Comment by throwaway192874 | Hacker News Reader

Comment by throwaway192874 | Hacker News Reader

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throwaway192874

There's a 1:1 backing of crypto funds, there is no fractional reserve stuff going on. But lots of internet people like to speculate there due to technical issues that happen from time to time.

A delay to take out coins != a fractional reserve. Exchanges operate with hot wallets that have limited throughput, there's a ton of reasons that particular withdrawals may be delayed that don't have anything do with having those assets.

One of the more common scenarios you would see is the hot wallet running low of funds, and there's a delay before more funds can be sent from cold storage to the hot wallet to service more transactions.

If more people are taking crypto off of Coinbase than sending it in, the hot wallet trends downwards. If whales make large withdrawals, it can take a huge leap downwards. Funny antecdote, whales see significantly more delays than your typical consumer but are used to it and have some lines of communication to get insight if they have concerns.

The process to move funds from cold to hot starts, but it's intentionally slow and takes time. So sometimes withdrawals can be delayed until that process completes.

> There's a 1:1 backing of crypto funds

Well, this isn't difficult to prove. Do they have a public process to display that 1:1 backing?

Google is failing me, I can't find anything but this:

https://blog.coinbase.com/a-behind-the-scenes-look-at-the-bi...

For individuals this isn't hard, but for large institutions it's very non-trivial. There's a reason that none of the major exchanges do this, it's not just incompetence or lack of desire.

Coinbase, and various other exchanges are regulated in the US so they undergo regular audits where having to prove funds is part of it. Some exchanges, I think it was Kraken, has published some version of those results, but the problem with these is at that point you're saying you trust the auditor and the process, which is another thing people would complain about anyways.

Technically, it's also very nontrivial to prove ownership of millions of addresses when they are also constantly changing (due to new address generation). Proving ownership of addresses stored in cold storage is even more involved, and would actually put the funds at risk because you would need to us bring the key out of cold storage to do so. Furthermore, people would likely not be satisfied with a one-time proof, so you need to operationalize this and do it on some regular basis.

Lastly, while this would be nice to have, it's frankly not something I expect any major exchange to do because it's simply not worth the investment. Most customers don't care and are happy to trust the government and regulations to ensure they are good enough. While I understand people are concerned because of what happened with MtGox, that doesn't mean that every other company after is involved in some big conspiracy about lying how much crypto they have. It's just FUD/conspiratorial thinking without real evidence to back it up.

The exchange going down at key moments (read: when the app is seeing peak traffic at new milestones regularly) is basically expected for a young fast growing SV startup, and doesn't support the argument that they are nefarious things going on

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