Crypto exchange AAX suspends withdrawals

An exchange shouldn't count deposited crypto as their asset. It is an asset of their customer.

I do not think the actual problem here is crypto exchanges being unprofitable. Even if a crypto exchange goes under, it could (and frankly should) still be able to go under gracefully, e.g. letting all customers withdraw their assets for a month (and E-Mailing private keys as a last resort). The issue here is crypto exchanges severely mismanaging the assets of their customers.

Banks need to be heavily regulated because they are investing the assets of their customers. An exchange should not be doing that, it should be holding customer assets and making them available on request.

They should make money in the same way that the New York Stock Exchange does - by taking a small fee from every trade.

I know nothing about the world of crypto currencies, but I do know finance.

The exchange does not hold the trades instruments/currencies/securities as assets. The business of a normal exchange is normally risk free (just matching buyers to sellers). Some exchanges step in as middle man in the trades, a process that I believe is called novation of the trade. The original trade between the buyer and the seller is novated, transformed into two trades, both against the exchange, one for each party and opposite direction. In this case the main risk is counterparty risk, the risk that one of the counterparties fail in some way.

An exchange never holds its own positions.

What is the difference in these cases? Have the crypto exchanges somehow used their users cryptosecurities as assets?

> Is there any reason someone would take out a loan in crypto and pay interest on the repayments?

People want to increase their exposure to crypto via leverage. For example:

1. Collatorize BTC to get USDT

2. Use the USTDT to buy ETH.

3. Use ETH to collatorize to get USDT

4. Use USDT to buy sh*tcoin

5. wash, rinse, repeat

If everything goes up, you can make a ton of money. If things go down... you lose everything.

Most of the exchanges are considered international and dance around laws and regulations. Some have versions of their site that are supposed to be dedicated to certain countries laws, but as we have seen lately that seems to be a lot of lies for a some of these exchanges as well. They make money on customer trades, but when the market is down, trade volume craters. If they were responsible with funds they would know this is coming and have planned accordingly, but most of these exchanges operate like its a perma-bull market. On top of all of that, they are leveraging heavily into other financial devices using customer funds on their books. Its a recipe for disaster.

> unless they are charging reasonable money for the privilege of using their exchanges

If the trading volumes they are claiming are real, these exchanges should be printing money from transaction fees alone.

It would be fine if it were only an exchange. If the only assets are those of the customers deposited, then everyone can withdraw at the same time without issue. The problem is that they are also lending on margin, which means they are lending customers money to use to buy more crypto.

Each customer has their margin loan secured by the crypto in their account, but in a steep drop in crypto valuations, the value of the crypto can drop below the loan principal. And if individuals don't cough up the cash to pay the balance, the exchange is on the hook for it.

And it gets worse. Where does the exchange get the cash to lend in the first place? They borrow it, of course. And like the individual traders use the securities in their account as collateral for their loans, the brokerage uses all of the securities they hold as collateral for their loan. Problem is that they don't own these securities, but rather hold them on behalf of customers. So in a situation where the exchange as a whole is undercolateralized, the brokerage as a whole can get a margin call. And then they will have to liquidate securities they hold (your crypto). This means that even if you are a customer with a low risk portfolio, you can lose your securities because the exchange took on risk to finance someone else's risky trade. This exact process happened at MF Global back in the financial crisis, and would have happened to a lot more firms if the government hadn't bailed them out.

Margin lending in the stock market is heavily regulated, and I'm sure you can see why. Crypto is the wild west. A lot of lessons were learned about this in the crash of 1929, and the crypto market is learning them now.

It gets fixed by largely replicating the traditional finance system, which would of course be completely pointless. The whole point of crypto is to evade government regulations, which means this kind of stuff is inevitable.

The problem is that the people who run the exchanges can't stop themselves from using customers' money to try to get rich.

In theory it is possible that an exchange could just take customer money, keep it in a lockbox, and make their revenue by charging transaction fees. But does that ever happen?

The kind of people who are so into crypto that they build a business out of it are fundamentally incapable of that kind of self control. They think they are revolutionaries who are remaking the financial system. They do really dumb financial stuff that the rest of us learned was bad after the 19th century. They aren't the kind of people who would just leave customer deposits alone.

Remember that FTX was supposed to be the responsible exchange. All the other ones were considered to be worse.

That's an interesting related problem - their costs are real dollars/Euro/Peso etc, but their revenue is in crypto. Eg they have to pay rent, salaries, AWS bill but their revenue is in ETH or BTC or SOL which is a fraction of what it used to be. Banks dont have that problem - their costs are denominated in same currency as their revenues.

With your description I am guessing that what you call FIAT world is a financial system that is regulated where in fact banks (not exchanges, although they are also regulated in terms of what they can do with whatever is deposited and how they create revenue) are forced to hold cash to handle the risk and ensure some safety for the deposits.

> If this is true, how does it get fixed?

So far the only way to fix this seems to be with regulations, which seems to go against one of the main arguments in favor of these assets.

> If this is true, how does it get fixed?

The root problem is people buying to pyramid schemes (read as: crypto).

It's in the name, isn't it? An exchange is where assets are exchanged.

For that service they get a fee, usually tied to the transaction volume. Pay any expenses out of that fee and keep transactions rates high is a good mode for survival.

Unfortunately, if asset prices depreciate, fees tank too. But that's manageable.

What's not manageable though if you start using assets of your customers to create a new revenue stream by locking those assets up somewhere or by using them for high-risk trades.

When people start asking their assets back you suddenly have a problem.

The issue here is that crypto exchanges DO make a tonne of cash from trading: the fees are high and the spreads are wide.

Yet they have ALSO been "dipping in" to customer money to make "loans" of questionable quality with...

In the fiat world banks are regulated and can’t do crazy shit with their reserves.

Banks have regulatory requirements that reduce risk. There are insurance mechanisms to protect bank deposits and securities insurance to protect custodial assets.

