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Author Topic: Should an exchange be able to withstand a run?  (Read 1306 times)
dscotese
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November 20, 2012, 12:49:32 AM
 #1

This is a question I think a lot of people unfortunately don't want to think about.  I am a sort of exchange because I owe a lot of people each a little bit of money for their writing on my website.  I know that if all of them asked for the money at the same time, I'd easily be able to pay them all, and I feel like this is how every exchange and bank! should be.  Banks, of course, aren't, unless they can use the central banking system, but that's a topic for a different thread.

I propose that if you run an exchange, invite a challenge from time to time to all your customers: "We encourage you to withdraw everything from us so that we can prove that we have adequately safeguarded the bitcoin and fiat currency you have stored with us."

I also propose that we run a sort of means testing group here on the forum, where we can choose an exchange to test, and then publish our decision, encouraging everyone to withdraw everything from an exchange.  It doesn't have to be coordinated at all, but the more coordinated it is, the more effective it will be.

If I were a goldsmith back in the day, being honest as I am, watching my competitors issue fake receipts, I would welcome this kind of action.  Too often, the parasite class ("government" is what most people call it) leverages public sentiment to justify protecting the worst of us at the expense of the best.  Bitcoin doesn't suffer from that yet, and I'd like to see us head off anything that leads it in that direction.

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November 20, 2012, 12:52:27 AM
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Welcome to our world.  I think that you will fit in fine here.

EDIT: I should say, welcome back. 

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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November 20, 2012, 01:54:23 AM
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Do exchanges loan or spend client money? I would not keep money in an exchange that did that.

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November 20, 2012, 02:19:40 AM
 #4

The exchanges don't use the funds for anything else, so you don't have to worry about this.

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November 20, 2012, 02:24:41 AM
 #5

Should an exchange be able to withstand a run?

Absolutely. And so should banks.

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November 20, 2012, 02:53:20 AM
 #6

I have proposed the same and got nowhere. I don't leave a single satoshi in exchanges as a result.

A shame really, because everyone doing the same detracts from BTC liquidity.

Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper or hardware wallets instead.
dscotese
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November 20, 2012, 06:36:07 AM
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The exchanges don't use the funds for anything else, so you don't have to worry about this.

This made me laugh.  It isn't accepted and known uses of the BTC and fiat currencies they hold that I'm worried about.  In those cases, caveat emptor, right?  It's that the exchange has the responsibility to keep those items safe.  Goldsmiths centuries ago had the same responsibility, but they learned how easy it was to issue fake receipts for gold they didn't have.  When enough of the holders of receipts attempted to redeem them for the gold, the goldsmith ran out.  Usually he got hanged as a result too.  But then we became "more civilized" and instead of hanging them, we just threw them in jail (I think).  Finally, now that we're ... what, I guess "SHEEPLE", we don't throw them in jail either.  We bail them out with taxpayer money.

Ok.  Sorry for the rant.

I have proposed the same and got nowhere. I don't leave a single satoshi in exchanges as a result.

A shame really, because everyone doing the same detracts from BTC liquidity.
Like every community, we are maturing.  Maybe we're ready to scare the bad exchange operators into being good stewards before governments "try to help" and f*ck everything up like they always do. 

Can you provide a link to your proposal?

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November 20, 2012, 06:39:25 AM
 #8

Can you provide a link to your proposal?

Search the forums for the following:
* SSAE 16 SAS 70
* Mickey Mouse Dollars

(make sure to search while looking at the list of forums, otherwise you're only searching the subforum you're in)

Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper or hardware wallets instead.
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November 20, 2012, 06:50:38 AM
 #9

Absolutely they should be able to withstand a run.  I'd reasonably expect some minor delays while they transfer BTC to their hot wallet in batches (so the hot wallet never contains all user funds) and that hard currency transfers might be affected by transaction limits at the bank's end but they should still be able to return user funds within a few days at most.

