Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse • Hacker News Board

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#171

Post by karpierz » Wed, Nov 16, 2022, 8:14 PM UTC

throwup wrote: post #140

karpierz wrote: post #135

Earlier quoted context omitted.

> All liabilities were verified by the auditors and included in the merkle tree, and as mentioned, all users can independently verify that their specific liabilities are present. What more would you expect? Where in the report do they verify off-chain liabilities?

I'm still not quite sure you're after, but I guess it would be this quote on page 3: > 14) Compare the total liabilities from the Client Liability Report extracted from Kraken’s production database as observed within Procedure 5 to the total assets controlled by the Kraken custodied addresses (the “In-Kind Assets”) as of the specified date and time of the assessment time and calculate the collateralization ratio base…

That's measuring how much they owe clients (IE, deposits) against how much crypto they hold (IE, the crypto in wallets they hold). That doesn't at all capture the kinds of liabilities I'm asking about, which is debt external to the blockchain.

Ex: I am Kraken. Someone deposits 1 BTC with me. I then sign a contract with someone else saying "You give me 1 BTC now, I will give you 1.2 BTC in a year". I then sell 1 BTC. In my wallet, I will have 1 BTC, exactly matching my client liabilities. But my total liability is 2.2 BTC. And if those contracts start calling in early (IE, margin calls), I'll end up in a liquidity crisis.

Or more simply, what if Kraken just uses the BTC as collateral for normal loans from a bank? If they fail to pay them, then they'll fork over the client BTC.

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#172

Post by DebtDeflation » Wed, Nov 16, 2022, 8:21 PM UTC

throwup wrote: post #147

DebtDeflation wrote: post #146

Earlier quoted context omitted.

https://www.businesswire.com/news/home/20220203005576/en/Kra... >Administered by Armanino LLP, the Proof of Reserves audit is the second of its kind conducted on our exchange since 2014, and it affirms that more than $19 billion worth of client bitcoin and ether is safely – and provably – on our platform . This includes the $3.5 billion worth of ether held in Kraken’s secure on-chain staking service, the industry’s l…

Come on man. That's an old article. It was true of the audit being reported on at the time, but their most recent audit was more comprehensive. Again, just open the links I posted if you want to see how things have changed since then.

Ok, looks like there was another "audit" done in August, where they did verify the existence of additional tokens.

Nevertheless, from the most recent "audit" report:

>"We were not engaged to and did not conduct an examination or review engagement, the objective of which would be the expression of an opinion or conclusion, respectively, related to the platform account liabilities and asset balances represented by Kraken. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported."

So once again, they're not saying anything al all about Kraken's overall assets or liabilities, merely confirming that the customer accounts have the correct number of coins in them at a point in time.

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#173

Post by throwup » Wed, Nov 16, 2022, 11:51 PM UTC

karpierz wrote: post #171

throwup wrote: post #140

Earlier quoted context omitted.

I'm still not quite sure you're after, but I guess it would be this quote on page 3: > 14) Compare the total liabilities from the Client Liability Report extracted from Kraken’s production database as observed within Procedure 5 to the total assets controlled by the Kraken custodied addresses (the “In-Kind Assets”) as of the specified date and time of the assessment time and calculate the collateralization ratio base…

That's measuring how much they owe clients (IE, deposits) against how much crypto they hold (IE, the crypto in wallets they hold). That doesn't at all capture the kinds of liabilities I'm asking about, which is debt external to the blockchain. Ex: I am Kraken. Someone deposits 1 BTC with me. I then sign a contract with someone else saying "You give me 1 BTC now, I will give you 1.2 BTC in a year". I then sell 1 BTC.…

You're right, there is no way to cryptographically prove that there are no contracts external to the blockchain. The audit is from a purely "not your keys, not your coins" perspective. And there's no way to prove they won't go get some USD loans tomorrow either, since you can't cryptographically prove the future.

Your defense against these tail risks is to remember, "not your keys, not your coins", and self-custody when you're not actively exchanging. In the end you do have to hope that the < 1 hour it takes you to exchange your coins and transfer them back to your own wallet doesn't overlap with the moment they decide to torpedo their 10+ year old business with no prior warning or red flags. But these are infinitesimally small tail risks.

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#174

Post by boc » Wed, Nov 16, 2022, 11:52 PM UTC

jonathan-adly wrote: post #124

boc wrote: post #89

Earlier quoted context omitted.

