Up to this point in Bitcoin's history, exchanges have been notoriously terrible at securing peoples corns. To the point that many casual observers tend to wrongly equate terrible exchange security with the Bitcoin protocol being insecure.
Here's a great long read for you freaks from our boy Nic Carter that dives into the different avenues through which we are attempting to scale Bitcoin, how "Bitcoin banks" play into these scaling paths, why we should demand proof of solvency, and argues that we should accept the existence of large custodians and their inevitable participation in this system going forward. A truly comprehensive breakdown that everyone should read, if only to get a clear illustration of the current landscape of the industry being built on top of Bitcoin.
Up to this point in Bitcoin's history, exchanges have been notoriously terrible at securing peoples corns. To the point that many casual observers tend to wrongly equate terrible exchange security with the Bitcoin protocol being insecure. One thing that can and should be done is proof of solvency, a way for exchanges to prove they have reserves to match the liabilities owed to their customers. As Nic documents, many exchanges have opportunistically promised to provide proof of reserves in perpetuity only to provide a one-time, half-assed effort. There is only one exchange in the world that has consistently provided proof of solvency for the last five years, and that is a small exchange out of England, CoinFloor. CoinFloor's efforts should be replicated by every other major custodian out there, but they haven't been for some reason.
The hope is that, with the emergence of more legitimate players like Fidelity, Square and Bakkt, the practice of proof of solvency will be more commonplace. This brings us to a hypothetical future of transparent Bitcoin banks that hold a considerable amount of supply, but are forced to play within the rules set forth by their customers' risk tolerance. Are we okay with allowing these institutions to work on a fractional reserve basis if their customers are okay with it and they are providing proof that they are within a certain reserve ratio threshold? I could definitely see this playing out. The beauty of Bitcoin is that if these institutions do fail, they do not have the ability to be bailed out by the network, so maybe more wise investment decisions will be made with this in mind.
A lot to ponder. Happy to see Nic pushing this conversation to the foreground and lighting the fire under the ass of the industry to start making proof of solvency a standard.
Had a bunch of errands to run this morning, hence the tardiness. Errands are annoying.