higher. Or economic to just stake. Or not.
We don’t know yet.
Staked ETH isn't available to be used for any other purpose, like paying transaction fees, depositing in defi protocols, using as currency, etc.
Anyway, this is getting a bit far afield of my point, which is just that for ETH, exchanges can earn money on deposits, without loaning them out to risky side ventures.
You keep not addressing that point, or providing concrete monetary values to any of these statements you are making.
Where to start with that. Sure yeah its part of the protocol, but its essentially baking in fiat like inflation.
not only that but its deliberately reducing liquidity, and makes you rely on large exchanges that have bigger stakes.
This basically undermines the point of crypto which is a secure way to quickly exchange value in a peer to peer way.
I don't see the reliance on large exchanges. There are plenty of solo stakers and the protocol gives them the same rate of return as large exchanges. That's an improvement over the economies of scale that large miners typically achieve. People without 32 ETH can use a decentralized staking pool, just like most solo miners use pools.
Total stake is under 15% of ETH so it's not a huge hit to liquidity. The real bottleneck for p2p value exchange is transaction rates, and on that front Ethereum is coming along quite well. If it were only doing ETH payments, it would be capable of 700 tx/sec today on chain. It actually does fewer since many of its transactions are more complex, but rollups multiply that significantly, and upcoming scaling improvements should get them to 100K tx/sec within the next several years, while still maintaining full trustlessness.
> 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?
> Why would anyone care how much gold the US government has?
was not intended to dismiss interest in any particular asset, but to ask why there isn’t an equal amount of interest in assets other than gold.
I can’t speak for the other commenters who raised the issue, but it’s presumably because the asset is far more valuable than the ones you’ve mentioned, and far easier to convert to other assets.
It’s also been used as medium of exchange or reserve currency for much of human history, so expecting people to dismiss it out of hand based on prevailing theories espoused by modern monetary institutions wouldn’t be reasonable.
- The government directly provides medical service via the VA and DoD and disclosing every transaction risks HIPAA violations.
- It may not now be illegal, but I think there would be some privacy concerns about things like revealing every person's student loan payments.
- Counseling and employee assistance type stuff for government employees can't be made public for the same reasons.
- Criminal fines for anyone whose record is later expunged present a hurdle.
- Payments to confidential informants in criminal investigations obviously need to stay confidential or you're going to get them murdered.
- Witness protection payments same thing.
- At least some transactions are classified.
- Contract details are kept hidden from other contractors right now to avoid undercutting and collusion.
All in all, as long as you're forced into some system where maybe some, even most, transactions can be made on a public ledger, but others have to be kept private, you'll never prevent fraud and/or suspicions of fraud in the form of transactions being kept illegally private. At some point, you have to trust the auditors and Congressional oversight committees.
There is no such thing beyond food, water and shelter.
https://jorgevelez.substack.com/p/ftx
One that seemingly failed to be properly regulated despite doing business in the USA, and where supposedly sophisticated investors seemingly failed to do due diligence.
"Crypto" is being blamed a lot for FTX, but it's starts to feel more like it's a scapegoat at this point.
(And/or an excuse for everyone to just look away from how the sausage is being made while the numbers were going up : see also : the complicated math behind the subprime morgages in the 2008 crisis.)
Surely if those US regulators and those huge investor companies felt incompetent about "crypto", they could just have hired specialists ??
(And it's starting to look that not even this was needed, simply sending your average accountant might have uncovered FTX' lack of... accountability ?!)
https://annasofia.xyz/2022/11/05/criticizing-computers.html
Every problem, issue with crypto-tech seems to be solved with yet another layer of crypto-tech. Every criticism of the tech is deflected by pointing at yet another project that is claimed to fix what is being criticized.
Cryptocurrencies have so far not resulted in a compelling use case. All that we are seeing is a questionable solution looking to solve some as yet undiscovered problem.
The parent comment is a bit flippant, but I agree with the thought. The entire crypto industry is rapidly becoming a bizarre and convoluted rube goldberg machine that is completely impenetrable to anyone but the most ardent zealots. Even more, as an outsider it seems like everyone is in this echo chamber of back patting and "with just this one more buzzword bingo sounding feature, we'll have unlocked the true potential of crypto".
Day traders want to trade, no matter how much you try to tell them their trades are fictional or "have no use cases."
Not ever person in the world needs to work on trying to totally reinvent things either. But the idea that something is wrong because it's different than what already exists is ridiculous. It's literally Larry David looking at the wheel in the commercial and saying "seems pointless".
It's a complete failure of imagination.
Awfully lot of trust you seem to need in this fancy world of trustless money of the future.
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.
If the exchange wants to offer interest-bearing deposits (eg: loan out your crypto), well then you'd expect to no longer be able to verify your deposits because you'd know they were loaned out, or that the exchange was trading with them, or whatever else. You'd also be forced to confront the fact that your assets are at risk at that point.
Right, but if an exchange took out a bank loan, the loan was recalled, and the exchange repaid it with customers' deposited cash and later goes bankrupt - possession is nine-tenths of the law.
Especially if the exchange intentionally has a structure that can avoid international tax laws - who's to say it won't also avoid international bankruptcy laws?
Then in this scheme depositors would be able to see that straight away, and force bankruptcy and asset recovery on the exchange while those assets still existed. This would (presumably!) stop the exchange repaying debts with customer deposits, because those customers would know straight away and could seek legal recourse against the bank and the exchange.
If you trust the fiat bank account statements, certainly.
Seems to me the problem of solvency at the boundary between the worlds of fiat and cryptocurrency is always present, and shuffling it around doesn't make it disappear.
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.)
Hence why proponents argue to do things on-chain, where we have built-in guarantees and this issue disappears entirely.
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.
> Client money is segregated in special bank or custody accounts, which are designated for the exclusive benefit of clients of IBKR. This protection (the SEC term is "reserve" and the CFTC term is "segregation") is a core principle of securities and commodities brokerage. By properly segregating the client's assets, if no money or stock is borrowed and no futures positions are held by the client, then the client's assets are available to be returned to the client in the event of a default by or bankruptcy of the broker.