Because economic activity is fundamentally incompatible with a deflationary currency like Bitcoin? If I can passively generate wealth by doing nothing but waiting, so can everyone else. Only suckers would work. This is basic macroeconomics but for some reason crypto believers just choose to live in an alternative reality.

You are right - that's the undergrad class in macroeconomics. A little more depth and you will find that it's not that black and white. A centrally-managed currency really has a terrible track-record everywhere in the world except maybe the US and Switzerland (emphasis on maybe). Political-pressure on the central bank, incompetence, corruption all add up to eventually break things. You have to have a lot of instituti…

I think you're confusing my use of basic.

Basic here means fundamental, not surface-level.

It's like saying carbon is a basic building block of life. It doesn't mean that if you dig deeper, it's actually something else. It means that carbon is where everything starts, and you go from there.

I personally have a bit more than a single undergrad econ class under my belt.

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#175

Post by karpierz » Wed, Nov 16, 2022, 11:59 PM UTC

throwup wrote: post #173

karpierz wrote: post #171

Earlier quoted context omitted.

That's measuring how much they owe clients (IE, deposits) against how much crypto they hold (IE, the crypto in wallets they hold). That doesn't at all capture the kinds of liabilities I'm asking about, which is debt external to the blockchain. Ex: I am Kraken. Someone deposits 1 BTC with me. I then sign a contract with someone else saying "You give me 1 BTC now, I will give you 1.2 BTC in a year". I then sell 1 BTC.…

You're right, there is no way to cryptographically prove that there are no contracts external to the blockchain. The audit is from a purely "not your keys, not your coins" perspective. And there's no way to prove they won't go get some USD loans tomorrow either, since you can't cryptographically prove the future. Your defense against these tail risks is to remember, "not your keys, not your coins", and self-custody w…

> You're right, there is no way to cryptographically prove that there are no contracts external to the blockchain.

But there is a very easy way to prove that there are not contracts external to the blockchain.

That's the whole point of an audit.

And it's very telling that they don't want their books audited, but repeatedly point to a clearly incomplete (from the perspective of someone who is concerned that the business might go under) as proof of solvency.

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#176

Post by shkkmo » Thu, Nov 17, 2022, 12:54 AM UTC

jmalicki wrote: post #157

shkkmo wrote: post #118

Earlier quoted context omitted.

I don't think that information is public to protect privacy...but any balances over the limit in a failed bank would result in non-insured losses.

That's actually not true [1] - the FDIC has continued the practice of covering balances over the insured limit despite not being required to. [1] https://www.americanbanker.com/opinion/will-fdic-keep-protec...

Interesting, glad they're doing that but ok probably best not to count on that policy if you don't have to.

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#177

Post by BoiledCabbage » Thu, Nov 17, 2022, 1:15 AM UTC

datadata wrote: post #71

BoiledCabbage wrote: post #55

Earlier quoted context omitted.

The Fed printed money to prop up the price of derivatives, not the price of house. Huge difference. Houses themselves fundamentally have intrinsic value as an asset. A currency has no intrinsic financial investment value. Especially not an arbitrarily created crypto currency. The only reason it's price would go up is people speculating that someone else will want to speculate on it in the future, and will pay a premi…

> The Fed printed money to prop up the price of derivatives, not the price of house. I'm not sure your point here. Derivatives absolutely are a driver on the price of the underlying assets. Derivatives are what inflated the housing bubble prior to 2008. I generally agree with you that homes have an intrinsic value, and that currencies do not necessarily have that. But that intrinsic value of homes was probably around…

> Derivatives are what inflated the housing bubble prior to 2008.

Yes derivatives are a big part of what inflated the bubble prior to 2008, but the fed purchasing them didn't do anything to maintain home prices.

The combination of (ARMs + low interest rates) and lenders being able to immediately flip mortgages to other to be combined in CDOs and other MBS derivates inflated housing. Lenders could make loans that they knew borrowers could not repay, but because it would be off their books before that time hit they continued to make them. Derivatives inflated the bubble.

But as rates continued to rise, ARMs began to reset, and buyers at the new prices dried up, prices began to crash and people began to walk away from homes. This immediately dropped home values and caused MBSes to devalue quickly. Demand for MBSes dropped immediately. Lenders stopped making loans because they realized they could no longer flip to loans to others to securitize them. As nobody wanted to buy a MBS now. This dried up the demand side, plus foreclosures added to supply side.