All I can say is that this is Bitcoin. I don't believe it until I see six confirmations.
dscotese
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November 20, 2012, 07:49:48 AM
 #10

Mike's thread is good: https://bitcointalk.org/index.php?topic=86579.20

I was going to add a poll asking how reliant people are on MtGox to hold their money or BTC, but I don't see how to do that.  There's a little bit of warning in the thread referenced above, that "MtGox is going down" - that was 4 months ago.  Let's make a hybrid approach.  Here are some suggestions:
  • Register yourself at tradeyourbitcoin.com and localbitcoins.com and tradebitcoin.com and other exchanges
  • Add other sites that facilitate local bitcoin trading.
  • Join bitcoin-otc.com and get to know some traders.
  • This will work better if we pick on one exchange at a time.  We can all move to other exchanges while one is undergoing our means testing.
  • What exchange would you like to see tested this way, and why?.

I keep thinking of such a coordinated run on an exchange as an attack, but at the same time, I realize that everyone has been answering my question in the OP with a resounding YES, which means it's not an attack at all.  If a rope is supposed to hold 100 pounds, and we dangle 100 pounds from it, are we attacking the rope?  NO! We're proving it's good rope.  This should make everyone happy.

I would like to see bitstamp.net tested this way.  They still allow you to remain anonymous, which I like, but at the same time, it raises a (small) flag.  If they survive our means test, that will be very nice.

I understand it seems like a lot of work.  Take the money out.  Take the bitcoins out.  Yeah, a lot of work.  WTF?? It's hardly any work at all!  And give yourself a moment to consider the peace of mind you'll feel by not having your savings at risk in that exchange.  If you're after that peace of mind, the sooner you get yours out the better!

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November 20, 2012, 07:59:03 AM
 #11

I don't understand what your trying to prove? If they have the funds to have everyone withdrawal? I mean no exchanges business plan/model every talked about investing users funds. Honestly this is a waste of time.

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November 20, 2012, 08:31:00 AM
 #12

I'd easily be able to pay them all, and I feel like this is how every exchange and bank! should be. 

Absolutely. The opposite is called "running on fractional reserve", is really frowned upon and if proven could easily constitute the kiss of death for an exchange.

If I were a goldsmith back in the day, being honest as I am, watching my competitors issue fake receipts, I would welcome this kind of action.  Too often, the parasite class ("government" is what most people call it) leverages public sentiment to justify protecting the worst of us at the expense of the best.  Bitcoin doesn't suffer from that yet, and I'd like to see us head off anything that leads it in that direction.

Absolutely. An atmosphere in which instability rather than "stability" is encouraged has the advantage of much more...stability, simply because bullshit doesn't get to be stacked quite as high.

I have proposed the same and got nowhere. I don't leave a single satoshi in exchanges as a result.

A shame really, because everyone doing the same detracts from BTC liquidity.

You're welcome to withdraw all your MPEx coins at any point you know.

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dscotese
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November 20, 2012, 08:31:57 AM
 #13

[N]o exchanges business plan/model ever talked about investing users funds.
I'm not sure I see the relevance here.  If they had talked about doing that, then withdrawing your money would kind of be an attack as they would possibly be forced to liquidate investments at suboptimal prices.  So you're more proving the point that this wouldn't be an attack.

I don't understand what your trying to prove?
Do you know what a bank run is, and why it hurts banks, and how fractional reserve banking plays a role in it?  Essentially, fractional reserve is fraud, and the coordination of many clients withdrawing funds around the same time causes that fraud to backfire on the bank.  If the bank isn't engaging in any fraud (ie no fractional reserve banking), then the coordinated withdrawals do no harm.  The same is true of bitcoin.  An exchange may keep only 1/2 the bitcoin it needs to pay back its customers, assuming that no more than half will every make withdrawals at the same time.  It could sell the other half to raise money to expand through advertising (or give bonuses to executives, make political donations, or take vacations).  That's fraud, pure and simple, and one effective way to prevent it is to schedule coordinated withdrawals because the exchanges would have to make sure they have all their clients' bitcoin ready to be provided to them on demand.