Because segregation is a necessary prior to enshrine further protection on customer assets.
No, originally you talked about segregation between crypto and non-crypto. I responded that there is no such thing. You then changed to talking about segregation between client finds and company funds -- do you see how this has nothing to do with the original point? How do you know a brokerage doesn't have both crypto and non-crypto liabilities? You don't. And the non-crypto can be senior to the crypto. There is no segregation between non-crypto and crypto and no guarantees about what kind of liabilities are held by both clients and investors.
> if no money or stock is borrowed and no futures positions are held by the client, then the client's assets are available to be returned
Right, this is exactly why you need to know what all the off chain liabilities are. Because when they come due, you can lose all your crypto because of a brokerage's off chain liability. Thus there is no such thing as a proof of solvency.
Note that for most exchanges a material portion (most?) of their liabilities will be off-chain—e.g. fiat customer deposits.
It's what one would call a "limited assurance engagement" in audit parlance. In other words, it provides assurance over a small subset of the balance sheet of an exchange - only the customer deposits and the exchange liabilities pertaining to said customers.
However, there are a few red flags which no-one seems to raise:
1) The customer deposits should be off balance sheet if they actually were held in custody. If deposits are not off balance sheet then customer assets cannot be held in custody. Instead, the customers are a creditor of the exchange.
2) From the terms and conditions I've read for various exchanges, customers are typically not treated as a preferential creditor.
3) In the event of an insolvency, customers are treated pari passu with other creditors.
4) To get sufficient assurance that the exchanges can honour their customer liabilities, we need to see ALL of the liabilities, not just the subset relating only to customer deposits. E.g. Who else is money owned to? Did they issue debt? Did they borrow from a bank? Are there any legal provisions? Etc...
5) Given the legal treatment of customers as unsecured creditors, without entire visibility of the balance sheet, the "proof of reserves" report is pretty much useless.
Worse, it provides false assurance that allows the operators of the exchange to loot the exchange more easily.
It's yet to be seen whether proof-of-holdings is practicable for crypto assets, let alone for real world assets. But it is an interesting use case for zero knowledge protocols that could tackle some very real problems. Yes, we have auditors in the real world, and I'm not thinking of replacing them, but it could improve audits. As one example, not too long ago there was a crash of a German payments provider of a scale not much smaller than FTX (Wirecard) that was audited by one of the major firms (EY), who missed a fake $2bn bank deposit claim.
Yeah, being first in a Ponzi scheme tend to work well for some people. For every winner in cryptocurrency there are losers as cryptocurrencies are a zero-sum game.
Burning thousands of GPU hours just to update an ineffective database is surely the most prominent one.
Burning thousands of GPU hours just to update an ineffective database is surely the most prominent one though.
The scale and the percentage of "legit" to "scam" definitely is.
The current process basically looks like this: an auditor will ask the bank to confirm that client X has such and such balance with them. Of course, the bank needs to be sure that the auditor is actually who they claim they are, so they get in touch with their client to confirm that they can tell the auditor their balance. Since this is a bit tricky if the auditor doesn't have a direct line of communication with the bank already, it is often facilitated by the client directly asking the bank to issue a balance confirmation to the auditor, and that's an entry point for impersonation attacks (in an overly simplified manner, that's also what happened at Wirecard). We probably don't need the exact fancy machinery of Merkle sum trees and zero knowledge proofs outlined in the OP, we also don't want to bring in blockchains, but I was wondering whether we could use some of those ideas to make the audit process for normal firms a bit safer.
Sure, and droughts aren't exclusive to the desert either, but I've been living in a desert for the past 4 months and I'm yet to see it rain.
Indeed, Vitalik warned people a few times at various points in the run up that crypto was in a bubble. The current crash is not surprising to anyone who has been paying attention.
The problem with crypto is that the bulk of the value is created through seigniorage of the tokens required to make it work, not actual utility derived from its technical features, for example better privacy or enabling new transactions.
So in reality the pump & dump, rugpull and speculative bubble dynamics are characteristic to crypto because there is very limited actual wealth created and a massive conflict of interest from the players to cash in on the juice flowing though their systems, which are nothing else than unregulated and inferior copycats of existing financial institutions, state issued currencies, banks etc.
Also it's interesting to note that in regular finance, exchanges and brokerage firms are separate entities .. meanwhile eg FTX was both the exchange and the 'broker'
Edit: just searched twitter and came across someone asking SBF this exact question about the conflict of interest in being both the exchange and broker (of course he was also trading with client funds on top of that..)
That's currently being resolved with the implementation & adoption of rollups: There're currently multiple efforts towards developing zk-based rollups, with everyone (Polygon, zkSync, Scroll) taking a different approach towards providing it. Right now, optimistic rollups are the dominant rollup strategy right now, with improvements & decentralization already undergoing development & deployment.
Most still have guardrails in place, but it's publicly known & already being worked on.
You could have an exchange whose users have 2nd-layer channels open to it for all the currencies they trade. Trading can then happen near-instantly with 0 fees. While still centralized, it doesn't need to take custody of any user's funds.
But replace with what? With people like Vitalik? He seems to be an influential figure and calling the shots. How is this in any way different than a "normal" company with a CEO and a board.
Ultimately layer 0 of a blockchain is the community that uses it, and if they decide to fork en masse, they will do so. It's an essential property of the system itself. Blockchains would not be antifragile if they could not fork.
He already did that once, and could do it again.
I fully expect that system to come crashing down in 5-10 year.
(Parent of copied answer: https://news.ycombinator.com/item?id=33690213)
> But replace with what?
Ideally, open-sourced & audited smart contracts that are ERC-compliant & developed by the general public, with the internal mechanisms made viewable to anyone that wants to learn how such mechanisms work.
> With people like Vitalik? He seems to be an influential figure and calling the shots.
