> If you prove that customers' deposits equal X ("proof of liabilities"), and prove ownership of the private keys of X coins ("proof of assets"), then you have a proof of solvency: you've proven the exchange has the funds to pay back all of its depositors.
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.
> 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?
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.
> 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?
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.
It would be impossible for any entity to fraudulently post proof of on-chain reserves today.
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.
Well... you wouldn't know if the reserves that they show proof of are theirs or borrowed from someone else. In the real world "your keys" doesn't necessarily mean "your assets", that's the point.
Personally, I don't think so. It's another attempt to replace 'trust', in this case trust on an independent party that audits the financial statements, with an even less reliable alternative that doesn't even work. This obsession with trustlessness is a mistake.
Maybe you do, but I don't need 20 years to figure out that 'crypto' can't succeed because of 1) limitations that are inherent to 'trustlessness', 2) isolation from and inability to deal with physical reality, 3) competitive disadvantage of distributed systems, and 4) lack of appeal to anyone who has normal, healthy relationships with other people (i.e. a social life).
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.