The fed stepped in and began buying close to worthless MBS for way above value not because of any impact on the housing market (overall MBS demand was still enormously down), but because they were buying them above their value to prop up the market so financial companies could still price them to "market" on their books and (via façade) maintain their capital requirements. They also purchased them to help inject capital into the markets and take more MBS off their book. The fed purchased these to prop up the financial system - it had nothing to do with home prices and had little impact on home prices. Lenders stopped pushing unviable loans to borrowers because they now held the risk. And they would hold the risk regardless.

The fed didn't prop up the housing market in 2008, they propped up the financial markets because so many people tried to get rich quick off mortgage backed securities and the bubble burst.

The bubble is now bursting in crypto. As you said, the floor for crypto (with little to no intrinsic value) is zero. The only question is how close to it's intrinsic value will it fall.

Wall St. pushed hard to keep MBSes unregulated, they formed a bubble and then fell back to close to their intrinsic value. Their intrinsic value was maybe 30% off of their peak value. (Maybe a bit lower, but due to the illiquid nature of housing the market never fully fell to it). So now crypto also unregulated has pushed a bubble, how far does it have to fall to hit its intrinsic value?

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#178

Post by throwup » Thu, Nov 17, 2022, 2:36 AM UTC

karpierz wrote: post #175

throwup wrote: post #173

Earlier quoted context omitted.

You're right, there is no way to cryptographically prove that there are no contracts external to the blockchain. The audit is from a purely "not your keys, not your coins" perspective. And there's no way to prove they won't go get some USD loans tomorrow either, since you can't cryptographically prove the future. Your defense against these tail risks is to remember, "not your keys, not your coins", and self-custody w…

> You're right, there is no way to cryptographically prove that there are no contracts external to the blockchain. But there is a very easy way to prove that there are not contracts external to the blockchain. That's the whole point of an audit. And it's very telling that they don't want their books audited, but repeatedly point to a clearly incomplete (from the perspective of someone who is concerned that the busine…

You have a point, but I think you're underestimating how "very easy" of a process an audit is. It's a mountain of time-consuming work for everyone involved. Their audits are encompassing more and more each time. They've talked about wanting to go public, at which point they would need to disclose everything quarterly, so I think it's likely they'll work their way up to your standards one day. But even if I'm wrong, if you keep your keys to yourself, none of this matters.

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#179

Post by throwup » Thu, Nov 17, 2022, 2:45 AM UTC

lxgr wrote: post #170

mirzap wrote: post #104

Earlier quoted context omitted.

I disagree. Wealth today is preserved thanks to "deflationary" instruments, whose value rises over time - like gold, silver or even stocks. Rich people take a loans of inflationary $$$ against their deflationary assets to generate economic activity. With that they not only preserve their fortune, but generate a lot more thanks to that economic activity they initiated. Bitcoin will allow that to everyone, not just the…

What incentivizes people to spend their Bitcoin today (whether as a business expense or for their cost of living) rather than holding on to them until tomorrow, getting richer passively? Would lending be allowed in your model? If so, what makes it different from the status quo (fractional reserve banking and ultimately debt becoming money itself)? If not, how do I start a business or purchase a home without the lump…

> What incentivizes people to spend their Bitcoin today (whether as a business expense or for their cost of living) rather than holding on to them until tomorrow, getting richer passively?

The same thing that incentivizes people to spend their USD today instead of passively getting rich using VTSAX

Re: Genesis' Crypto-Lending Unit Is Suspending Withdrawals in Wake of FTX Collapse

#180

Post by datadata » Thu, Nov 17, 2022, 4:15 AM UTC

BoiledCabbage wrote: post #177

datadata wrote: post #71

Earlier quoted context omitted.

> The Fed printed money to prop up the price of derivatives, not the price of house. I'm not sure your point here. Derivatives absolutely are a driver on the price of the underlying assets. Derivatives are what inflated the housing bubble prior to 2008. I generally agree with you that homes have an intrinsic value, and that currencies do not necessarily have that. But that intrinsic value of homes was probably around…

> Derivatives are what inflated the housing bubble prior to 2008. Yes derivatives are a big part of what inflated the bubble prior to 2008, but the fed purchasing them didn't do anything to maintain home prices. The combination of (ARMs + low interest rates) and lenders being able to immediately flip mortgages to other to be combined in CDOs and other MBS derivates inflated housing. Lenders could make loans that they…

You are making this too complicated. If the fed did not buy any MBS, what would have happened to home prices in the long run? Financial markets would have failed, and then home prices would have plummeted.