Vitalik can point at where focus could be targeted at, but the decision is ultimately up to the developers themselves. In fact, as far as I can remember, most of the efforts mentioned in the post & image below are not publicly mentioned at all, with other developers leading the charge on that front. (Danksharding being one example, with the development efforts led by Dankrad Feist, hence the name.)
https://twitter.com/VitalikButerin/status/158866978247136870...
https://pbs.twimg.com/media/FgwVhUjaAAEx_Bb?format=jpg&name=...
> How is this in any way different than a "normal" company with a CEO and a board?
The main difference is that development is not wholly left to one party: Anyone can choose to develop the applications that they want to see & deploy them onto the platform. Even if you're external from the main development efforts, you can still contribute to the overall ecosystem with code contributions towards one of the various nodes of the entire system. This stands in contrast with a standard company, where external development's forbidden outside of a special area designated for the general public to interact with.
Uniswap was the first well-done AMM (automated market maker) design. It's on version 3 now, and has traded more than $1.2 trillion in volume: https://uniswap.org/
The smart contracts are posted here: https://github.com/Uniswap/v3-core and can be viewed directly onchain as well: https://etherscan.io/address/0x68b3465833fb72a70ecdf485e0e4c...
FTX was primarily used for perpetuals trading, which is a type of leveraged derivative product. Popular decentralized perp products include: GMX: https://gmx.io/#/ and Dydx: https://dydx.exchange/
Vitalik is certainly influential, and he did conceive of and invent the first smart contract blockchain, but he doesn't call the shots any more than Tim Berners-Lee controls the web.
It's partly also because you have to bridge from traditional finance to cryptocurrency somehow. Many of these centralized exchanges are allowing that bridging. Usually that would involve meeting strict banking and KYC regulations. FTX decided that was too much of a hassle and incorporated in Bahamas to avoid it.
A lot of crypto people do use Uniswap. The tone of Vitalik’s post is: what if we took some of the non custodial, on-chain, cryptographic proof things that work well in a DEX, and inject them into more CEXes so that even lazy users end up with better security guarantees.
Don’t get me wrong, I think it’s great. In the US, it’s mostly the worst folks actually losing to this game and I’m overall entertained.
edit: I should maybe clarify that my crypto holdings are now about $20, entirely from folks losing bets to me.
But what if your private keys are actually owned by Alameda, who lent you them for the purpose of demonstrating solvency but then oops options blew up and they're gone now?
But what if most of your deposits were gold- or USD-backed assets and your assets are all shitecoin and a 51% attack happens to shitecoin and everybody wants their gold back?
But what if you do all this and you prove solvency, but your assets are all rated by S&P and oh crap just like in 2007 they rated everything triple-A but it's actually junk?
I mean the technical ideas in the piece are sound, but there's nothing here to fundamentally rebuild trust in crypto.
Also: the title "having a safe CEX" -- cute, but underscores how crypto is such a sausage fest.
You don't understand public key cryptography. If someone else has the private key to your assets, the assets are not yours.
This is not a failure of cryptography. Don't blame crypto.
Sure, the fraud might fool some subset of extremely uninformed people initially, but someone is bound to find the fraud when they check the chain with one of the hundreds of different open source clients that exist today. Immediately, they would post this astonishing finding on Twitter. Immediately, Twitter would blow up and out them as frauds. Immediately, all of the people who were initially fooled would know that this company is a fraud.
Private keys are never exposed at any point in the overall operation of the proof. In fact, the general structure provided as an example in the article itself doesn't expose anything of the sort.
Furthermore, the structure provided isolates the asset amounts down to each individual account, effectively siloing the damage to that particular account.
Even if the idea of lending them the assets is entertained, the flows out from their accounts would be recorded.
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> But what if most of your deposits were gold- or USD-backed assets and your assets are all shitecoin and a 51% attack happens to shitecoin and everybody wants their gold back?
1) The conversion over to the token in question would've already occurred & been recorded onto the overall proof.
2) The sudden collapse in value of the token doesn't warrant a refund in the same way that a sudden collapse in oil commodities/futures doesn't mean that a refund is permitted. The downtrend risk is explicit in the desire to convert from A to B.
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> But what if you do all this and you prove solvency, but your assets are all rated by S&P and oh crap just like in 2007 they rated everything triple-A but it's actually junk?
The scenario mentioned is a problem with the rating system itself, along with the overreliance of a handful of rating agencies with opaque rating systems/mechanisms. This is outside the scope of the article in question, but it's resolvable via the implementation of crowdsourced & automated rating systems that have clear grading rubrics & metrics, along with the inputs used to give said grades.
So... use crypto to prove that you hold enough crypto to cover the losses if crypto crashes and you can't pay people back without crypto.
This only works to prove that you hold enough Trashcoin to pay back people's Trashcoin that you're supposed to have - but why have their Trashcoin at all if you need to make it available to them?
You can't do anything with it that would make you money while still guaranteeing availability to it's owner, so then you're just providing a free custody service for someone that's worse than them just holding it themselves.
Also, if you're able to cryptographically guarantee Trashcoin holdings then you don't need the exchange anymore. Guarantees + DEX + off-chain transactions replaces your exchange for low fees in that case.
Leaving all that aside though - It's a suggestion to optimise away protections as a problem to be solved when the solution being proposed has time-and-again proven itself unfit for purpose with catastrophic consequences. Regulating financial systems and making them safe is hard, because it's more complicated than anyone who's approached this in crypto seems willing to acknowledge.
Honestly, I think regulators should be approaching this whole space with a view of "we'll get involved to stop criminals that have the potential for non-crypto victims, but we'll not spend time or resources to help anyone that get's ripped off after choosing to put their money in this".
(i.e. The state has a duty to protect it's citizens, but I don't see what burden the state has to protect money that was wilfully removed from the protections of the regulated financial system. If anything, the state has a duty to not waste resources pursuing lost funds in those instances as they have no mandate to do so.)
I have sympathy for people that lost out with FTX and Celsius - I genuinely do - but there were so many warnings that you would have had to dismiss before ending up in that situation and it's hard to believe that people that put money into these platforms (or tokens in general) didn't realise what they were getting into. There's a massive amount of historical experience to draw on - these aren't new schemes.