The problem with crypto stuff is that it was the Wild West and that atmospheric attracts and breeds crooks.

Wrt loans, people were pretending that these coins were cash. The reality is that they are sort of like virtual silver. All debts get settled in legal tender.

This part is not actually that much different with respect to banks, where the cushion is the equity (the stock). Also, if I'm not mistaken the debt securities (bonds) issued by the bank are below the bank account claims, so that's your regular customer cushion too.

Bankruptcy is essentially drawing a horizontal line across the pyramid of liabilities, where everyone below the line gets nothing, everyone above the line gets fully paid back, and everyone on the line is the new shareholder. This line is called "fulcrum".

The difference is in government oversight (regulations) and the social agreement that bank accounts will be bailed out. Because of the former the latter rarely happens (yes I know, 2008, but this concept has been around for a century and a significant minority of protected liabilities such as bank accounts have had to be rescued since then world-wide).

> In the FIAT world, banks make tonnes of money from things like loans and mortgages so they can handle some risk by holding onto cash.

And by being a member of national and international banks; if a bank in NL fails, there's the Dutch National Bank that will step in and guarantee people's money (up until a certain amount); above that is the European Central Bank that holds a lot of money to ensure stability, reliability and trust in the fiat banking system.

Don't get me wrong, the traditional financial system is fucky (professional term) and they do a lot of weird shit with people's money ($1 invested 10x over) but there's checks & balances at least.

>If this is true, how does it get fixed?

It's not true, they're just dipping into customer funds to make risky bets on extremely volatile instruments (more crypto assets) and losing. Along with straight up fraud stealing customer funds and having shit security and getting robbed.

It gets "fixed" by regulatory bodies like the SEC appropriately and quickly requiring a set of rules and regulations on any exchange that operates in country along with auditing, fines, and general fast and effective enforcement.

These exchanges aren't failing because of accidents or inherent risk, they're committing fraud and taking foolish risks that traditional banks aren't allowed to take.

> In the FIAT world, banks make tonnes of money from things like loans and mortgages so they can handle some risk by holding onto cash.

Also, IIRC, conventional stock exchanges make their money from transaction fees on trading volume. Are there cryptocurrency exchanges not doing that? I suppose even if they are, they're probably in trouble, since once the bubble bursts there will be a lot less trading activity going on.

Unless the exchange is only crypto-crypto they need cash as well.

> can only come from trading crypto

"trading" is a really broad term. They will get fees from trading, but they will probably also be doing things like providing liquidly to other exchanges and arbitrage (crypto is of course very volatile so arb opportunities are all over the place).

Banks don't make money from mortgages and loans, but from deposits. Our financial system uses fractional reserve. When you deposit $1 in a bank account, they are allowed to have ~10x that, or $10. They can literally create virtual money and deposit on other people's accounts (loans).

From $1 deposit, they make 900% instantly.

From $1 loan, they make 5-10% a year.

Crypto exchanges can't create money. Unless they have their own tokens. But even these tokens have more transparency than our current financial system.

So yes, they're pushed to handle their customers' money in risky ways to make a profit.

It's dumb. Against the whole point of decentralization...

It's like hosting every TOR node on AWS.

There is nothing wrong with this, and indeed it's a good thing.

Firstly, people keep their Crypto with the exchange for trading purposes and because it is easier than self custody. This means if the exchange goes bankrupt they potentially lose their money.

Secondly, as it is an unregulated space, we have instances such as FTX where they were using clients funds which should be segregated. This arguably crosses into fraud, and we do not really know which exchanges have been doing this and which ones have been properly segregating client funds. Coinbase is probably the only one we know for sure as they are an audited US publically traded company.

Finally, we also have situations where exchanges are doing things such as not matching client deposits to their reserves 1-1, or hold those reserves in less liquid investments. This could range from another fraudulent situation to good practice, but leaves them very exposed to situations where everyones wants their money back now.

You have to look at the business model of the exchange. They way you describe it is how it SHOULD work. The exchange makes money directly from you through transaction fees or just account fees. They would not need to "invest" your crypto in anything, because they have other ways to make money. This is (I think) the way Binance and Coinbase operate.

But a lot of these exchanges have attracted customers by offering interest (rather than charging a fee) and/or free transactions. But then how can the exchange make money and keep the lights on? Well they have to "invest" the customer's money. Then the investments go bad and it all blows up.

> What am I missing?

That most of them, not all of them but, by very far, most of them are downright scams, planned as scams from day one, just like in the FTX case. Evidence is mounting quickly that both Alameda Research and FTX were mounted as scams (despite the narrative that's going to be sold that it was bad luck / bad trades that sent them in a death spiral).

There are people who warned about the very scam Alameda and FTX were putting the very day FTX launched.

For FTX, turns out they called themselves "crypto exchange" but lent the money just like a bank, making them, surprisingly, vulnerable to bank run, which happened.

Unfortunately, this is common, just like $LUNA called themselves "stable coin" but it was stable only against assets in the crypto that were not stable at all.

Live by "Do your own research" and die by it. I guess.

The thing that you are missing is that crypto transactions are slow and expensive. When I say slow I mean hours to complete a single transaction. That's why people keep their money on the exchange, it's far more efficient and usable. Of course it's also risky because exchanges do rug pulls all the time. Knowing when to pull your crypto and bail is a trick. If you're seeing news articles about "minor irregularities" and "temporarily suspended trading" it is too late. Your money is gone.

Most of them are committing massive fraud. Gambling with customer funds. Misreporting trading volume via wash trading, and using that to create false impressions in the market that they can trade on. For instsnce, using their own tokens or "stablecoins" and then juicing the numbers for those.

As far as I know, Coinbase works this way. They don't transact, trade, or create derivatives of the crypto coins they manage. They simply make a profit by charging a fee per trade. They are regulated and a publicly traded company (which means certain standards of accounting) so they might be one of the only ones standing when this thing is done falling down.

