Proof of Reserves: Show Me the Money, Or It Didn’t Happen
If we claim to be an improvement on traditional finance, we had better start playing the part. It’s clear how Bitcoin fixes rampant monetary discretion. It’s clear, too, how Bitcoin changes your relationship with money—both financially because you’re more inclined to save an appreciating asset—as well as physically because you can do novel things like hold the GDP of a small island nation on a USB. There is one thing, however, that is slowly gaining acceptance and needs to be accepted if we are to truly improve on the mistakes of the past, and that’s Proof of Reserves.
Bitcoin has unique audit properties baked into the system itself. Bitcoin allows any third party to audit the entire money supply down to the smallest unit. A third party can do this for free, without any special privileges or permissions. It’s difficult to overestimate how novel and consequential this property of the Bitcoin protocol is and the implications of the guarantees it provides. For context, the total global supply of dollars is an estimate and not an exact number by any stretch of the imagination due to a variety of factors including the existence of physical and digital cash, as well as currency circulation abroad. The total number of gold in existence is also an estimate due to entirely different reasons mainly the lack of certainty when it comes to the volume of mined gold from different mines around the world, gold existing in private hands, gold hoards and stashes, new mining, recycling, and unreported sources. There is no global, trustless, source of truth for any money or commodity other than Bitcoin. And this should be Bitcoin’s driving force moving forward.
Proof of Reserves (PoR) has been an important part of the industry since near-inception. The infamous Mt. Gox collapse of 2014 set the stage for much needed transparency. The exchange was hacked, 850,000 BTC (~47,617,204,000 USD at the time of this article) were stolen and their customers were unaware. The funds were drained over the course of a few years before the actual collapse happened. A PoR system would have mitigated further loss of funds as their customers would have seen the exchange’s reserves depleting at an alarming rate. If this sounds more like recent memory than an ancient piece of Bitcoin history it’s because the same argument applies to FTX, and the same basic thing happened to FTX. If customers, and the wider market at-large, would have seen the exchanges BTC reserves depleting in real-time (or the fact that FTX had zero Bitcoin), systemic-risk would have been dramatically mitigated.
So, what do you think would happen if the single custodian holding 90% of the spot Bitcoin backing these ETF’s were hacked or and/or acted maliciously? Unless the public is notified by the exchange, millions of people would be holding billions of paper Bitcoin. The more we connect ourselves to traditional finance the more cross-risk there is between traditional financial markets and the…
Read More: Proof of Reserves: Show Me the Money, Or It Didn’t Happen