BitInstant - a look at an old idea from the Bitcoin space

Every now and then, an interesting service will appear in the Bitcoin space, then get shut down at some point and we won't see the idea behind it come back. Often that might be because the idea in itself was bad (like, lending out your BTC to strangers), but sometimes you find an old idea that could be feasible still. One such idea I would like to talk about today is BitInstant, or at least one notable part of it.

BitInstant

BitInstant was a service started in 2011 by Gareth Nelson and Charlie Shrem aiming to help make faster fiat deposits into a few Bitcoin exchanges, such as MtGox, BitStamp or VirVox. At some point you could also convert the deposits directly into BTC. BitInstant would handle cash deposits from places like Walmart and credit you appropriately.

Overall, it seemed like an approachable way to get some bitcoins back in the day when a lot of the Bitcoin exchanges were struggling with accepting funds in the US.

It seems there was a lot of demand for this service in 2013, but unfortunately the site was shut down after its CEO got arrested in early 2014.

Now, what I just described doesn't sound all that interesting in 2018 - we currently have a lot more payment options available now that fewer banks are afraid of Bitcoin. However, BitInstant had one more underappreciated feature I wanted to talk about...

Inter-exchange transfers

BitInstant not only did normal cash deposits, but it also allowed you to redeem coupons from MtGox, VouchX or BTC-e and use those as a deposit methods into the above mentioned exchanges. In other words, you could use it to transfer money from BTC-e into BitStamp, or from MtGox into VirVox. This would allow you to handle arbitrage between the exchanges much more easily.

It seems these days there aren't as many options for that. Last time I checked I could find about three exchanges that would take BTC-e coupons as a deposit method and you can use Tether across a number of exchanges as a substitute for USD, but there isn't a neat way of transferring fiat between exchanges in a really fast manner.

I suppose you soon won't need a service for transferring bitcoins between exchanges if the Lightning Network can deliver its instant transfers on mainnet. Some other alts might benefit from something like voting pools though.

A service that would allow you to transfer fiat between any exchanges might make for a more efficient market - imagine being able to take advantage of some of the more recent arbitrate opportunities. The prices would be more uniform around the world and everyone would be getting a more fair deal.

The solution wouldn't even be that hard to implement - the major complexity would come from having to handle the large, international capital transfers to balance the books every now and then. So once again, it comes down to the inefficiencies of the traditional banking system...

Conclusions

BitInstant was an interesting "old" service in the Bitcoin space that helped people deposit their money onto a few crypto exchanges. It also provided a way to move funds between crypto exchanges, providing some way of cashing in on some arbitrage opportunities. Unfortunately, there aren't that many ways of transferring fiat efficiently between the major exchanges these days.

What crypto projects I'm looking looking forward to in 2018

2017 has been an important day for both Bitcoin and cryptocurrencies in general. While hopefully not as tumultuous, 2018 is looking like it will bring us a lot of interesting innovation in the space. Here are some of the things I'm personally looking forward to seeing unfold in the new year.

ICO Securities

After the SEC's investigative report on The DAO, we have seen a number of companies (mine included) start looking into ICO Securities. This might be a start of a new wave of ICOs that will be bigger than the entirety of the current market.

If a lot of sentiments I've heard so far are to be believed, we might see such ICOs replace traditional VC funding, bring in more traditional investment industry into the market, and get a number of people from various governments to watch closely where this trend will unfold. If properly harnessed, Security ICOs could also drive real-world innovation while providing more sustainable, long-term growth than the current trend of "sell vaporware with hype and turn 100x profit in a few months".

I'm certainly the most excited to see where this trend will go and whether my guesses will turn out to be correct or not...

Lightning Network adoption

In 2017 we got SegWit activated on Bitcoin and a few other currencies. So far it has alleviated a bit of the transaction traffic, but it's nowhere near useful enough to solve the Bitcoin scaling problem on its own. Hence why I'm excited to see if the Lightning Network will be able to deliver on its promises and go mainstream allowing Bitcoin to once more be used for everyday purchases. Betting on SegWit without blocksize increase has certainly been a large gamble that has allowed a number of alts to grow into their own prominence. Hopefully we'll see this year if this bet pays off, or Bitcoin might lose its luster...

Ethereum POS change

The anticipation of Ethereum changing from POW to mostly POS has been heard many times through 2017. We've seen the technology delayed to (hopefully) later this year. If successful, it would make Ethereum the most prominent POS coin out there, possibly driving some people to invest in it for the staking returns. While I'm not sharing the paranoia surrounding Bitcoin's POW (claiming that its energy consumption will continue to grow at a massive rate eating a significant chunk of world's energy production in a few years), it's still a worthwhile experiment to see undertaken.

