Annnnnnnd it is gone...

Crypto lending and CEX are collapsing. 

So how can we prevent the next FTX?

The idea of proof of solvency or proof of reserves is not a new idea.

The idea is to give users a sense of normality about how much CEX really got and can be redeemed money to their customers to avoid a bank run.

There are two ways: on-chain and off-chain.

On-chain route is to show off your cold store wallet or any wallet to demonstrate your total assets. Like Binance did.

The off-chain route is asking a third-party custodian like Coinbase to back up your claim as Grayscale did.

What Vitalik described in his view is that you may have two sets of network on the reserves.

One is owned by the book (firm) and the other one is owned by the blockchain.

From DEX perspective, everything runs on chain and users can withdraw without any approval.

From CEX perspective, assets show on the book for users to reference while users can withdraw funds without any problems on chain.

For CEX, the book value will have to match on chain data to proof their reserves are sufficient, or it will flag their insufficient reserves to against their operations.

Also, the operator of such reserves on chain cannot manipulate the funds or data.

You can read full article with mathematical back up at

https://hackmd.io/@vbuterin/proof_of_solvency

I think it is a great idea to move forward but how likely all CEX will implement is up to their discretion.

Photo by Camille Brodard on Unsplash

Note: the post was shared on multiple platforms here.

You can refer my previous article lists here and here and here
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Disclosure: The article was written by a delusional author who is possibly a nut job without any questions whatsoever about expertise in the subject matters. You should not believe any words this author wrote or you may experience similar symptoms or even possibly become a nut job.