> Exchanges can solve this problem: first e-mail recovery, and if even that fails, more complicated forms of recovery through KYC. But to be able to solve such problems, the exchange needs to actually have control over the coins. In order to have the ability to recover user accounts' funds for good reasons, exchanges need to have power that could also be used to steal user accounts' funds for bad reasons. This is an unavoidable tradeoff.
> The ideal long-term solution is to rely on self-custody, in a future where users have easy access to technologies such as multisig and social recovery wallets to help deal with emergency situations.
Not to dismiss this out of hand, but isn’t that the central problem? Users want to use Coinbase for convenience as much as for any other reason.
Saying “we’ll make it easier to host your own coins” is a bit like saying “we’ll solve the #1 problem with mass crypto adoption”.
> Saying “we’ll make it easier to host your own coins” is a bit like saying “we’ll solve the #1 problem with mass crypto adoption”.
That's the point: Coinbase & CEXes have it easy because they can centralize - Their development efforts can be honed in more effectively.
The ultimate long-term goal is to remove the need for such entities in the first place, and make it easier/safer/cheaper with the use of rollups, on-chain insurances, social recovery wallets, DEXes, & integrated crowdsourced filter/allow lists.
But replace with what? With people like Vitalik? He seems to be an influential figure and calling the shots. How is this in any way different than a "normal" company with a CEO and a board?
Ideally, open-sourced & audited smart contracts that are ERC-compliant & developed by the general public, with the internal mechanisms made viewable to anyone that wants to learn how such mechanisms work.
> With people like Vitalik? He seems to be an influential figure and calling the shots.
Vitalik can point at where focus could be targeted at, but the decision is ultimately up to the developers themselves. In fact, as far as I can remember, most of the efforts mentioned in the post & image below are not publicly mentioned at all, with other developers leading the charge on that front. (Danksharding being one example, with the development efforts led by Dankrad Feist, hence the name.)
https://twitter.com/VitalikButerin/status/158866978247136870...
https://pbs.twimg.com/media/FgwVhUjaAAEx_Bb?format=jpg&name=...
> How is this in any way different than a "normal" company with a CEO and a board?
The main difference is that development is not wholly left to one party: Anyone can choose to develop the applications that they want to see & deploy them onto the platform. Even if you're external from the main development efforts, you can still contribute to the overall ecosystem with code contributions towards one of the various nodes of the entire system. This stands in contrast with a standard company, where external development's forbidden outside of a special area designated for the general public to interact with.
Sure, I mean, we're still in the "dial-up era" of crypto and a big part of that is wallet UX. But if you're following the space closely, you can see there's been some solid efforts on that front.
Rainbow Wallet (https://rainbow.me/) is an iOS & Android wallet that backs up your private keys to iCloud/Google cloud. I think for smaller sums of money and valuables, this is a pretty good solution.
Argent (https://www.argent.xyz/) is a smart contract wallet that has a "social recovery" feature that allows you to delegate account recovery to a circle of trusted parties.
Gnosis Safe (https://gnosis-safe.io/) is another smart contract wallet that many DAOs use for treasury management, which allows for arbitrary multisig settings to be configured (like requiring 3 out of 5 signers or what have you).
Some of these still need work on UX, but the core tech is there. Another factor is blockchain fees. Layer 2s like Arbitrum (https://arbitrum.io/) and Starkware (https://starkware.co/) have already dramatically reduced fees (by as much as 10-20x and will likely get to 1000x reduction by the end of the decade).
Once the layer 2s and layer 3s are more mature, it's conceivable that a Coinbase or Kraken could run their own auditable rollup, even if the order book was run on a centralized server, at least the net balances would be held on-chain (Dydx https://dydx.exchange/ works like this currently).
Maybe vitalik should focus on preserving decentralization instead. As far as I can see it the biggest flaw in cryptocurrencies — including Bitcoin - is when you look hard enough you realize the decentralization is a facade.
This isn’t the case with crypto where you can carry potentially all the wealth in the world on a single flash drive.
I think more can be done. An entity with a mobile app like Coinbase that seamlessly carries out transactions and then deposits your coins in your own personal wallet but manages your keys in an encrypted manner so all of the account management is hidden behind a single password. They should charge a monthly subscription for it.
You prefer to have an encrypted number in your pocket which only Coinbase can access over an encrypted number at a regular bank's server?
What % of humanity needs that?
As opposed to crypto where you lose it rather quickly[1]
https://twitter.com/VitalikButerin/status/158866978247136870...
https://pbs.twimg.com/media/FgwVhUjaAAEx_Bb?format=jpg&name=...
It's being worked on multiple fronts by multiple independent teams simultaneously. What you're specifically asking for can be found under "The Scourge" & "The Verge".
They were hard to start for example . You would get your hands dirty and needed some power to turn that hand crank.
When those problems got solved and more cars got on the road it would become dangerous with so many cars, and people suggested you need to learn it properly (and get a driver license). Some thought not many would get such a license to drive a still dangerous machine (no airbags or even ABS at that time).
In the end you are ready to do the work (learn) if it is worth it.
And if it is worth it… that nobody knows (in the western world the answer is mostly “no” right now, at least if one trusts the complex economic systems to work well for the next decades).
If it’s worth the hassle, more technologies will get built to help.
I guess you mean the 20th century?
In any case, those people were actually right. A car for everyone and their daughter is one of the biggest contributing factor for pollution and noise.
At the moment, it's quite clear that current cryptocurrencies are solving problems nobody has (trustless transactions), in a way nobody likes the consequences of (distributed) and are magnets for fraud and grift (too many to list).
Now the idea of giving people cryptographic keys is really attractive and unlocks a bunch of use-cases (most of which crypto proponents have claimed in vain for a decades crypto could solve), but there are a few problems (which crypto doesn't even try to solve): how to restore keys when they lose them or they are stolen, and related how to tie those keys to real-world identity in a meaningful way, how to rollback fraud and punish grifters, etc... for most of these you need a trusted central authority and also trusted, verified identity.