Interledger, Codius, etc.

Ripple is another company / crypto to look out for in 2018. While I might have my reservations about XRP the currency, I have strong respect for Ripple the network and its creators.

Other than the growth of the Ripple network itself, there are two interesting projects from Ripple Labs that might become more prominent in 2018. The first one is the Interledger Protocol, a protocol aiming to help facilitate payments across different ledgers / blockchains / etc. The second one I was surprised to see the light of day again was Codius (which has been shelved for some time in 2015) - a universal hosting standard for smart oracles.

Ripple Labs is definitely a company that will be doing interesting projects for years to come. It will be interesting to see what they will cook up for us in 2018...

Tether and other fiat IOUs

Tether has been an interesting fiat IOU these past few years. The space itself has been a bit paradoxical honestly - there have been a lot of fiat IOUs on Ripple, but only one prominent IOU on the Omni network and so far not all that much on the Ethereum network. Tether as a currency has been rather unremarkable until it started having some banking problems and despite that its market cap has increased to almost 1.5B USD at the time of writing. This has sparked at least one very prominent Twitter user to start calling it out on every given opportunity.

There are two ways I could see this play out in 2018. On one hand, we might see fiat IOUs to appear more prominently on the Ethereum blockchain (Tether has apparently already made that leap), possibly to compliment the above mentioned ICO Securities. On the other hand if some more paranoid people are to be believed, Tether might turn into another MtGox and implode with such a force as to crash the crypto prices by a lot.

One way or another 2018 is looking like a year where fiat IOUs might become more important in the crypto space.

Government-backed cryptos

For years a lot of Bitcoiners have been stating that some governments should adopt Bitcoin as a national currency. A few years back we saw Canada looking into doing the opposite - adopting its fiat currency into a crypto form with MintChip. Unfortunately, that project went nowhere, but it's looking like this year we might have the next serious contender - Venezuela aiming to launch its Petro.

Petro is designed to be "backed by oil, gas, gold and diamond reserves", making it a bit more of a commodity IOU than a fiat IOU. It might be an interesting experiment, especially if this creates an alternative to the hyper-inflating bolivar accessible to the people of Venezuela. It will remain to be seen whether the government will be able to keep the value of the new currency stable and keep it backed by the natural resources, or will we one day see the currency stop being backed by anything.

If successful, this might be the first time a government-created currency will have to complete on somewhat equal footing to private currencies and digital cats.

Conclusions

2018 is looking like another exciting year in crypto space. We will see how the echos of the prior year will play out, as well as get to experience entirely new developments shape the space. There is never a dull moment in this industry...

Counterarguments to XRP value preposition

As some of you might know, I really like the idea behind the Ripple system. Creating a settlement layer based on trust and IOUs, being able to issue any asset easily, working quite well as a middleware layer, incentivising specialisation, creating a singularity of money, all of that is great. The system is not without its flaws however - centralisation of validators is an issue, and so is the token distribution. While both are interesting topics, with the recent meteoric rise in XRP price, I think it's worth focusing on that part of the discussion.

Basics of Ripple and XRPs

Ripple is a Crypto 2.0 system launched in late 2012. It is based on a protocol predating Bitcoin by a few years, known as Ripplepay. As any good Crypto 2.0 network, Ripple allows its users to issue and transact in any currency. It also supports its own native currency - ripples, or XRPs.

XRPs have a few key uses on the Ripple network. They are used to pay transaction fees, and are required as reserves for any address using the network and creating trust lines. All in all, it serves as an anti-spam measure for the network. Moreover, since every account on the Ripple network can accept XRPs, it is also promoted as a bridge currency.

IOUs are user-created currencies. While any address can issue their own currency, most people will be using IOUs issued by gateways. Those will usually be denominated in fiat or crypto. The IOUs can be traded directly on the network, sent from one user to another, and even perform atomic, multi-currency bounces in a single transaction.

There are a few key differences between XRPs and IOUs. IOUs have a counterparty risk - if the issuing gateway defaults, the tokens will be worthless. You can only send IOUs to or through people that also trust the same gateway. The gateways usually charge a small percentage fee on every transaction. IOU transactions are a bit bigger and more complicated, meaning they can cost more to execute. XRPs are their own cryptocurrency, meaning they are not redeemable for anything directly.

Beyond that, the Ripple network handles both XRPs and IOUs identically - both can be traded on the decentralised exchange built into the network, both can be part of multi-currency transactions, both operate at the same speed and they are both highly divisible.