These other exchanges are doing far more exotic things like creating their own coins to grant status on their exchange and creating derivatives so traders have more leverage and therefore action. Coinbase would be considered boring to these users since it is a vanilla exchange.

Crypto exchanges also function like banks (holding customer deposits, making loans/investments with customer funds), just without reserve requirements or FDIC insurance. The protections against bank runs that we have in place in TradFi are largely lacking in crypto, and the whole sector seems to have reached 1929 in its speed run of modern economic history.

Well, a lot of people will keep some $$$ and some cryptocurrency in their account at the exchange. Maybe because they want to play the day trader, being able to buy and sell at a moment's notice.

So the exchange ends up with a big account of client funds containing cash, and a big wallet of clients' cryptocurrencies.

If a bit of that money goes missing, they can cover it up for a long time, if cryptocurrencies are growing and there's net more money flowing in than flowing out. You just pay departing customers' withdrawals from new customers' deposits.

It is only when the tide goes out we find out which swimmers have lost their trunks.

And once a company's demise becomes inevitable, perhaps insiders decide to help it along. If you've already been hacked for $10 million, why not make it $100 million given the company's going under anyway and you'll be the prime suspect?

Even if an exchange doesn't start out as a scam, it might become insolvent due to a partial hack, or losing a wallet by accident, or some other screwup.

An exchange can be technically insolvent for a long time without anyone noticing, and try to fill the hole with money from fees etc. All will look normal from the outside... until too much money gets taken out too fast.

From a legal perspective there are no required internal controls on the flow of crypto going in and out. Apparently when there is a couple of hundred million worths of crypto sitting in a wallet, it becomes real tempting to go to the racetrack so to say.

Also, most of these exchanges have their own tokens which they control the supply of and keep as "assets" on their books. In doing so they can use these self printed tokens as collateral for loans. Add to that some nicely leveraged positions in all kinds of shitcoins and you start to understand how we got here.

Crypto exchanges always have lots of money because plenty of people keep their money inside. Those lots of money are getting withdrawn by owners and spend. It would be stupid not to do so. Free money yo. It works as long as exchange grows (more money to spend) or at least does not shrink. It stops working when lots of people want to withdraw their assets which are already gone. Time to hide.

> What are crypto exchanges fundamentally doing differently that they are suddenly losing money?

Fractional reserve banking. Exchanges now offer traditional banking services such as savings accounts and loans.

They are unregulated banks with none of the insurance and government protections to bail them out. They cannot resist the temptation to gamble with the vast amounts of money they are sitting on. Only a matter of time before they lose it all and people can't withdraw their cryptocurrencies because there's no money in the reserves.

I think they are more like a bank, when everyone wants to withdraw at the same time, bad things happen.

crime.

None of these collapses have been due to fractional reserve banking, because fractional reserve banking requires being open about what you're doing. These collapses have been about fraud. There are lots of other kinds of fraud; getting rid of this type would barely make an impact.

While there's nothing intrinsic about cryptocurrency that would make it more prone to fraud than anything else, the culture around it seems highly susceptible to it.

This is the correct take, and why American regulators need to address crypto sooner rather than later.

Sure, without the safeguards. No FDIC. No lessons learned from the history of banking.

I agree it's a banking problem in that they're trying to streamline a new economy by not doing what "legacy banking" does. Which is like streamlining airlines by starting the rule book from scratch. But the rules and regulation of the airlines have been paid for in blood. Discard them at your own peril.

Or, in the case of cryptocurrencies, at the peril of the finances of anyone investing in your experiment.

Of all the problems listed in critiques of fiat currency, what percent is just banking?

Seems hard to try to disentangle money and how money gets managed at scale.

As I've noted before on HN the entire concept of people being able to manage their own wallets flies against everything we know about people. People forget stuff, make mistakes, and lose things. The margin of error for a wallet is tiny. It's not rare for crypto forums, twitter, etc to prescribe completely ridiculous processes and systems for securing wallets, backing up seed phrases, etc. There's an entire cottage industry built around people etching their seed phrases on steel plates for people to (I'm not kidding) bury them like they're gold in the 1800s.

Plus funds in a wallet require extra steps when you want to trade on an exchange (extra costs via gas, time, possible errors, etc). The use cases for crypto are so minimal for the general population one could argue it's only survived this long through making trades on exchanges - to what essentially amounts to gambling. You can't gamble with funds in a wallet which defeats the entire purpose of crypto for the vast majority of the "users" in the space.

The use of intermediaries is due to the deficient user experience of cryptocurrencies and cryptocurrency community:

1) They downplay the expertise and knowledge required to manage your own tokens.

2) They advocate for the use of cryptocurrencies by normal (i.e. non-expert) users as this increases the value of their holdings.

3) They prefer to blame users who make mistakes, are hacked/scammed, or otherwise lose (real) money for their lack of technical expertise.

Given this, it's not surprising that the enormous gap between naive engineering assumptions and human reality is filled by intermediaries despite how consistently they fail. As long as cryptocurrencies continue to exist beyond a tiny niche I don't see this changing.

> Apparently nobody does this anymore, and gives their wallets to these exchanges (i.e. banks) and balks when the obvious happens in pyramid schemes.

The name of the game is pump and dump, you can't play the game (speculation) if you're not on the field (the exchange).

Crypto's marketing is 'financial freedom' as in get-rich-quick, not free as in libre.

You're not taking crazy pills. It's become abundantly clear that the vision of everybody being their own bank will never work.

People don't want to be their own bank, just like they don't want to be their own bakery, or their own farmer.

Sure, some people do bake their own bread, but they do it either because they have to, or because they enjoy it.

So the people who control their own keys need to have a reason to do so. Because it takes more effort than not managing your own bank.

What exactly are the reasons to run your own bank? What problems in your life are solved by it?

I can think of a two:

* You want to hold more cash than FDIC guarantees. * You think the government will seize money out of savings accounts, as happened in Cyprus.