Maybe currencies are just the wrong angle to attack this problem from?
Unfortunately that's a really hard problem - if someone can tackle that and tie it to real world verified identity, there are a gold-mine of opportunities to solve. BUT it will require trusted central services for trust, rolling back transactions in case of fraud and identify verification to keep grifters and scammers out. When you do all that you end up with something far more like our current banking system (though it does have significant problems I don't wish to downplay, it also has hundreds of years of scam protection built-in).
That’s an assumption, not a fact. And trustless transactions might not be the only problem that it tries to solve. What about predictable money supply. Trustless custody (instead of just “trustless transactions), … All these will not appeal to a lot more people today (but nobody and not many is very different, and that ratio can change with future technologies being built)
> how to restore keys when they lose them or they are stolen, and related how to tie those keys to real-world identity in a meaningful way, how to rollback fraud and punish grifters, etc... for most of these you need a trusted central authority and also trusted, verified identity.
The first part (how to restore keys when they lose them or they are stolen) does not necessarily mean that there is no decentralized solution. Social recovery (Shamir Secret Sharing + social recovery; or safer some multisig + social recovery) is being worked on.
The second part “how to tie those keys to real-world identity ” is much harder (specially if one values anonimity to avoid 1984 scenarios).
If a good was regulated to have a stable price nobody would be incentivized to find a clever solution to solve a future crisis with high demand for that good
It's clear that current cryptocurrencies are absolutely not solving that problem either. There's a fact if you like facts, consult the Bitcoin price.
> Trustless custody
Not clear to me that people outside the crypto bubble want this; people want trusted counterparties, not trustless obfuscated counterparties. It is IMO a solution looking for a problem.
I'd be a lot more sympathetic to this space if wasn't full of grifters and fraud. As it is I think the crypto experiment has irreversibly been tainted by that association (and by people losing lots of money), and I would not trust a 'trustless' solution from any of the current crypto companies or individuals.
> how to restore keys when they lose them or they are stolen
This is a v. hard problem, why make it 100x harder by insisting on decentralising the solution? And then 1000x harder by insisting on anonymity? Those may be properties of your chosen solution, which is I suspect why you're insisting they are necessary, but they are a bad design IMO - these are the fundamental design flaws of current cryptocurrencies.
Normal people don't keep backup keys on a second device etc etc, web of trust is a very old idea which has been tried quite a few times (see pgp for example, keybase for another corporate one), and you need a way for a normal person to prove they are who they say they are and regain access via courts or a central authority, take over inherited accounts etc. At some point these systems have to interface with the real world and real world authorities and laws/courts.
Just to propose alternative solutions to safely storing cryptographic keys (note those are useful for all sorts of things and unrelated to cryptocurrencies):
Corporations like Apple, Google could provide such a service, as they already own most of the infrastructure. There are obvious and significant downsides to this.
Enlightened governments could propose such an infrastructure of identity verification and private keys, there are obviously problems with that too, but it could be workable if you trust your government.
Utopian techno-geeks could also provide such an infrastructure, but somebody has to pay for it, and people fundamentally have to trust the people who create and run the system - that's a hard problem without financial incentives for the devs/maintainers. One example of an existing system is DNS and another is certificate authorities - both are not great but do work in the real world for their intended purpose.
I do believe at some point we'll come to solve this problem of digital identity and authentication because it is so fundamental, both for humans and corporate entities. I'm not sure we'll like the solution which ends up winning, and I certainly don't think cryptocurrencies are a contender.
The supply is pretty much math.
Yes, the longterm price trend is an indicator of people valuing that fact (and other properties). Short term is governed a lot more by media, fear, …
Crypto doesn’t do anything faster, cheaper or safer. In fact it’s the opposite: slower, more expensive and brittle. In fact, even if it could advance in those dimensions, it doesn’t seem to offer any competitive advantage over the incumbent technologies.
And there I was thinking that the stupid comparisons of crypto to cars or internet finally stopped.
> And if it is worth it… that nobody knows
Tell me you know nothing about history without telling me you know nothing about history
I can't begin to list all the ways in which comparing the auto industry of the 20th century to crypto of today breaks down. For starters, automobiles promised a massive demonstrable value-add to society from the get-go. Crypto, as others here have pointed out, is a solution looking for a problem.
So far, every application of crypto has actually destroyed value for the process it seeks to replace[1], by adding layers of busy-work on top of an already-working process. If it were of value as a self-contained, isolated ecosystem, then things might be different; but where it interfaces with the existing economic infrastructure within which it needs to operate (and which it seeks to replace), any economic efficiencies bleed out rapidly.
[1] Edit: And I'm not even considering the scams
Number of mining pools - power to hard fork the network, or to attack the network (51% attack is a very real possibility, the only reason it doesn't happen is the lack of general adoption - there are too few places to actually double spend tokens).
Number of people making decisions - power to hard fork at will, change protocol properties etc.
And before you say "but but the banks are also bad!", sure they are often crooks, but proposing to replace them with even worse system, and even less accountable people is weird.
Miners can hard fork but if the economical agents (exchanges, users) don't follow that won't get them anywhere. Their fork will just become an alternative coin and they won't be able to sell their mined coins, or at a lower price. It happened in 2017 with Bitcoin Cash.
> Number of people making decisions - power to hard fork at will, change protocol properties etc.
Same here: if the economical actors don't follow these people would just create a new altcoin.
And these economical actors seem much more decentralized than the people you mention.
How would users and exchanges find out about the alternate chain? Because from what I know the longest chain in existence is the valid chain, unless you are suggesting we trust centralized third parties like Vitalik and the Ethereum foundation to tell us which chain to mine on.
The agents decide which chain to follow be choosing what rules their node applies. They have to actively change their client software to follow a hard fork. Of course users who don't run their own node and rely only on exchanges depend on the decision made by their exchange. But in a controversial fork most exchanges would probably not pick side and handle both chains as two different coins. They would still have to somewhat pick a side by choosing the name of the coins though.
