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Author Topic: why MtGox (in)solvency cannot be calculated from the blockchain?  (Read 5640 times)
zhangweiwu
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February 21, 2014, 03:29:04 PM
 #1

I was waiting for someone to calculate it for a few days, and no one did, means it is impossible. But I thought it was possible.

1. Identify MtGox addresses. I remember someone did this before, academic work. Or blockchain's Andreas knows it.
2. Calculate all the coins in and out. The amount-into-mtgox minus amount-out-of-mtgox is the coins in possession by MtGox.
3. Calculate the current market cap in MtGox. If market cap is greater than the coins MtGox possesses, they must be insolvent, because the market is trading coins that ain't there. If not, they are either solvent or insolvent, where market cap divided by coins-in-possession can give you percentage of coins being traded, which hints the solvence/insolvence: e.g. if 90% of the coins are being traded on the market, then some of the coins ain't there.

Perhaps this calculation is not possible, e.g. because MtGox adopted some anti-trace measurement some time in the past years. Then, is it possible to start an alliance that requires each member exchanges to publish their addresses, so that a 3rd party can verify the solvence of exchanges in the alliance - and notify them if small leaks are found.

If it is indeeded calculatable, anyone who did it must have tried to do it to other exchanges as well.

P.S. I also wonder why it takes so long for MtGox to find someone stealing their coins. It is easily spotted by checking the sum of wallets against the book. My guess is that wallet's sum is bugged, so it didn't report the leak.

My (old) column about Bitcoin & China: http://bitcoinblog.de/tag/zhangweiwuengl/
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February 21, 2014, 03:40:31 PM
 #2

I was waiting for someone to calculate it for a few days, and no one did, means it is impossible. But I thought it was possible.

1. Identify MtGox addresses. I remember someone did this before, academic work.
2. Calculate all the coins in and out. The amount-into-mtgox minus amount-out-of-mtgox is the coins in possession by MtGox.
3. Calculate the current market cap in MtGox. If market cap is greater than the coins MtGox possesses, they must be insolvent, because the market is trading coins that ain't there. If not, they are either solvent or insolvent, where market cap divided by coins-in-possession can give you percentage of coins being traded, which hints the solvence/insolvence: e.g. if 90% of the coins are being traded on the market, then some of the coins ain't there.

Perhaps this calculation is not possible, e.g. because MtGox adopted some anti-trace measurement some time in the past years. Then, is it possible to start an alliance that requires each member exchanges to publish their addresses, so that a 3rd party can verify the solvence of exchanges in the alliance - and notify them if small leaks are found.

If it is indeeded calculatable, anyone who did it must have tried to do it to other exchanges as well.

P.S. I also wonder why it takes so long for MtGox to find someone stealing their coins. It is easily spotted by checking the sum of wallets against the book. My guess is that wallet's sum is bugged, so it didn't report the leak.

Say you can identify a lot of MtGox addresses. Now a large sum goes to a new address from these addresses. There is no way to tell the difference between this new address being a MtGox cold storage or a criminal's address.


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zhangweiwu
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February 21, 2014, 03:50:50 PM
 #3

Say you can identify a lot of MtGox addresses. Now a large sum goes to a new address. There is no way to tell the difference between this new address being a MtGox cold storage or a criminal's address.

To identify the cold storage address:
1) The cold stroage address can be identified if the same address transfers funds back to MtGox in regular operation.

2) If cold-storage uses different address to send than to receive, then try this: the criminal would not use big transactions to call attention when MtGox wallet can repeatedly reissue him small amounts automatically. The criminal have a large sum of transactions, not a large transation.

I also expect someone reply saying there is no way to tell criminal's address from normal-customer's address. Well, it is not necessary, because you only need in/out amount to find out the amount in possession by MtGox. Besides, you already know the criminal uses repeated transactions of the same amount, few customers would do that, so the criminal's address is not a mystery like its owner's identity.