These have to be weighed against the facts that while not literally in your mattress, the money becomes pretty easy to steal, for anyone willing to point a gun at you. And being your own bank comes with obligations, too, so the government will come after you if they want to drain your bank. And the justice system can put you in a box if you don't comply.

Basically: If you already have a bank, why would you not just use it? And if they refuse to do your thing (like order a hit), then buy tokens and pay a hitman in tokens.

If there were FDIC for tokens at your real bank, redeemable in same number of tokens, then any general public that wanted to use cryptocurrency would likely just use that. Because outside of fringe LARPing nobody wants to run their own bank.

No, that's exactly it. People love the idea of decentralization and doing things on your own, except then they realize that it's actually kind of hard to be off-exchange and still be liquid (whatever the hell that means in crypto-land).

So basically no real change except they're much more exposed to risk (fraud and market swings notwithstanding)

The core truth in this day and age is that nobody (understand this a non-significant minority if you prefer) wants to host their own stuff. It's way more convenient to use centralized services that do the heavy lifting for you. If you don't have that convenience, you can't have mass adoption.

Most people hold Bitcoin these days in the hopes of making money. The distributed consensus nature of crypto is irrelevant.

I think so many cryptocurrency users avoid maintaining their own wallet for the same reasons most people (these days) don't store all their wealth as cash or gold under the mattress: it's both inconvenient and easy to lose.

Of course what folks are seeing now is that it's real easy for exchanges to lose their buttcoin deposits too.

You do have control. You can start your own blockchain and keep the transactions flowing. Of course, transactions imply other people will use your chain. It's like you can create value not by gold, or tobacco, or even math, but by the very trust people have in your asset. And this brings us to a concept that some may be familiar with but is relatively new to the crypto community. A new kind of coin is here.

This is a concept that probably never existed before crypto, called "fiat." "fiat" is the latest and greatest in crypto technology. True decentralization. Multiple countries. Multiple municipalities. Multiple systems, multiple institutions, multiple protocols and multiple contracts, the picture of decentralization that crypto could only dream of. And of course, if you make a mistake, you can revert your transaction, a form of technology crypto has not yet mastered. Oh, NFTs? Please. "fiat" utilizes advanced art international HS92 commodities exchange codes to kick start the burgeoning modern art scene of completely legitimate businesses.

That's because nobody really cares about what crypto can do anymore, and only cares about making fast money.

If you internalize this fact, then it explains why people just keep their coins on exchanges, why they buy centralized "cryptocurrencies" , why they leap at the chance of buying the latest Paris Hilton NFT and why they keep defending Tether as legitimate.

Fundamentals are thrown out of the window unfortunately.

The people who were pushing the fact that you'd have sole control over your wallet were those who wanted to be immune from the government seizing their money: scammers, criminals, tax dodgers, and exchange runners (a combination of the first three).

Those people put a bunch of money into bitcoin to inflate the price, but they need a bunch of rubes trading the currency to keep the value of the coin (relatively) stable so they can withdraw their holdings, but they don't care much if those rubes have full control, and that's where exchanges come in.

Exchanges are there as a way for the first movers and the ultra-wealthy to extract wealth from uninformed, naive new investors into crypto.

I think once crypto gained traction beyond early adopters into more mainstream people it became an "app" and that "app" was the exchange and non tech, non crypto people don't put more effort into it then that.

What is alarming and becoming more revealing is how much of this crypto was being back-doored from one crypto "product" (exchange, fund, coin, ICO, etc.) into another. In programmer terminology: it looks like there are (were) a lot of pointers to the same memory address.

Distributed currency turns out to be too difficult for most people, and a currency that only 5% of the population can use isn't very useful.

The crypto community is very much to blame for this. Initially, back when bitcoin was hovering about $1 per coin, everyone was talking about personal wallets, and educating people how the wallet was just a bunch of numbers you can write on a piece of paper and which you can keep hidden in the lining of your pants, etc.

But then bitcoin started getting popular and emerging towards mainstream culture, the talk about wallets seized. All the new crypto firms started marketing accounts and "cloud wallets" and the personal pocket wallet was never mentioned.

Crypto then continued to advance in mainstream culture and personal wallets were kept a secret. I doubt the average crypto user even knows about personal wallets.

And if you disagree, please prove me wrong. There are many crypto commercials on mainstream media, show me one that has mentioned that you can keep a personal wallet.

So the crypto industry is to blame for this. They basically hid the most important part of crypto from the public because they would make more money without it.

A lot of crypto investors are day traders or naive hodlers who have no idea what blockchain and DeFi means. But DeFi protocols like Uniswap and Aave are holding up fine and are incapable of pausing user withdrawals.

The user growth is high enough that at any given time roughly half of the people involved have been at it for less than 18 months. So the space is dominated by the least-savvy and has been for some time.

Many people will never be capable of self-custody because the lack the interest to do it. They see money to be made and ignore the warnings of those who try to explain what they have on an exchange is a promise of money, not money itself.

When you say "nobody does this anymore," that's kind of true, but also not true. Those who have learned the hard way do, the newbies (which vastly outnumber the first group) don't.

Self custody requires knowledge of some basic math, cryptography, and the ability to understand basic security principles.

User growth explodes with exchange rates. Those diving in understand very little about what they're doing and should stay out. They don't listen to people saying such things and the result is, well, predictable.

You get things, I think, but bitcoin’s transaction bottleneck meant it was never going to be able to handle anything approaching wide scale adoption for day to day transactions. Attempts to address that with other coins or centralized exchanges is at least one of the major factors that lead to this point.

I think it depends on your goals.

I mean, do you store all your cash under your bed in case your bank go bust? People keep crypto on the exchange because it makes transactions easier, and in some cases you might have other perks such as being able to lend it for interest or spend it with crypto credit cards.