What's also interesting is that anyone owning coins before the fork will have the same amount of coins on both chains. That happened in 2017 and the price almost instantaneously split to about 90 % of the previous value to the previous chain, and 10 % to the new chain. Users rejecting the fork could just sell their Bitcoin Cash for Bitcoin and return to their initial value in Bitcoin.
Take as a simple example of making mining more democratic — ie we can all mining on our CPUs without being completely dwarfed by those who imported Chinese hardware. That’s an easy change to the protocol. Do you think that the current pools will vote for that?
The whole thing is a facade.
Exactly this. The entire selling point of crypto is its separation from regulated finance and from the rule of law.
If you don't believe yourself capable of either going toe to toe with the kinds of predators that prefer such an environment and thrive there, or of personally shouldering the risk of losing whatever funds you place into this space to such actors, crypto is not for you.
I would say this is actually true of very nearly everyone, which is why traditional financial systems look like they do.
I would expect an exchange to also hold traditional liquid money, which currently couldn't be captured by this. If you could get the US financial system onboard, maybe you could get them to maintain a 1:1 representation of a digital coin, but I don't see why they would be motivated to do so.
The next problem then is that you can't diversify your holdings beyond that of crypto, so you are completely trapped by the relatively unstable nature of crypto. One day you hold a billion meme coins worth one billion dollars, the next day it is worth zero.
Stablecoins can be used to avoid price volatility, and work within the framework Vitalik is suggesting.
Take Tether for example. Every time BTC starts to dip, USDT starts to de-peg. They are not at all uncoupled. Tether doesn't have the market cap to cash out all of the BTC, and never will. The amount of apparent value in the crypto market heavily outweighs any possibility of cashing it all out.
And that doesn't even begin to touch the questionable liquid assets held by stable coins. Tether claim to be holding 82% of "extremely liquid" assets [1], but I'm unsure it's proven or tested. From the report [2]:
> The valuation of the assets of the Group is based on normal trading conditions and does not reflect unexpected and extraordinary market conditions, or the case of key custodians or counterparties experiencing substantial illiquidity, which may result in delayed realisable values. No provision for expected credit losses was identified by management at the reporting date.
Substantial liquidity could be caused by, say, global inflation or recession conditions. But that surely won't happen...
[1] https://tether.to/en/tether-proves-resilience-of-reserves-in...
[2] https://assets.ctfassets.net/vyse88cgwfbl/1Xfu4398CIoMiuKjPh...
Deploy an open source, deterministically buildable, stateless, and immutable, unikernel OS to all platforms that enforces strict signing policies on a multisig wallet address signed and owned by whoever requested that wallet to be created.
End users will not need to trust the custodian as they will have access the remote attestation interface to prove systems they pay for are running expected binaries and thus obey the rules. A user then asks those systems to generate a wallet with a policy that grants the custodian the ability to transact only specific maximum amounts per day, with an automatic dead-mans-switch that always signs/exports an updated escape-hatch transaction sweeping all funds that a user can publish at any time.
It is possible, per the above, to create custodians with no raw access to key material that are provably bound to the terms a user agreed to on deposit.
This accountable computing setup ends up looking a lot like off-chain smart contracts. It could be used to ensure any type of user owned cryptographic key material can only be used by a SaaS according to user defined policies.
I am working with several custodians on implementing this type of accountability right now.
Anyone that fails to have a good proof-of-funds solution is going to become irrelevant in the medium term and hopefully illegal in the long term.
My point is anyone with an internet connection can give their savings 100% exposure to any centralized fiat currency, _if they so choose._
I'm not saying you should or you have to. I'm just saying this gives people the option to do that. What's bad about that? What's wrong with that? Should only US citizens be allowed to save US dollars?
https://jumpcrypto.com/the-depegging-of-ust/
That coin was supposed to be pegged to $1 USD.
Why are you arguing against letting anyone with an internet connection save US dollars? Should only US citizens be allowed to save US dollars? Why should we prevent humans from having that option?
Why did the argument suddenly switch from "have been for years" to "theoretically there could exist a stable coin that isn't outright fraud"? Is the reason that you can't think of a single example that is actually trust worthy?
In addition to USDC, USDH, and DAI, we've also got GUSD, RAI, LUSD, and USDP in terms of trustworthy stablecoins.
All of them are audited in reputable ways, either by large accounting firms or directly on-chain by cryptography:
USDC decided to remove guarantees from its site and invest its reserves as it saw fit without any guarantees or limitations on risk in 2021 before returning to form several months later. This happened despite the reserves being subjected to attestations every month. So it might be a good idea to start a list of trust worthy stable coins with just about anything else, especially if you want to give the impression that the attestations are actually worth the paper they are printed on.
Or you can do it, but suffer extortionist fees.
Classic first-worlder, thinking corrupt, authoritarian regimes which arbitrarily seize assets and cut off access to basic financial services do not exist.
It's about giving people slightly better odds of escaping abuse. It's about helping humanity.
No, THAT seems disingenuous.
I am working on crypto because I want to help these oppressed, unlucky people who are born into terrible regimes that are very hard to escape. I literally work on open source, gratis projects that do not generate any money for me.
Save pontification for investors.
Crypto is a first-world solution to mostly non-existent problems. "The poor unwashed and huddled masses of unbanked in authoritarian regimes will surely be helped by a system that requires smartphones, always-on internet, and trips to limited offline currency exchanges (heavily monitored in authoritarian regimes) to get any value out of fictional tokens" isn't a solution you want to make others believe it is.
False. It doesn't require always-on internet.
False. It doesn't require offline currency exchanges.
Try fleeing Brazil or Russia with significant amounts of cash. Either you cannot do it through legacy banking systems, or you cannot do it in real life with cash, or you have to pay an extortionist bribe in real life.
Why is it that "we're providing basic financial services to the unwashed and huddled poor masses of the unbanked" always becomes "move large amounts of money from one jurisdiction to another without any government control look Russia Brazil" (but in reality international monetary fraud).
Would you argue Jews should leave all their money behind in Nazi Germany when fleeing?