Rothbard's History of Money and Banking might help explain the problem more effectively than I have, though he goes on a bit more than I have ;-)

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November 20, 2012, 02:07:34 PM
 #14

That's fraud, pure and simple, and one effective way to prevent it

The only effect your scheme would be effective at producing would be the fractional reserve people creating a loan market to move capital around to cover themselves...ie, a federal reserve.

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November 20, 2012, 03:37:31 PM
 #15

I am not sure a bank run is necessary to prove anything - it causes instability itself.  Rather, exchanges should simply voluntarily submit to audits to prove they hold what they say they hold.  It is fairly easy to prove possession of BTC simply by signing messages with the private keys encumbering them.

If a competing exchange could pop up that resolved concerns like this - even if their fees were double or triple - they would probably get a decent share of the market.

Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper or hardware wallets instead.
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November 20, 2012, 03:58:46 PM
 #16

Make a list of all balances paired with a hash of the account number.
Sign some random message with each private key holding funds.

Everyone can check that their balance is correctly reported, everyone can check that the sum of balances is actually under control of the exchange.

In order to be fully complete the exchange needs to deliver signed account balances to individual users.

dscotese
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November 20, 2012, 04:56:15 PM
 #17

Make a list of all balances paired with a hash of the account number.
Sign some random message with each private key holding funds.

Everyone can check that their balance is correctly reported, everyone can check that the sum of balances is actually under control of the exchange.

In order to be fully complete the exchange needs to deliver signed account balances to individual users.
It is fairly easy to prove possession of BTC simply by signing messages with the private keys encumbering them.

If a competing exchange could pop up that resolved concerns like this - even if their fees were double or triple - they would probably get a decent share of the market.
Good ideas.  The message signing could take care of the bitcoin balances, but what about the fiat balances?  They could take care of that too if they held bitcoin in reserve with some kind of guarantee to provide it instead of cash if cash is unavailable, at 120% of the prevailing market rate.

The only effect your scheme would be effective at producing would be the fractional reserve people creating a loan market to move capital around to cover themselves...ie, a federal reserve.
I see you've connected the U.S. central bank to the concept of federation and mutual insurance.  That doesn't impugn federation or mutual insurance.  Such agreements make economies stronger.  In fact it was one of the major selling points used by the creators of the federal reserve.  The essential element of the federal reserve that makes it destructive is neither inter-bank borrowing nor agreements to support it, but rather the ability to create money - and that is missing from bitcoin no matter what.

So if the scheme only accomplished that, it would still be a benefit.

Don't make the mistake of thinking that all the untrustworthy people trust each other and work together to screw honest people.  The effect you predict would require that they means test each other, which would be another benefit.

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November 20, 2012, 05:07:22 PM
 #18

All of that would be great, but my efforts to get MtGox to do so much as simply prove to any third party whose word we'd be likely to respect that they actually have our funds on deposit were met with a response I didn't think was coherent, and loosely suggested all of the following: that it's too difficult, that they're not sure how to do that, that the way they store their BTC makes it impractical, that they shouldn't be expected to do such a thing, that it's too risky security wise, that whatever they do do should be good enough.

So I would say, good luck getting them to do anything comprehensive: they're not even willing to do something cursory last time I checked.

Companies claiming they got hacked and lost your coins sounds like fraud so perfect it could be called fashionable.  I never believe them.  If I ever experience the misfortune of a real intrusion, I declare I have been honest about the way I have managed the keys in Casascius Coins.  I maintain no ability to recover or reproduce the keys, not even under limitless duress or total intrusion.  Remember that trusting strangers with your coins without any recourse is, as a matter of principle, not a best practice.  Don't keep coins online. Use paper or hardware wallets instead.
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November 21, 2012, 04:05:31 AM
 #19

Like the ideas

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