This idea that you can have a digital currency without some kind of bank or exchange is fundamentally flawed imo. Unless you believe the only valid usecase of crypto is as a digital alternative to physical gold then it probably makes more sense on an exchange. The main issue here is that the exchanges are not regulated.

But I suppose given the lack of regulation I would have to agree with you that the only safe use case right now is as a "store of value" in a cold wallet.

Trading is addictive. Like all forms of gambling, it lights our reward centers up.

On decentralized exchanges, you pay each time you trade (gas fees and such). That cuts right through the endorphin rush.

Centralized exchanges keep those fees low by making everything centralized. It's akin to casinos keeping their guests comfortable and liquored up.

As a person who works in crypto, I'd like to see us engage with this more forthrightly. When we cut out gambling, how many use cases are left? How many are viable today?

You still have people with their own wallet. But the vast majority of people don't want to deal with the complexity of decentralization so they prefer centralization

"Not your keys, not your coin" is a popular adage, but it doesn't really seem like many people follow it. Thus the popularity of coins with high transaction fees.

The original crypto culture which emphasized privacy (although speaking of a public list of all transactions ever performed on the network as privacy oriented is pretty hilarious), control and decentralization has for the most part been lost to crypto's eternal September.

I do this (for the most part). Whenever I buy currency on an exchange, I Immediately transfer it to a personal wallet. This is actually what drove me away from anything based on Ethereum, because the transfer speed and fee system for Ethereum is so horrendous, I found myself leaving that currency in the exchange managed wallets.

Many people are managing our own coins, you just don't hear from us because we don't get burned every year.

That is still the promise and unlock of cryptographic currencies. But that does not seem to be the use case for much of the people I've seen in the space the last years. I think the fact it is crypto currencies is incidental, it is all about earning money through appreciation of some popular asset.

I read an interesting thread on why this isn't a pyramid scheme. Basically there's no one at the top. It's decentralized so there's a loose federation of edges arranged in a many-sided polygon. So we need a new name. Instead of Ponzi, this is a Nakamoto Scheme.

> People just don't get distributed currency if they promptly undistribute it.

Same as with source code version control. As soon as distributed VCS appears (git), people promptly centralize it with another abstraction layer (github, gitlab, bitbucket, etc).

The same thing has happened with git over time, no? Decentralized source control, forking whatever you want/have access to when you have a flash of inspiration, etc.

Now everything is in github, gitlab, or bitbucket, and centralized there.

The thing is that the people that are most active in crypto and typically have the largest stacks are traders. They grow their stack by shorting/longing, leverage, staking and DeFi, all of which require an exchange.

Well, run a full bitcoin node. I am doing thwt.

It's close to just running your own email / fileserver etc. IMHO.

So while possible it's also annoying and not worth it for most people, and I get that.

> Apparently nobody does this anymore

The right way to do that is to use a hardware wallet. There are many companies making and selling those, so there's definitely a market for that.

Fuck. Exchanges. I lost all my dogecoin in the early days to an exchange. I knew no better it was too early.

I do it. Certainly some people else.

I recommend going off all crypto, not only on exchange.

Not your keys, not your cheese. It's sad how many people have to learn this the hard way.

While I agree with you generally, it's a bit absurd to compare these bizarre degen exchanges with something like coinbase.

Why wouldn't you get out of any/all crypto you can right now?

If you're bullish on crypto's long-term prospects you can always buy back in after the crash. There will be a new "ground floor". (I would suggest no one do that... just saying, even if you believe whole-hog in the future of crypto, now's the time to sell any way you can.)

Take your magic beans off-exchange, because otherwise someone might steal them.

And this will be how the cryptocurrency / DeFi world learns another concept of regulated banks: bank run.

I've had a store credit card (via Comenity Bank) having "system maintenance issues" since early June, refusing to pay out the money owed per their rewards scheme. No one at either the store's corporate office can tell you anything nor will the backing bank say anything other than "We value you as a customer and appreciate your patience."

It's a common industry tactic, sadly, to scapegoat IT operations for internal failures.

BlockFI was offering 8.5% APY on deposits. FTX was offering 8%

A true exchange, where you just buy and sell, will never pause withdrawals because they won't be acting with these ponzi-like methods

A decentralized exchange won't give you free money, so less people will use it. Also the same with a centralized exchange offering you 0% APY and full liquidity at all times. You could build one, but will people sign up?

They are widely used and process billions per day.[1]

There are other problems with DeFi: protocol risk, transaction fees, speed, UX. They are newer and less known than CEXes and most users who buy and hold crypto on FTX or BlockFi do not know how to use the blockchain. Most of these problems can be overcome, like see L2 development, but it will take some time.

[1] https://defillama.com/chain/Ethereum

Usability is still not great. Slippage risk is hard to communicate and txn costs were high since they require on-chain txns.

There is no on/off ramps to the fiat world.

Other issues like complexity/bad ux are being rapidly fixed but the on/off ramp issue is one thing that technology can't fix. Its a legal issue.

Most people use fiat, there is no way to use a credit card to buy crypto on a DEX. Also, transaction fees are usually higher and some coins just cannot be supported unless wrapped, like trading bitcoin on an ethereum DEX requires you to use WBTC or similar tokens, which are usually costly to wrap/unwrap and might even be centralized.

The entire point of a cryptocurrency is to be a decentralized electronic currency.

Centralized exchanges exist to handle the problems with decentralized electronic currency.

If there was a good way to decentralize a centralized exchange, that solution would just be part of the decentralized currency and the exchange wouldn't need to exist.

DEXs don't interface with state backed currencies, which makes them have limited utility for typical users who want to engage in economies they actively live in.

they are: https://www.benzinga.com/markets/cryptocurrency/22/11/295847...

Decentralized exchanges can't offer 0 fee trading.

"Pease don't take all your money out, because then we are fucked!"

(rough translation)

This.

If an exchange cannot 1:1 fund withdrawals it is not an exchange, it's a ponzi scheme. Full stop.