By your logic, Nazi Germany should have the right to inspect and disallow the transfer.
Just because it is a government making an arbitrary decision, that doesn't make it morally right.
Mmm. Godwin's Law. I haven't seen one in the wild for a loooong time.
Adieu.
If you feel stocks and equities is gambling, then you might also feel that this sector of crypto is gambling.
But there are other sectors of crypto that don't register on this price graph, maybe because price is not the only metric of their success, or because their volume is lower. Smart contracts, non custodial wallets, ENS, trustless payments, DEXes like Uniswap, are all interesting and valid use cases of crypto and blockchain tech.
It doesn't.
E.g., this vote corresponds to an SSN that hasn't cast any other vote, without revealing the SSN in question.
Any implementations?
https://0xparc.org/blog have a bunch of cool things like https://www.heyanon.xyz/
also the S part being succinct is useful without the zk parts too!
Crypto's real future is in machine-readable accounting imo
This guy lives in a bubble.
https://davidgerard.co.uk/blockchain/buterins-quantum-quest/
A more cogent explanation is that Vitalik finally found the right way to pull a con.
Sometimes even smart people are wrong about stuff, that doesn't make them necessarily malicious: https://en.wikipedia.org/wiki/Isaac_Newton#Alchemy
I'm willing to accept that people's actions from when they're 19 shouldn't color their lives years later. But maybe people's actions when they were 19 are good to examine to put context into a project they began when they were 20.
Evidence: https://old.reddit.com/r/Buttcoin/comments/we8514/nomad_hack...
It's not like I can verify "one number on the chain" with my own human eyes and no third parties involved. There's always trust somewhere in the system, you're just making that trust relationship more obscure and opaque.
We just witnessed one of the largest frauds in all of human history. It would have been nearly impossible to trick every client that exists that can examine the chain. You are so wrong it is unfathomable that you are being honest right now.
Consider that Tether is obviously a scam but continues unabated to this day. Better tooling is not going to fix the problems you think it will, because the incentives are all stacked toward dishonesty and fraud.
[0] - https://insidebitcoins.com/news/scammers-are-using-fake-wall...
Second, the fraud you're alleging Tether is doing is off chain! It's in the fiat world! It's not happening on-chain. Stop blaming a system that literally mathematically precludes fraud (within the system itself, of course).
Sure, while it's hard for users to verify that the code does what it says and has no bugs, there are companies that can do it for you (as you posted) and even automated tools that allow anyone to do so automatically, and as the EVM gets used and exploited, these tools and audits also gets more robust. More importantly, the code can be audited by multiple sources, as it being public means it can be audited by anyone.
On the other hand, financial records are likely audited by a single "reputable" company, with all the information the customers have is a badge that says "the money is there, trust me bro" and nothing else. But hey, it's "reputable" source so it's ok to trust them, right? ...Until it turns out that whoops, the money wasn't actually there because someone got a fat paycheck to make a honest mistake, ahah...
Do you have any examples of this happening with a reputable (read: top 5) auditing firm in the last decade? Because I can find a dozen examples of crypto frauds happening in the past week.
lol
Crypto is a tool to build a public financial system that minimizes the amount of trust needed. If you invest in DogeSpaceMarsElonCumMakeMeRichInu and lose money, it's not crypto's fault. You STILL have to do your due diligence and invest responsibly.
>In his book on the Equity Funding Corporation fraud – the Enron of the 1970s – Raymond Dirks wrote: "If routine auditing procedures cannot detect 64,000 phony insurance policies, $25m in counterfeit bonds and $100m in missing assets, what is the purpose of audits?" More than 30 years later, investors are asking themselves the same questions.
Disagree? Suggest three crypto "investments" that are not scams. Just three, with the entire ecosystem to pick from. Then let's check back in six months and see how many of them have gone the way of FTX.
You're welcome
Instead, the company under audit pays the auditor $$$$ for 'consultancy services' if the audit goes well, and fires them if they're too argumentative or time-consuming.
The results of this are:
https://en.wikipedia.org/wiki/Ernst_%26_Young#Accounting_sca...
https://en.wikipedia.org/wiki/PricewaterhouseCoopers#Litigat...
https://en.wikipedia.org/wiki/Deloitte#Litigation_and_regula...
https://en.wikipedia.org/wiki/KPMG#Controversies
While it's nothing like as bad as the cryptocurrency market, where scams are a daily occurrence, nobody investing in the stock market should imagine these auditors are going to catch anything but the most blatant fraud.
Just because something can be audited by everyone doesn't automatically make it better.
[1] https://threatpost.com/linux-bug-in-all-major-distros-an-att...
Smart contracts can be audited by any member of the public with the technical know-how, so there are typically a lot of eyes on the most important cogs - similar in some ways to the OSS security model. Traditional accounts typically cannot be directly and reliably audited by members of the public.
The OSS security model is honestly poor.
This very fundamental bug in Debian (one of the most popular Linux distros) sat unnoticed (and exploited?) for two years: https://www.schneier.com/blog/archives/2008/05/random_number...
How many eyes are on Debian vs memecoin-smart-contract-22112?
To be perfectly honest, the memecoin contract probably has more. A smart contract's code base is much, much smaller and changes less often, and a greater number of people are much more strongly financially incentivized to find bugs. Plus, they often do a thorough third-party code audit up-front at the time they publish the code, which would be impractical to do with OS code since it needs to be constantly updated due to its threat model.
I would trust the Shiba Inu token code to have less critical bugs in it than the Debian code.
Crypto seems like it's all of the bad stuff, unrealized potential good maybe if you think a certain way but generally not useful.
Legal oversight is still required. If you come in my house and $5 wrench my BTC out of me, legal oversight is still required to make it right, just as it would have happened with fiat, with banks, or barter, or whatever else.
If I run a scam, legal oversight is going to whoop my ass, even if the "legal oversight" is people that had their money stolen doing justice themselves.
