Pascal Abams⭕
Pascal Abams⭕ 3 minutes reading from Bitcoin

Two Big Problems for Bitcoin: Liquidity, Lagutenance, and Solvency

1/ proof of reserves isn't enough

so there are two major problems banks, neo banks, and/or lending desks usually run into.

1) liquidity risk and 2) solvency issues

btc bitcoin

2/ liquidity risk has to do with maturity mismatch. where a bank takes in deposits for the short term and lends out long term. for example, a user deposits funds for 3 months, and the bank lends those funds out for 6 months. upon recalling those loans after 3 months,...

3/ ...the money isn't there – because the bank loaned it out an extra 3 months into the future. the bank then takes deposits of someone who deposited for a longer term than 3 months and pays out the 3-month depositor.

4/ this can continue as long as everyone doesn't call in their loans at the same time. but once everyone does, the bank goes into a liquidity crunch as the funds for withdrawals aren't available at the moment.

5/ now, this is bad for depositors but isn't bad lending practices by the bank. the depositors would have to wait much longer, but they definitely would have their withdrawals processed.

rather than having customers wait, the bank can raise capital to service...

6/...withdrawals in the meantime.

solvency issues are when the money isn't available (regardless of the time frame). maybe the bank issued bad loans to counterparties who went belly up, or funds loaned out, were lost.whatever the reason is, the funds customers deposited are lost

7/ again, this can go on as long as everyone doesn't withdraw their funds at the same time. if they do, the banks won't have the ability to process withdrawals, no matter how long the customers wait.

raising capital in this instance is difficult if not impossible,...

8/ as investors won't be able to risk capital knowing that they won't be able to get anything in return.

proof of reserves can at least solve for liquidity risk, as you can see that binance for instance has over 500k btc in their reserves.

9/ if there's a bank run on binance, they would be able to service withdrawals to the tune of 500k+ btc.

PoR doesn't solve solvency risk. we don't know the liabilities against the 500k+ btc binance has in asset.

10/ we don't even know for a start if over 1m+ BTC was initially deposited, and they currently have 500k+ btc. like, there's a lot we don't know.

a good PoR has to show both assets and liabilities. none of this would have unfolded if we only saw what assets alameda had...

11/ on their balance sheet. both assets and liabilities were leaked, that's how we knew alameda was insolvent.

This post is based on this twitter thread.


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