Translation of article from nick Carter, partner venture company Castle Island and co-founder of Analytics company Coin Metrics.
What bitcoin is different from gold, its analog cousin? Can you tell us about “separability” or “endurance”. And you’re right. But what radically distinguishes bitcoin from gold? The answer, of course, verifiability.
If you feel that gold is a medium of exchange, without a special spectrometer (sold for $13 500), you are unlikely to be able to prove that the ingot is genuine. Otherwise, I shall take your word for it. It’s not a problem if you don’t keep gold on my behalf. But in this case another problem arises: I trusted you with my gold — you may have given me an IOU that represents a claim on the gold, but I have no way to determine whether you have gold, which, as you say, is kept on Deposit. I can’t check my gold from afar.
Maybe I’ll decide to trust you. But if you don’t exert effort to re-check all you receive gold, you will need to prove to your investor that all of your partners in the supply chain of gold honest. And they have to prove that their counterparties — the miners, refiners, jewellers, keepers — too honest. The result is a sophisticated supply chain, in which one body attracts every organization in accordance with a certain set of rules. One controls the London Association of precious metals market (LBMA) which controls gold at $400 billion Since the management of this supply chain is very expensive, gold LBMA rarely go outside of this market.
Another result of this is that the government (actually the government) keeps gold each, and then refuses to return it.
Expensive validation leads to centralization. More expensive to verify the authenticity of the product, the harder it is to get him to smallholders and easier to confiscate.
Now consider bitcoin. How do you authenticate you receive bitcoins? Full node bitcoin does this by default, just by following agreed rules.
How about you prove to me that you do have bitcoin, which as you say belongs to you? With public key cryptography is quite simple. The most convenient way for bitcoin is to use a RPC command signmessage, which is in Bitcoin Core or Electrum. I give you a line of text, and you connect it with your private key to create a proof that you have certain unspent transaction outputs (UTXO). Thus, trusting only crypto I know exactly what you control a certain number of bitcoins in a given time.
President Nixon it was easy to abandon the gold standard in 1971, because most of the gold was already in the government vaults of the United States. Bitcoin store millions of people. And I consider myself one of those who were optimistic that the properties of bitcoin as collateral with a high degree of verifiability, will give the underlying asset which belongs to the end user, and not a tiny handful of intermediaries.
However, despite the verifiability of bitcoin, the reality is that we don’t know how many bitcoins are stored mediators. And I don’t believe that fractional reserve banking is inherently fraudulent. Fraud is a exchange who claim to have a full backup, when in fact it is not. Theoretically, the properties bicton reduce this risk. Investors can independently verify that the obligation of Depository institutions to their assets. The problem is that some of the most famous representatives of the industry do not share my enthusiasm for this idea. The problem is that this group includes the leaders of the bitcoin banks, which today is called cryptocurrency exchanges.
The exchange store completely check an asset but all they ask depositors to trust them. And the history of bitcoin banks is full of breaches of that trust. The list is long: Mt. Gox, Quadriga, FCoin, Cryptopia, Bitfinex, Cryptsy, Bitcoinica, etc…
Undoubtedly, investors can find some assurance in the laws and regulations: if the exchange has Regulations or licensed trust company, she’s probably out audit of deposits. However, a major exchange (Binance, Bitmex, Deribit, Bitfinex, etc) are not regulated. On the other hand, bitchener should not require more regulation.
One possible solution is the periodic results exchanges proof that they actually own the assets of depositors. These “proof of reserves” (Proofs of Reserve) use of cryptographic properties of bitcoin and give investors reasonable assurance that the stock exchange is not lying about its solvency. However, after a brief period of enthusiasm for public audits after the collapse of Mt. Gox in 2014, the only stock exchange that is today regularly conducts such audits, is a London-based Coinfloor.
If some operations, previously based on contracts and trust can be formalized and expressed in code, we need to take them. Proof of reserves is not without its weaknesses (and the exchanges were able to deceive the auditors implementing this process in the past), but we must not forget the greater objective. If we fail to use this advantage of bitcoin, we hardly make it more innovative than gold.