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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?

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.

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Discussion

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