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Crypto exchanges and crypto retail shops may make a ton of profit by running fractional reserves just like banks do with fiat money, pumping out paper bitcoin to customers who don't take custody of their bitcoin.

What does it take to get big exchanges ot shops that provide instant and 100% transparency /self audit, where you see their pool of bitcoin on one or more adresses and you instantly can follow all of the inflow as well as all of the outflow?

Is this technically feasible, will it be costly, do we already have players who offer this type of service or do you have any other insights on this question?

Furthermore, what happens in practice when we get big run on multiple exchanges/retailrs and suddenly everyone want to take self custody ?

For instance, what happens in such a scenario with the transaction fees, and how long will it take to reveal if they have been running ponzis?

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Discussion

DireMunchkin 1y ago

In order to for the custodian to be solvent liabilities have to be less

than reserves, so for every Bitcoin "claim" I have there must be one

real Bitcoin on chain able to be redeemed.

It's not too difficult to prove how much Bitcoin you have on chain actually - You can just publish your addresses somewhere. Several exchanges and ETF:s already do this. For example Bitwise, Fidelity, Kraken.

The sticky part is proving liabilities, I.E how much Bitcoin is owed to your customers. This info is not on the chain itself so it's harder to prove. The best way at the moment to do this is a 3rd party audit, but then you have to trust the auditor is not colluding with the custodian to hide some liabilities.

Rune Østgård 1y ago

Shouldn't is be possible to instantly lock sats equivavent to orders as soon as they came in? That would make it possible to see the balance. Only orders that locked sats would be valid. By continually publishing a list of the balance, one would see if they had a deficit or a surplus of bitcoin holdings

ede3d957... 1y ago

BTC's limited blocksize unfortunately also limits the potential of bank runs. The technological understanding of most Bitcoiners also limits the likelihood of a bank run. So market participants and exchanges have plenty of time to adjust their strategies while they halt withdrawals. All of them learned from Mt.Gox and FTX mistakes.

Monero has gone through some years of heavy fractional reserving. But due to regulation it gets now delisted from all exchanges which ironically increases self-custody to close to 100%.