My (old) column about Bitcoin & China: http://bitcoinblog.de/tag/zhangweiwuengl/
Zangelbert Bingledack
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February 21, 2014, 04:01:31 PM
 #4

Couldn't you just check for duplicate transactions with different hashes? Maybe the ones that aren't processed are not generally recorded, but somewhere perhaps they are.
zhangweiwu
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February 21, 2014, 04:03:21 PM
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Couldn't you just check for duplicate transactions with different hashes? Maybe the ones that aren't processed are not generally recorded, but somewhere perhaps they are.

Yes, but that only finds out the stolen coins of this heist. MtGox could be insolvent since 2011.

Even what you suggested should have been done a few days ago, why no one is posting anything about it?

My (old) column about Bitcoin & China: http://bitcoinblog.de/tag/zhangweiwuengl/
segeln
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February 21, 2014, 04:36:45 PM
 #6

Even what you suggested should have been done a few days ago, why no one is posting anything about it?
yes,it is a pity we don`t have a whistleblower
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February 21, 2014, 04:46:32 PM
 #7

It can't be done without internal information.  If someone in MtGox leaked their receive and cold storage address list you could do this but without it you can't.
When people say the blockchain is traceable they mean the blockchain + OUTSIDE INFORMATION is traceable.  Using simply the blockchain and no outside information is next to useless.

Just some things to get you thinking in the right direction.
1) There is no way to identify all MtGox deposit addresses.
2) There is no way to identify all MtGox cold wallet addresses (yes if there are round trips you may be able to identify some but it is very possible some of the cold wallet addresses have never made outbound transactions, not once, ever).
3) There is no way to identify all outbound transactions from internal operations.
4) There is no way to identify the change from the outbound transaction on the last use of particular address.
5) There is no way to identify customer redemptions from MtGoxes corporate profit redemptions or MtGox's expenses (if they pay any of them in Bitcoins).

Can you identify some of these case, some of the time? Sure.  That however would be like getting a random 1/3 of the accounting entries for a company and someone asking you to prove if they are are insolvent or not.

So when people say the blockchain is traceable they mean that most people are very bad about not "leaking" information and that information PLUS the blockchain can be a very useful tool for investigators, law enforcement, or even malicious entities. 
zhangweiwu
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February 21, 2014, 05:30:51 PM
 #8

I'll keep your list for the moment, since I was more or less aware if it were easy we should be seeing some results already.

I'll excercise the 'can do' spirite for a while: prooving insolvency is not the same as reproducing the ledger, if a single set of expense happen to be greater than all income, you do not need to find all expenses to proove insolvency. See? I added one YES item on your long NO list. Perhaps it can be developed further.

By the way, someone did try to find MtGox addresses, to certain degree. I forgot where I read it, a few years ago.

My (old) column about Bitcoin & China: http://bitcoinblog.de/tag/zhangweiwuengl/
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February 21, 2014, 05:57:42 PM
 #9

You can't know how many bitcoins Mtgox has from independent investigation. However Mtgox used the blockchain to prove they weren't insolvent and didn't have all the coins on deposit stolen after the big hack in 2011, by announcing and transferring 424242 bitcoins. If they had the ability then to prove they weren't insolvent, I don't see why they wouldn't now of all times.
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February 21, 2014, 07:37:46 PM
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You can't know how many bitcoins Mtgox has from independent investigation. However Mtgox used the blockchain to prove they weren't insolvent and didn't have all the coins on deposit stolen after the big hack in 2011, by announcing and transferring 424242 bitcoins. If they had the ability then to prove they weren't insolvent, I don't see why they wouldn't now of all times.

Its interesting just clicking around randomly from that transaction there is a bunch of transactions of 50k away from it that all then reconverge here... https://blockchain.info/address/1M8s2S5bgAzSSzVTeL7zruvMPLvzSkEAuv

gox cold storage or criminal mastermind?

