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Comment by imhoguy | Hacker News Reader

Proof of reserves != proof of liabilities.

Proof today != proof tomorrow.

The proof of reserves can be done in such a way that each user can verify that their balance is backed: https://www.kraken.com/proof-of-reserves

> Proof of reserves today != proof of reserves tomorrow.

You should be able to detect large outflows/inflows from/to their wallets and demand an explanation.

Coffeezilla demanded explanations from Tether. None were offerred.

https://www.youtube.com/watch?v=-whuXHSL1Pg

Providing a proof of reserves is about putting user/investor minds at ease. If you're not willing to go all the way, why bother doing it at all?

Though I guess post FTX, all exchanges are scrambling to avoid losing a large chunk of their userbase. Claiming to have a proof of reserves, even if it was done in a half-assed and non transparent way, is probably good enough for the non-scrutinous user.

How does Kraken/proof of reserves ensure that in case of bankruptcy there are no creditors with higher privileges?

That's a good point. The exchange's remaining liabilities outside user deposits are still an unknown. (Or at least can't be verified in a trustless manner.)

Doesn’t that make it borderline worthless?

Correct. There is no on-chain way to prove that my exchange doesn't actually owe some third party a trillion dollars.

It does prove that the exchange is in possession of "liquid" assets matching user deposits, which I don't think is worthless, especially if the userbase is large.

I agree that it's far from a comprehensive proof though. Perhaps exchanges need to stick to the bigger auditors for now.

Yes, but it's probably good enough to fool the average crypto investor.

Indeed.

An exchange can borrow loads of assets, have an "attestation" that the assets are in their accounts, then pay them back.

Unless those assets devalue or are not easily liquidated.

Exchanges are in the business of "liquifying". But, indeed, it can go wrong, with severe consequences.

Anything they hold a position in creates risk, the typical exchange business model is that they are fast enough and good enough that they can operate out of the excess through various arbitrage options but with extremely volatile assets the bottom can drop out pretty quickly and once you start borrowing and leveraging it can happen a lot faster still.

Essentially they are operating as banks sans regulatory oversight. It's a recipe for disaster.

Exactly. Exchanges are important to exist. The problem is that some crypto exchanges became ordinary but unregulated banks and they sell "printed" crypto asset giving illusion the user owns crypto on blockchain.

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