All real exchanges should be releasing evidence of 1:1 backed customer deposits ASAP like Coinbase has. And if they don't, it should be considered a canary of systemic risk.

Well said. It is exactly this simple.

People usually have crypto on exchanges for leverage, which is a valid reason. People do this with many stock brokers as well, e.g. for option trading.

I have something like 600 stuck in blockfi (original 1k - market value since then).

I had almost totally forgot about it until someone posted something on reddit, and they sent an email, and now I can't get the money out. I believe it's 50% 'stablecoin' 50% btc.

I do not follow crypto and think the proselytizers are a bit crazy.

In my mind I wanted a small amount of crypto exposure.

But post this stupidness, 5-6% or whatever interest does not correlate with what the actual risk seemed to be in my mind.

well rated corporate bonds are approaching that now. I was just googling examples I think big name corporates are sitting like 5.3%

so in my mind 5-6% was not a big bright ponzi warning sign, especially since they stopped taking new deposits to 'go legit.'

Like afaik there are big brand name corps that are b level rated that have coupons that or higher.

and would be shocking if they all went bust in the same week.

The risk -> return % seems like the yield should have been bigger

https://fred.stlouisfed.org/series/HQMCB6YR

I had mine on Gemini, which I actually trust as the most reliable exchange. I don't expect them to run into trouble[0] as they've submitted to NY finance regulations and haven't dabbled in obvious scams like Tether.

However I'm taking them off today on principle. I bought-to-hold because I think the tech is cool and I like the 'emotion' of having an investment to motivate me to keep an eye on the space. But if I really think the tech is interesting at the protocol level and think it might find future application, I should embrace self-custody, which is the whole point.

Correct, there seems to be an exodus from exchanges or at least moving to decentralized exchanges

knowing how lazy & comfortable people are with banks probably 90% of the 'casual' investor space is entirely on exchanges.

If I were a betting man, and I am because I am involved in this crypto-calamity, yes, do expect this cascade to reach them eventually. Putting aside the philosophical questions about contributing to a bank-run, if you have assets on Binance it may behoove to you start withdrawals sooner rather than later.

anyone who claims to know is lying to you. historically speaking, a good heuristic would be: not your keys not your coins, no matter what the exchange is. if you control your own keys then you don't need to wonder about whether binance is solvent or not.

How much of Binance's $500-million worth of FTT did they manage to salvage before FTT / FTX went bankrupt? We already know that Binance had at least one giant pile of FTT, as they tweeted about this before FTX / FTT troubles started to go down.

In some sense, it has already reached Binance. The real question is whether or not Binance has enough funds to weather that kind of storm.

Small sample set, but I recently saw a poll on a DeFi fb group that I'm in and the question was: "where are you moving your crypto during this sh*t show?"

The majority of the people answered 'binance'.

If/when this cascades to Binance we can it will be a big big setback for crypto and probably slows down adoption of decentralised currencies by decades.

See, bank and bank regulations have some problems and are not bulletproof, but we don't want to just have some problems, we want to have all the problems!

Yeah, very low. Damn.

Having worked on a crpyto exchange myself in the past, it's almost never a technical issue; the traffic isn't bloated with media resources or anything, and those requests were just thrown in a backend queue until they were pushed to the chains.

It’s almost like they got greedy and didn’t keep adequate reserves

It seems you are thinking of the crypto exchange as selling crypto to customers and then "holding on" to their money. That's not the right model.

Party A deposits 1 BTC into the exchange. Party B deposits $1000 into the exchange. Party A wants to sell a BTC for $1000 and party B wants to buy a BTC. They trade through the exchange, pay some fee to the exchange, and an entry in a database is changed such that the $1000 in the exchange now belongs to A and the 1BTC in the exchange's wallet now belongs to B.

Since actually holding cryptocurrency is inconvenient for users, many will just choose to keep the BTC on the exchange until they want to use it/sell it for cash or a different cryptocoin. Many crypto users are speculators who view it the same as holding stocks in brokerage accounts and not as just an exchange.

This money is held in the exchange platform but belongs to the users. They should in theory be able to withdraw it whenever they want.

Instead the crypto exchange decides to make use of these idle customer funds and invest in speculative funds/embezzle all the money and all of a sudden there is not enough funds in the exchange for all users to withdraw.

It's not expected to exchange back, it is expected to give back cryptocurrency deposited there.

21st Century Beanie Babies

Those exchanges don't have the ability to trade crypto for fiat (to my knowledge) so it's not a real alternative.

Because the money you exchange for at an airport currency exchange can be used for goods and services, which is the primary use case. With crypto, the primary use case is speculation and trading, so it makes more sense to leave it there.

There are plenty of ways to commit fraud with fully decentralized protocols. For example, build in a well hidden backdoor, and then steal all the users funds with it (via a good VPN of course, so nobody knows it was you, and you can publicly claim you were hacked).

I have USD or EUR. I want BTC or ETH. To sell my USD or EUR in exchange for BTC or ETH, I use a centralised exchange. Then I immediately transfer the BTC or ETH that I bought to a wallet that I control.

Centralised exchanges are useful.

"second largest"? Did they pop out of nowhere? Today is literally the first time I heard of them.

crypto.com, kucoin and others are way likelier. All the exchanges that passed ETH around to "demonstrate" their reserves.

More like house of cards

They may be next. It's not 100% sure but very plausible.

I’m deep into crypto and nobody I know has ever heard of it, and nobody I follow has ever mentioned it.

This was a failure of traditional financial institutions and people who are ok with them, not of crypto.

Satoshi wouldn't be encouraging people to put their coins on a trusted third party like that. All fundamental crypto values say this.

Centralized exchanges are the polar opposite of what Satoshi was advocating for.

It’s like the thing schools used to do, give kids an egg they had to carry around for a week without breaking.

The best large-scale example of Chesterton's Fence that I've seen so far.