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windjc
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February 22, 2014, 05:36:18 AM
 #11

You can't know how many bitcoins Mtgox has from independent investigation. However Mtgox used the blockchain to prove they weren't insolvent and didn't have all the coins on deposit stolen after the big hack in 2011, by announcing and transferring 424242 bitcoins. If they had the ability then to prove they weren't insolvent, I don't see why they wouldn't now of all times.

Its interesting just clicking around randomly from that transaction there is a bunch of transactions of 50k away from it that all then reconverge here... https://blockchain.info/address/1M8s2S5bgAzSSzVTeL7zruvMPLvzSkEAuv

gox cold storage or criminal mastermind?

There are a million coins between that account and another associated with it. That's got to be one of the major exchanges.

If you haven't heard about what is happening with GAME, check it out.  It's revolutionizing gaming. https://bitcointalk.org/index.php?topic=1266597.0
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February 22, 2014, 11:30:26 AM
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You can't know how many bitcoins Mtgox has from independent investigation. However Mtgox used the blockchain to prove they weren't insolvent and didn't have all the coins on deposit stolen after the big hack in 2011, by announcing and transferring 424242 bitcoins. If they had the ability then to prove they weren't insolvent, I don't see why they wouldn't now of all times.

Its interesting just clicking around randomly from that transaction there is a bunch of transactions of 50k away from it that all then reconverge here... https://blockchain.info/address/1M8s2S5bgAzSSzVTeL7zruvMPLvzSkEAuv

gox cold storage or criminal mastermind?

There are a million coins between that account and another associated with it. That's got to be one of the major exchanges.

Following 1M8s2S5bgAzSSzVTeL7zruvMPLvzSkEAuv one gets to https://blockchain.info/de/address/1LNWw6yCxkUmkhArb2Nf2MPw6vG7u5WG7q, which is annotated with "Mt.Gox" it seems. The ~5.7MBTC that went through there have been split to many other addresses though. Was that the question? Huh I merely have a basic understanding of how these transactions work.
JorgeStolfi
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February 23, 2014, 01:18:39 AM
 #13

Knowing how many BTC MtGOX actually owns (X) is only 1/4 of the data one needs.

One would also need to know how much money (USD, JPY, etc.) MtGOX has in their bank accounts (Y).

Then one would need to know how much MtGOX owes -- that is, the total of their clients' account balances, in national currencies (M) and in BTC (N). 
These are not real coins and dollars, of course, but virtual "goxBTC" and "goxUSD" that are converted to their real counterparts only at deposit or withdrawal time.

One would also need to know any subtantial debts they may have: loans, payments due for large coin purchases (or the reverse), etc.  But probably these are smallcompared to M+N.   ("Market cap" is not the right name for M+N, is it?)

MtGOX would be insolvent if M + N (both converted to a common unit, say USD) were much larger than X + Y (ditto).  (For these conversions, one should use the market price outside MtGOX, of real BTC in real USD.)

I do not see how one could estimate M and N without an independent and thorough audit of their internal ledgers.  Did MtGOX ever provide such numbers?

Transactions between MtGOX clients exchange goxUSD for goxBTC; they show up as trade volume, but not in the blockchain.  Some goxBTC and goxUSD may not have been traded at all in months, some may have been traded many times in that interval.   Therefore, the total trade volume in any period may be much smaller or much larger than M + N.


Academic interest in bitcoin only. Not owner, not trader, very skeptical of its longterm success.
JorgeStolfi
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February 23, 2014, 03:34:01 AM
 #14

My guess, based on the amount of transactions that were stuck until recently (~40,000), is that the sum N of the BTC balances in all of MtGOX accounts (the total number of goxBTC) is at least 200,000 goxBTC.

I would guess that the sum M of of the national currency balances in all of accounts (the total number of goxUSD, goxGBP, etc.), has about the same value as N times the market price outside MtGOX (~600 USD); that is, M is equivalent to at least 120 million goxUSD.

By these guesses, MtGOX owes at least 240 million USD to their clients, in BTC or national currencies.

Are these guesses reasonable? Too low perhaps?