Meat space still exists, but at least with crypto you're still minimizing the amount of trust required to digitally operate your own finances. "But then crypto is pointless" is a dumb take, because while not perfect it's still a massive, MASSIVE improvement over the "trust me bro" that financial istitutions are running on today.
So far crypto seems worse on every account.
I do not get why it's so hard to conceive that you can use crypto to build a system where you don't have to trust that people are doing the correct thing, as it's mathematically ensured by the system itself that no shenanigans are occurring.
The only "trust me bro" that is occurring in crypto comes from CENTRALIZED entities (such as CEXs, Tether, etc) and from people running scams where money appears out of thin air.
...but crypto is not even attempting to solve that problem. Not even vaguely. The rules in this space are "finders keepers, no takesie backsies", and the participants like it this way (until someone does something that makes them feel aggrieved and suddenly they don't and there is no recourse, by design). No negotiation, no arbitration, no common sense, no human element at all: "you snooze, you lose", and this is the entire selling point.
I can understand why one would disagree, though.
What's wrong with having the option to do away with the nanny, again?
This is an odd statement from someone who, I'm guessing at one point or another, said that "value depends on what everyone agrees it is"?
Oh but wait, the dollar has "the full faith and confidence of the US Gov" backing it, right? lmao
Until it doesn't. See you there.
How many more FTX disasters do we need until we've decided crypto is clearly the worse option?
FTX !== crypto.
What they did is fraud regardless of the cryptocurrency aspect, and plenty of people in crypto warned against centralized exchanges for decades now because of this exact reason, with MtGox and FTX being the most prominent examples because CENTRALIZED EXCHANGES WILL RUN AWAY WITH YOUR MONEY.
Because ->CENTRALIZED EXCHANGES<- ARE SCAMS.
BTC had NOTHING to do with it, it was just what gullible people fake traded in the exchange. If BTC was used properly and implemented actual Proof of Solvency as per the discussion we're currently having, this whole discussion would not be taking place because the ledger is public. The whole fiasco has taken place because the entire circus operated on "trust me bro we have your money, look we have been audited by a certified auditor ;)", which, in case you haven't noticed, is exactly how the rest of the financial system works.
How many more FTX disasters do we need until we've decided not using crypto as a public ledger is clearly the worse option?
Oh and BTW good luck next time the US doubles the circulating money supply again, but I guess that's ok because they have lots of big ships lol.
It seems obvious to me you can't use technology to plug a social issue (trust).
Whether you use PoW, PoS, or some other consensus algorithm, you will always have some necessary baseline of trust among people operating the network.
And the whole point of Proof of Reserve is exactly to avoid another stable coin fiasco. Every single person in crypto knows Tether is bound to explode as it's not backed by anything. With PoR you don't have to trust anyone, as it's cryptographically ensured the money is there.
And PoW, PoS are several orders of magnitude harder to exploit than a single centralized exchange. There is still a baseline of trust, but that baseline is beyond what any exchange could possibly reach by virtue of it being public and decentralized. Any malicious activity is much harder to execute and much easier to detect than any malicious activity operated by an opaque black box company. (see: FTX -> Alameda)
https://en.wikipedia.org/wiki/Arthur_Andersen#Enron_scandal
Or the S&L crisis, where most big failures had clean audits from the top audit firms.
As the same error seems to be being made in HN again and again, here is an analogy that hopefully will make the point clear. Traditional finance is like a dynamically typed programming language. You can certainly be productive with it, but it's much easier to slip through programming errors. To compensate you need to build a large set of unit tests to re-do much of what a strongly typed language gives you out of the box. A blockchain is the strongly typed version of traditional finance. Harder to use, to a large extent much of the ecosystem is nascent and still being built but it prevents large swaths of fraud and manipulation because it provides the checks built-in. The DeFi ecosystem is coming unscathed from all this fallout; Uniswap, Aave, Curve, MakerDAO, RocketPool, GMX, dYdX...
The retort to 'these crypto problems could be solved with regulations' is that traditional finance has these problems already and is regulated. This is a problem with society and not with technology, and trying to apply technological solutions to problems that have existed and will exist as long as people exist, seems to be arrogant and ineffective.
By trying to 'solve' these issues with technology, we appear to be opening new avenues up for gaming the system because there is no technology that emerges completely solved. Since we have been iteratively working on financial systems for a lot longer, it may be practical to work to progress that way instead of wiping everything and starting from scratch, where we are reinventing the wheel and getting all of the tragic consequences along with that.
Uniswap alone has settled over a trillion USD. The current DeFi ecosystem on Ethereum (even now in the current market) has tens of billions of in value locked. I do not know what would be vast sums of money, it's still small in comparison with traditional finance but the technology is a few years old.
> This seems to me to be a problem with society and not with technology, and trying to apply technological solutions to problems that have existed and will exist as long as people exist, seems to be arrogant and ineffective.
Indeed, the fundamental problems are societal and human in nature. The point is minimizing the surface area where that human intervention can cause damage. If your argument held any merit we might as well get rid of double entry accounting. After all, it's just trying to apply a technological solution to human problems. https://en.wikipedia.org/wiki/Double-entry_bookkeeping
> Since we have been iteratively working on financial systems for a lot longer, it seems practical to work to progress that way instead of wiping everything and starting from scratch, where we are reinventing the wheel and all of the tragic consequences along with that.
It's not reinventing the wheel. It's building a stronger foundation. I'm going to assume your field of expertise is CS, if it's not, hopefully it will be useful for someone else. Imagine the same argument brought to progress in programming language design. What's the point of Rust? We are just reinventing the wheel, considering how much has been built in unsafe languages like C or C++ we might as well keep iteratively building on them. Humans are still making programming mistakes. We don't need no memory safety in programming languages.
During the early 2000s you had quite a few, including Enron, WorldCom, Tyco, Parmalat and other accounting scandals.
During the 2008 crisis it turned out that large parts of the financial system was insolvent, but all had clean auditor opinions.
As William K. Black says it, in control frauds (where the fraudsters are the the persons in control of the institution), accounting fraud is the weapon of choice.
The problem with Crypto is there's nothing but frauds and Ponzis.