I like to call it "eventual civilisation" ...

That's a great quote. What's the source?

EDIT: Ah, looks like it's from wise Hacker News contributor gzer0:

https://news.ycombinator.com/item?id=32415093

People look at all the market failures and declare the system is broken. Crypto is here to show us all the market failures that didn't happen.

Mostly agree. But not all those regulations. The power given to Trudeau to freeze the bank accounts of his political opponents does not serve any public good. Those regulations are also being abused all over the place at various degrees. Doesn’t mean there shouldn’t be any regulation but over regulation is a thing.

Totally, if only they had been regulated and too big to fail as a result of regulatory capture, which is how our system works, the taxpayers would get to bail them out and award SBF a multimillion dollar bonus. Bailing out the banks and execs in 2008 to perpetuate this was just great.

Would you be surprised to learn that SBF was the champion for regulation, was advising congress and a top political donor?

Regulated banks and currencies have similar issues, for example:

- the government can print more money and devaluate your savings (it's like a form of tax one cannot avoid). But it is difficult to "print" more cryptocurrency.

- the government can put limits on amount of money one can withdraw from a bank account. So you legally have the money but cannot use it.

- the bank can refuse to deal with you under AML acts without need to prove anything. But nobody will ban you from mining and exchanging crypto.

- the bank can go bankrupt

The most reliable way to keep your savings safe seems to be to store it as gold. However, there are usually high taxes for buying/selling gold (because why let people store their savings safely) and often governments outright ban gold (folks from US are probably familiar with such situations [1]).

[1] https://en.wikipedia.org/wiki/Executive_Order_6102

Like: "you don't gamble with other people's money that they didn't give you for that purpose"?

At this point? This platitude has been reposted on about every cryptocurrency thread on HN for the past decade.

In case, I'm getting downvoted because I didn't provide a source, see for yourself: https://www.google.com/search?q=rediscover+regulation+site%3...

Hopefully, people will understand that crypto is about self-sovereignty and not get-rich-quick schemes.

Maybe the name 'Satoshi Nakamoto' is an anagram that I'm too stupid to decipher.

That also really stuck out to me.

"We're aren't sure customer's recorded balances are accurate and it may be possible for money to simply appear or disappear in our system, but we definitely have enough money to pay out everyone's balance (which as already mentioned is inaccurate)"

We’ve already stolen your money, but hopefully as a community we can work through these troubling times together.

It actually makes sense if they were “dropshipping” lol, which an exchange might do to increase liquidity. In other words, when you deposited to their exchange they actually held your money and executed your trades at FTX for certain pairs. Then FTX suddenly zeroed everyone’s balances (! or at least many people’s) so their crappy scraping system overwrote your old balance with zero and they have to manually check backups to see how much money you had with them. Definitely possible as an exchange is a chicken and egg problem and they seem to be a nobody.

Everything ends up being an Excel sheet, I guess.

This is a major indictment of blockchain technology. Supposedly, all these accounts are recorded on an immutable, verifiable chain. Manual proofreading means something is wrong with your blockchain code, or you're lying to users about where the recording happens.

Sounds like it was written by GPT3.

If they are going to make stuff up at least make it half-believable.

Volatility aside, stuff like Bitcoin _is_ already used for payments, albeit in a much lower volume than the crypto proponents wish it would be. I pay contractors now and then with BTC, particularly in South America and Africa, and works MUCH better than SWIFT (even if I have to convert from USD to BTC and they have to convert from BTC to whatever on their side).

Projects like Ripple also have their use - it's mostly a replacement for SWIFT & similar systems (you'd be surprised by just how fragile these interbank systems are).

Some countries are implementing their own "digital currencies" as well (notably China), and they may end up being some flavor of crypto currency (although a public blockchain is not mandatory for these cases - see the example of PIX in Brazil, which works incredibly well without any public chain shenanigans).

So yea, there's value on the whole thing, but the amount of fraud, money laundering and flat out scams (in particular now that mainstream VCs are propping up the entire system) is really too big of a downside to ignore.

I can explain seriously and answer follow-up questions. I will simplify and just highlight the most valuable current use case, there might or might not be others now or in the future.

The value of ether (ETH) is to be a currency that you need to spend in order to include transactions into Ethereum's distributed ledger. Most useful transactions are transfers of stablecoins like USDT or USDC. USDT and USDC can be exchanged for goods and services all over the world, and are very convenient for any international transfers and cash exchanges bigger than 500 USD.

Price of stablecoins is ideally tethered to the underlying fiat currency, so price swings don't matter. Price of ether is _whatever_, because usually your stablecoin ledger transaction fee is low enough, so price swings don't matter again.

>Can someone actually explain what the intrinsic use of coins is supposed to be

It's supposed to be a digital equivalent to physical cash. Specifically the ability to be transferred directly from one individual to another without either having any special permissions, access, or power. The ultimate goal is for all transactions to be completely stateless. Meaning, you should be able to "drop" a bitcoin into a digital "bucket" without needing any kind of pre-existing authorization/account/identification/association/etc with the holder of the bucket (or any third-party acting on their behalf).

You are correct in your assessment that in their current (and foreseeable future) states, cryptocurrencies are completely useless as actual currency.

Theoretically, the coins also act as an ownership share in their respective technology. Or are a transaction unit for it. You could have a deed to something on a blockchain instead of at a title company.

But to your point, if 99.99% of the technology the coins represent is... more coins? Then yeah, it's a big ol' Ponzi scheme.

I always thought it would be interesting to have a coin specifically based on its demand. You have to post something for sale in that coin for a new coin to be minted. So the coin only propagates so long as there is actual demand for it.

