Binance's proof of reserves raises red flags: Report

[buwaytress]

This Binance thing, Mazar, etc. made me smile, and I do feel bad about it, because I shouldn't take joy from other people all loving on BNB and Binance et al, and having known personally some people fked thanks to FTX, there are bound to be many more innocents who'll be victims if the #1 exchange folds...

... but we should see better proof of reserves in future, that's the good thing to come out of it.

Wonder when anyone's going to try and find the chinks in NEXO's version of that. It's been over a year since they introduced it: https://real-time-attest.trustexplorer.io/nexo

[1714061807]

1714061807

[1714061807]

1714061807

[o_e_l_e_o]

... but we should see better proof of reserves in future, that's the good thing to come out of it.

There is no such thing as better proof of reserves. As I've said over and over and over, proof of reserves with proof of liabilities is utterly meaningless. It does not matter in the slightest if Binance can prove they are holding a 100,000 BTC. We have no idea if customer deposits on Binance total 100,000 BTC or 200,000 BTC, or more. Their proof of reserves could be enough to cover everything, or it could be a tiny fraction and they are massively insolvent. And we'll never know because either we will never see a proof of liabilities, or we will get some small, tightly controlled snapshot that only shows what the exchange wants us to see.

Wonder when anyone's going to try and find the chinks in NEXO's version of that. It's been over a year since they introduced it: https://real-time-attest.trustexplorer.io/nexo

Downloaded the PDF from the link you provided. Second paragraph in (emphasis mine):

Specifically, the procedures detailed herein, and Armanino’s findings, are intended to demonstrate that, at the time the procedures were performed, Nexo assets consisting of fiat (USD, GBP, and EUR), digital assets (self-custodied, third-party custodied, derivatives, and lending positions), and an outstanding customer loan book (collectively, “Nexo Assets”) were greater than or equal to customer deposits (“Customer Liabilities”).

So they include coins which Nexo has handed out to third parties, gambled on derivatives, and future loan repayments in what they class as assets. This is exactly the position that the likes of Celsius and Voyager were in when they went bankrupt - holding a tiny portion of deposits themselves, with the rest being handed out to variety of shady third parties in order to try to make themselves more profits.

[Z-tight]

... but we should see better proof of reserves in future, that's the good thing to come out of it.

I don't think any good thing can come out of it, except we can see an accurate proof of solvency, which may not be hard for the exchange to provide, but they would refuse to do so because they are mostly insolvent. If they can accurately provide wallets that hold their reserve funds and then sign a message from those wallets proving that they can truly move the funds out of the wallet, and then accurately provide information on funds that all customers are owed, that's the only way they can prove solvency, because we'll all be able to ascertain if the funds in their reserve can cover what all customers are owed if they all decide to withdraw their money at exactly the same time.

[buwaytress]

... but we should see better proof of reserves in future, that's the good thing to come out of it.

There is no such thing as better proof of reserves. As I've said over and over and over, proof of reserves with proof of liabilities is utterly meaningless.

Do agree it's pointless without knowing liabities is meaningless because they'll always cook the books to fit their needs -- all banks do this, and that's fractional (or in the case of US, zero) reserves -- but I do think they can be better version of proof of reserves -- if everything is real time, on chain (including liabilities!).

That said, it's a business model that needs to make profit, therefore, needs to take on risks. And that risk behaviour of banking systems that CEXs follow will always mean customers are the ones bearing ALL the risk.

Specifically, the procedures detailed herein, and Armanino’s findings, are intended to demonstrate that, at the time the procedures were performed, Nexo assets consisting of fiat (USD, GBP, and EUR), digital assets (self-custodied, third-party custodied, derivatives, and lending positions), and an outstanding customer loan book (collectively, “Nexo Assets”) were greater than or equal to customer deposits (“Customer Liabilities”).

So they include coins which Nexo has handed out to third parties, gambled on derivatives, and future loan repayments in what they class as assets. This is exactly the position that the likes of Celsius and Voyager were in when they went bankrupt - holding a tiny portion of deposits themselves, with the rest being handed out to variety of shady third parties in order to try to make themselves more profits.

No doubt will fail at some point, a point probably closer than anyone including Nexo themselves will think ever predict. Only reason I brought up Nexo is they seem to have escaped scrutiny despite making large moves this year. They're not considered a big player but are under the radar for their exposure in EU and rest of the world, while also owning a controlling stake in a small US bank. I suspect it'll take someone like them to fail to produce the next domino fall.

[o_e_l_e_o]

and then accurately provide information on funds that all customers are owed

I cannot see a trustless way this can be done. It's not like proof of reserves where they can sign a message from bitcoin addresses,  proving access to a certain number of coins. Liabilities are simply stored in the exchange's own internal database. If they say "These are our liabilities", then you are trusting the exchange. If they get an auditor to say it, then you are trusting the auditor. Even these Merkle trees they produce are easily manipulated by leaving out some liabilities or adding in some accounts with negative value.

if everything is real time, on chain (including liabilities!).

How can they put their liabilities on chain so they can be independently verified?

Only reason I brought up Nexo is they seem to have escaped scrutiny despite making large moves this year.

Yeah. I suppose everyone has been too busy talking about FTX and the others recently, but every centralized exchange is in the same risky boat right now.

[bbc.reporter]

Binance reserves is okay, according to this.



Two charts based on the same facts, but presenting one without the other can skew perceptions.

Binance BTC balance basically flat at 400k BTC since since mid 2021.

Source https://twitter.com/ergobtc/status/1604289386442788864


It has be very obvious that there are groups of people in the cryptospace that are creating a coordinated attack and negative propaganda against Binance. I am not defending Binance and my speculation on Binance as being used in a global moneylaundering ring does not change. However, we should also see reality.

[o_e_l_e_o]

Here is a story from FTX which proves what I've been saying all along: https://news.yahoo.com/ftx-execs-hid-8-billion-173336895.html. FTX created a single account on their system, not belonging to any person, and put $8 billion of unaccounted for liabilities in to it in order to balance their books.

And so what stops any other centralized exchange doing the same thing? Absolutely nothing. They create a Merkle tree which includes a sham account or two with a balance of negative $8 billion. Oh look! Everything balances up perfectly. How convenient. Or maybe they have some third parties "audit" their books and bottom lines. Bearing in mind that none of these audits were actual audits and were just "agreed upon procedures" where the third parties were only given access to what the exchange wanted them to have access to, and so hidden in those books are a few sham accounts holding billions in made up liabilities. And surprise again! Everything balances up just fine. And all the time the exchange is actually massively insolvent and your coins are already lost.