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February 23, 2014, 11:42:42 AM
 #15

gox has been making 500k profit per day for years.  no fucking possible way they are insolvent. it's simply impossible to lose that much money in such a short amount of time with out noticing. I'm sure they got taken for a few million. like a week or two worth of profits. annoying to be sure but no possible way on this fucking plane of existence that they got taken for everything they are worth.  no one is that stupid. no one.

Hi forum: 1DDpiEt36VTJsiJunyBc3XtG6CcSAnsQ4p
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February 23, 2014, 12:48:35 PM
 #16

gox has been making 500k profit per day for years.

Is that right? 

According to bitcoincharts, the average trade volume there was (very roughly) 10 M$/day from March to May 2013, 20 M$/day in December,  10 M$/day in November and January.  It may have been 1 M$/day for the rest of 2013 and 2014, and practically nothing before that.

What are their trading fees? Are they applied to all clients?

If their commission is 0.5% on all transactions, then in Dec/2013 they may have made 100 k$/day, but perhaps only 10 k$/days on the average since Jan/2013.

On the other hand, if they make 500 k$/day,  as you claim,  then their clients must be trading 200 times as much, that is 100 M$/day; and the sum of all their account balances must be much larger than that, perhaps 1 G$. 

Either way, their revenue from fees must be a small fraction of the total amount they owe to their clients (M + N above). 

But why don't they give us these numbers?  It would be a first step towards restoring the confidence of their clients and of the rest of the world.

it's simply impossible to lose that much money in such a short amount of time. [...]  no one is that stupid. no one.

I can think of three ways, not totally implausible, that they could have lost most of their clients' coins without people outside realizing it.  And theft is not one of them.

Look at other classical collapses - Enron, Worldcom, Lehmann Brothers, Madoff...  They all seemed "too big to fail", and yet...

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JorgeStolfi
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February 24, 2014, 06:14:07 AM
 #17

From http://www.reddit.com/r/Bitcoin/comments/1yre42/mt_gox_ceo_resigns_from_bitcoin_foundation/cfn38sq

Quote
@Bitcoin_Charlie (= Charlie Shrem) 93 points 2 hours ago
This is actually good news. I applaud Mark and the MtGox team for making the right decision as I had to do the same. Speaking very lengthy to Mark and the team over the weekend, I see good news on the horizon for people who have funds stuck in MtGox (I also have funds in MtGox stuck) - Charlie

@bitnub 1 point 1 hour ago
When you say funds... do you mean USD, BTC or both?
permalinksaveparent

@Bitcoin_Charlie 4 points 1 hour ago
A small amount of BTC.

Academic interest in bitcoin only. Not owner, not trader, very skeptical of its longterm success.
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February 24, 2014, 10:01:02 PM
 #18

https://blockchain.info/address/1LNWw6yCxkUmkhArb2Nf2MPw6vG7u5WG7q

This is a wallet linked to both the 424k transaction and the 500k transaction and has been identified previously as MtGox's wallet.

Everything that enters, leaves.  The final balance is zero.
zhangweiwu
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February 26, 2014, 03:39:52 AM
 #19


I can think of three ways, not totally implausible, that they could have lost most of their clients' coins without people outside realizing it.  And theft is not one of them.

Jorge, just tell me how can I subscrib everything from your month. The leaked document 'Gox Crisis Management Plan' confirmed every number is in your prediction range. And if you need a partner in project / business, kindly drop a message to my humble self.

My (old) column about Bitcoin & China: http://bitcoinblog.de/tag/zhangweiwuengl/
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February 26, 2014, 03:43:10 AM
 #20

all karpeles has to do to prove how many bitcoins he has left, is to create a wallet he publicly announces the public wallet address of, and then fills it with whatever bitcoin he has controll over still.

He won't do that of course, because his motive was to harm BTC all along this time. Even if he does, it would be just an attempt to get back in and do more harm to BTC.


Hopefully if this miracle happens, people will draw out their funds of any service this evil clown touches again.
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