I find it helpful to think about blockchains as the next step in the fintech ladder. Imagine you want to represent ownership of a company, i.e. stock. You don't need electricity to do that. You can accept orders in person, record ownership in a book, issue paper certificates, etc. However, when the mainframe was invented, it became easier to track ownership electronically. Using electronic transactions also made it possible for many more people to trade and expanded the types of products offered, e.g. options became commonplace. Now, the blockchain has arrived. It does everything a mainframe at a large financial institution can do, but it opens up the platform so that more complicated transactions can happen and democratizes the platform so that anyone with a computer can write their own smart contract.

What we're seeing now is akin to the the dotcom boom / bust in the late 90s and early 2000s. A new technology has appeared on the scene which leads to two things:

1) People get ahead of themselves. In the late 90s, people could envision all the cool things the internet would unlock and tried to start businesses to realize the potential. Many of those business ideas would be viable today, but the tech wasn't there at the time leading to a lot of empty promises being sold. Today, people can envision how the blockchain will lead to the securitization of everything, but the tech isn't quite there to make the transition yet.

2) As with any optimism boom, there will always be crooks ready to separate a fool from their money.

Its not practical as a global currency with regards to BTC. It never really has been. It is too slow and too expensive compared to centralized options. The idea of a neutral all digital currency sounds fantastic but it glosses over a key advantage of the US dollar. The dollar is backed by the US Gov't and the US military. It didn't just randomly become the defacto monetary standard in the world by accident.

Price fluctuations would diminish with more adoption as well. We also interact with things that vary wildly in price year over year too, like the price of gas (oil). We have just become used to it. The dollar itself fluctuates a fair bit, the DXY index is at 106, and it will probably get much higher next year indicating a strong dollar if there is a global recession. Actual price adjustments are just slow to trickle down to consumers because of a lack of practicality of changing on the shelf prices each day. Also, inflation will drive prices higher, but even after the economy is back under control, prices rarely will go back down.

When Ethereum/ another crypto VM becomes fast enough, decentralised applications will be the new iPhone - stuff we can’t imagine will be built there.

As far as NFTs, 90-99% of the activity is nonsense, fraud and money laundering, but there are real artists in the space. Whether that’s satisfactory for you is really a matter of perspective.

I don't use a ton of cryptocurrency, but I have a few uses for it.

My primary use case right now is using Filecoin to pay for off-site backups of various kinds, encrypted with (supposedly) quantum-proof cryptography that I encrypt my data with before finally replicating it to numerous instances across the world. This is together with also writing my backups to CDs, using online services like rsync.net and one big USB stick at one. One time I lost my backups so I'm trying to make sure this never happens again...

Secondly, I've used Algorand, Ethereum and Bitcoin for transferring funds to relatives and friends to/from South America and Africa, which ended up being the cheapest way of transferring funds to them, even accounting for me buying it, the transfer fee and them cashing it out. It also was way faster than anything we tried before, so pretty good experience overall.

But to your main point, most if not 99% of all cryptocurrency is definitely over-hyped beyond anything I've ever seen. I wouldn't touch most of the ecosystem with a ten-foot pole, doing a lot of research and actually understanding the protocols that you use. Most people don't, so they tend to get burned. Countless of times I've had to help family and friends to avoid scams that they come across, and it honestly makes me kind of glad that what is happening now is happening, it'll shake off all of these scammy projects that are just trying to scam people.

Speculating is the intrinsic use

I think algorand is by far the best crypto platform out there, but the sad part is that it's the economic / behavioral issues that hold crypto back. if you could earn Algo and it was widely adopted, it would be an attractive alternative currency and smart contract platform.

but for me tech and adoption are like two out of four things needed to make crypto non-evil (literally) - the third is democratic governance. the fourth is environmental impact which Algorand checks off. But it's not democratically organized or run, which is a complete non-starter.

the foundation that runs it is probably the least corrupt org I can think of in crypto (I am not an expert) but its still a group that hold a giant percentage of the existing coins, which is a huge non-starter as well, and there is no concept of citizen ship or personhood that maps to the real world.

I dont believe in the decentralization nonsense and this pseudo anonymous thing over crypto is not good. to really run a DAO you need real people interacting in something like a co-op. kind of like the internet, actually.

what some people call decentralization I call by an old fashioned name - distributed. there is another concept which is more to the point than the term centralization and it is concentration. The Gini index of a logical dimension of a system is more important to me than whether it is centralized per se.

So voting power should not be too concentrated, wealth should not be too concentrated.

We are a long way from a workable model for crypto that fulfills these criteria. Buterin who is a frontman for libertarians (and worse) who are actually evil is the closest thing we have besides the Algo founder to a non-greedy figurehead, but we need no figurehead.

what has proven good enough for countries will prove good enough for crypto. democracy.

Drugs. Other contraband too. Blackmail, ransomware, circumventing anti-money laundering / taxation / capital controls / etc

Not many legal use cases,k but there are massive dark industries that would suffer greatly if cryptos disappered.

one dude explained that they wanted to make a loan platform that would avoid usual bank management costs since it's automated, so he claimed the higher yields came from that. It seemed a coherent explanation to me (he could be lying too, but at least his talk had some foundations and not moonshots of potential decentralized nirvanian future)

The only real use case for crypto has always been buying drugs online (and other, similarly illegal things that normal payment processors won't touch). Tons of hot air has been generated proposing other things but none of them have any product market fit once you remove the traders/speculators.

I can see some value in ethereum's VM. The upside there is a bootstrapped cloud that every computer can join when not in use, unlocking tons of value that currently is just sitting around. Seems reasonable to believe that 10 years from now ML training/other compute intensive async tasks might be done via the ethereum VM.

Probably would be easier to just do this via a centralized organizer, but getting enough buy in to actually attract users might be difficult. Ethereum already has it.

Small nit, there is no evidence that barter and trade economies ever existed.

When there is a utility for it, humans invent a form of currency nearly immediately.

> there can be no circumstance that changes the fact that Bitcoin only ever has 21 million units and cannot ever be inflated

Yes it is deflationary, which is worse for a currency. Why buy anything with a currency whose value will always rise? Better to just hold it. Thus it fails as a currency