š¤·āāļøš Proof-of-Reserves, Can it Save Crypto?
Happy Hump Day everyone,
There are more than 8 billion people in the world now! And I still donāt have a girlfriendā¦ Elon really does seem to be doing a lot to combat the risk of population collapse.
In other news, tech continues to lay off thousands of workers, and Donald Trump announced he would be running as the Republican Presidential candidate for 2024.
I also just put out a new video where I Try 24 Habits of Famous CEOs in 24 Hours. Iām going to stick with one of the habits so if you want to know which one, definitely give the video a watch!
Enjoy this weekās Hump Days!
- Humphrey, Rickie & Tim
Featured Story
As the crypto world begins picking up the rubble left behind from the FTX saga, slowing uncovering new information about the inappropriate ways they used user deposits to fund things such as extravagant real estate in the Bahamas in gated communities for their small team, we are left with many questions and very few answers. One of the most pressing questions being: where do we go from here? Whatās next?
The big driving issue behind FTX was that they did not have the funds to fulfill customer withdrawals. Keep in mind, this issue is not unique to FTX either. Crypto exchanges have a bad habit of hiding their reserves or outright lying about them so they can do shady things with your money such as propping up a failing crypto hedge fund or accidentally wiring hundred of millions of dollars worth of customer funds to another exchange.
Trust in crypto is steeply declining and as such, many crypto exchanges are now calling for a form of transparency called proof-of-reserves which is a cryptographic method of proving an exchange is liquid enough to process all customer withdrawals and allows customers to keep tabs on where their money really is. The proposed way of executing this involves using something called Merkle trees which produce efficient data structures called āhash treesā that can be securely verified and act like a map of customersā funds. These reserves would then be audited by a third-party vendor to verify customer holdings.
The idea for proof-of-reserves based on Merkle trees became popular following the collapse of Mt. Gox (who lost all customer funds in a hack) in 2014. The wave of proof-of-reserves then fizzled out until FTX happened and now weāre seeing the exchanges call for it again. It takes a crisis for any real movement on reform to happen, it seems.
Where the proof-of-reserves conversation is limited, however, is that it would not prevent the misappropriation of customer funds completely. It only tracks holdings and does not prevent the exchange from lending out your money to borrowers who may not be able to repay them. It does not provide customers with greater control over their money either; it only provides them with more information.
It will be a long uphill journey to regain the trust of the public in crypto, but concepts such as proof-of-reserves and its future iterations could restore confidence in the asset class. But for now, I wouldnāt touch it with a 10-foot pole in its current state.
Weekly News Roundup
Janet Yellen Warns of the Need to Lift Debt Ceiling (Reuters)
With the increasing likelihood of a split U.S. Congress, Treasury Secretary Janet Yellen warned that lawmakersā failure to raise the statutory limit on U.S. debt posed a āhuge threatā to Americaās credit rating and functioning of U.S. financial markets. In 2010, Republicans who took back control of Congress brought the U.S. to the brink of default, prompting the first-ever credit rating downgrade on U.S. treasury debt by rating agency S&P. Without an increase, analysts anticipate a potential default crisis by Q3 of 2023.
Biden-Xi Talks Mark Shift in U.S.-China Ties Toward Managing Fierce Competition (WSJ)
In the hours after House Speaker Nancy Pelosiās August visit to Taiwan, Beijing had largely severed lines of communication with the U.S. government, saying that Pelosiās arrival was in defiance of Chinaās sovereignty. Since then, Biden quietly opened back-channel talks with a senior Chinese diplomat and laid the groundwork for the first face-to-face meeting between the U.S. and Chinese presidents since Biden was elected. The 3-hour long meeting covered issues such as their differences over Taiwan, Russiaās war in Ukraine, and ways to ensure that the U.S.-China rivalry doesnāt flare into open conflict.
Meta, Lyft, Salesforce. and Other Tech Firms Dump Office Space as They Downsize (WSJ)
Meta, Lyft, Salesforce, and other tech companies are unloading millions of sqft of office space in San Francisco, Silicon Valley, New York, Austin, and elsewhere. With the prospect of a recession looming and companies slashing payroll, tech firms find they have too many floors of office space and want to unload big chunks of it. The national office vacancy rate is 12.5% up from 9.6% in 2019, and the highest since 2011. Office buildings are backed by $1.2T of the $5.4T total commercial real estate debt outstanding in Q2. If landlords begin defaulting at high rates on their mortgages, their distress could ripple through the entire financial system.
Charts of the Week
As it turns out, the majority of FTXās assets werenāt liquid. FTX only had $900M in liquid assets ($472mn of that being Robinhood stock) and $9B in liabilities. Yikes.