The bankruptcy of Ftx, the third largest exchange in the world, caused an earthquake. In less than two weeks, the overall cryptocurrency market capitalization has lost 20% in value (from over trillion to around 800). Worse still: the enormous distrust caused by the collapse of the trading platform founded by Sam Bankman-Fried could also infect other major exchanges, creating a domino effect.
Everything happening between Binance and FTX
by Amelia Tomasicchio
An operator like BlockFi has already stopped withdrawals, while some realities also exposed in terms of crypto-lending (high-yield cryptocurrency loans) such as Genesis and Gemini are starting to suffer some backlash. Inevitably – and as has already happened hundreds of times in the past – numerous analysts have decreed the end of cryptocurrencies, knocked out by a deadly blow from which it would be impossible to recover.
It is difficult to predict whether this will really happen, but it is certain that there is a great deal of urgency to recover some investor confidence, already grappling with the end of the expansionary cycle that characterized the past two years. Is it possible to succeed in the enterprise? According to some insiders, the answer is positive and bears the name of proof-of-reserves: a mechanism that allows us to verify at any time, via blockchain, the solvency of the exchange to which we have entrusted our money.
Bitcoin
History of the biggest crash in the history of cryptocurrencies. What happened to Ftx
by Archangel Rociola
The causes that led to the collapse of Ftx are varied and complex, but two numbers are in fact sufficient to summarize: this exchange had liquidity of only 900 million dollars against a liability to its customers of over 9 billion. Proof-of-reserves would in theory immediately show that FTX clients’ money was being moved to where it shouldn’t be (in this case, to trading firm Alameda Research, also owned by Sam Bankman-Fried).
Proof-of-reserves (POR) is already used by an entity that issues stablecoins (fixed-value cryptocurrencies) such as Paxos – which can thus demonstrate that it has the necessary reserves to guarantee its value – or by exchanges such as BitMex, which they use to prove that customers’ deposits match the assets they have in custody.
From your envoy to the front
by Adriano Marconetto
How does this POR work? This is an independent audit, conducted by a third party who receives another network’s balance sheet data and verifies that the accounts are in order. As the website of the US exchange Kraken explains in an in-depth analysis, the auditor who uses this system first of all records an overview of the balance sheets of an exchange, archiving data relating to customer accounts. Later, he obtains a “cryptographic fingerprint” that represents the aggregate data of all the accounts. Finally, oversimplifying, he verifies that balances are equal to or greater than customer deposits, demonstrating that assets are backed by reserves.
There are multiple methods to conduct this review, but in all cases the central point is one: to allow a third party – and consequently users – to verify through encrypted and automatic tools that the deposits are where they should be and that the exchange is solvent. Binance, the largest exchange in the world, has already announced its intention to adopt this system in the coming weeks, as have other platforms such as Gate.io, Poloniex, Bitget, Huobi and others. Is that enough to reassure investors and restore some confidence in this sector?
According to Erick Richmond, operational manager of the Canadian exchange Coinsquare, this is a step in the right direction, but it would be even better to rely on classic regulation, as Coinsquare has chosen to do. “We have an obligation to make daily reports in which we show our customers’ liabilities by comparing them with our assets,” Richmond explained to CoinDesk, specifying how the assets are stored in archives not connected to the internet to avoid the danger of hacker attacks. “Every single day we have to ensure that these values match.”
However, as is well known, the world of the blockchain is very reluctant to rely on classic regulations (which at least partially undermine the raison d’être of this sector, which is based on the disintermediation of processes) and sees in the proof-of -reserves one of the last chances to demonstrate that we are able to self-regulate: “Heaven knows how badly we need to show regulators that we are able to self-regulate, especially after Ftx destroyed all trust,” he said. Nic Carter of cryptocurrency investment firm Castle Island Ventures also stated to CoinDesk. “Any exchange that refuses to submit to Por will be subject to a lot of skepticism from customers.”
Either the exchanges accept strict external regulation or adopt tools to demonstrate their reliability without a shadow of a doubt. It is the only way to prevent the “end of cryptocurrencies” predicted by many from actually happening. Leading instead to the conclusion of the far west that has so far characterized this sector.