Criticism of XRPs

The main criticism levelled at XRPs and thus also against the Ripple network is the way the coins were distributed. Ripple Labs, the creators of Ripple, created the network with 100B XRPs in it, and no new XRPs were created since the network inception. This is not an unknown practice in the crypto space - a lot of networks premine their tokens. However, the network creators usually only keep a fraction of the tokens for themselves, preselling the rest to anyone that wishes to buy some. Ripple Labs however, still owns about 60% of the originally issued tokens. This raises a few issues.

First, the company could try cashing out and potentially crash the market. It is very unlikely however. Ripple Labs has recently taken steps to promote its XRP market and put the majority of their XRPs into an escrow (then again, the escrow is unlocking 1B XRP every month for the next ~4.5 years, so it could be better).

Secondly, since the network fees are paid through burning XRPs, they essentially enrich everyone in proportion to the amount of XRPs they hold (if 1% of the tokens got burned, the remaining tokens would be worth about 1% more provided the market doesn't change). This means Ripple Labs is essentially earning 60% of all network fees on the network. This probably doesn't amount to much at the current time, but may be more important in the future.

Lastly, the amount of XRPs owned by one company gives it a negative reputation. A lot of people in the crypto space dismiss Ripple outright as "a premined scamcoin" just because of the amount of coins owned by Ripple Labs.

All in all, that isn't too damning really. Ripple Labs appears to be reputable enough not to try cashing out of what appears to be their golden goose. However, they are not the only major players around...

The founders of Ripple Labs, Jed McCaleb, Chris Larsen and Arthur Britto gave themselves 20B XRPs early on. This later came to bite Ripple Labs in the ass. Jed left the team to start his own version of Ripple called Stellar, and decided to sell his XRP stash, resulting in a legal kerfuffle, a settlement, and a schedule for how those coins may be sold. If those numbers are correct, Jed is still cashing out 20k USD per week, and come ~2019, he will be able to cash out 750M XRP (worth ~256M USD at today's price of 0.34 USD/XRP). Not an ideal situation if the money from your network will be going to a former employee building your direct competitor to the tune of a quarter of billion dollars. While some of those funds might go to charity, that's still not an ideal outcome.

Now that we've dealt with most of the issues XRPs had to face, let's have a look at how XRPs fare on their own network.

XRPs vs IOUs

While Ripple the network has to compete with Bitcoin, Ethereum and other cryptocurrency networks, XRPs the currency have another important competitor - the rest of the assets on the Ripple network. Some networks, like NXT or Counterparty, ensure their native token is at the centre of every trade - you can't trade IOUs for one another on those networks. In Ripple, you can transact purely in IOUs all day every day without touching XRPs for anything else than the fees.

This ties to the central value proposition of XRPs - being the universal medium of exchange.

Distributed currency network vs XRP as medium of exchange (source, presentation)

In short, the problem is as follows. If you have many different currencies on the network, you can have potentially a very large number of markets between those currencies (mathematically, twice as many markets as there are currencies). This means you would have to have a lot of market makers providing liquidity to every market. However, if everyone agreed to use XRPs as the common currency, you would only need to make one market per currency - between that currency and XRP.

At the moment, it looks like that is the case - the major markets on the Ripple network are all trading XRPs for the various currencies issued on the network. At the time of writing, 11M USD worth of trades and 88M USD worth of payments have been executed on the Ripple network in the last 24 hours, majority of which were using XRPs.

The main advantages given for XRPs being better than IOUs are:

• XRPs are acceptable by anyone on the Ripple network
• There are no extra transfer or trade fees on XRPs
• XRPs have no counterparty risk

However, there are also some drawbacks to XRPs, even not counting the coin distribution and centralisation.

Just because someone can receive XRPs, doesn't mean they'll want to settle in XRPs. The network just essentially forces everyone to have an unlimited trust line to XRPs, even if they wouldn't want to hold them.

XRPs might be a decent universal currency for people that want to hold XRPs, but that might not be ideal for banks or big institutions. That's why we see networks like Corda, or even Interledger Protocol (also developed by Ripple Labs) that don't rely on a native cryptocurrency gain traction, while the best example of a real-world application relying on crypto token in the middle is Abra. Creating a universal, international settlement currency was the idea behind Bitcoin, and you don't really see banks using it for that cause.

Market making essentially boils down to either trading the currency like any other crypto, or copying the market from another source to offset your trades. The amount of liquidity you could copy with XRPs is small in comparison to the nigh-bottomless FX market from the real world. If you are going to see real-world use cases being deployed on Ripple, it will be more likely to see them leveraging the existing FX markets rather than going through XRPs.

While XRPs have no counterparty risk, they also have no counterparty protection. If anyone steals your XRPs, they are gone. With IOUs, you can still appeal to the issuing gateway to halt the transaction and potentially track down where it was withdrawn to. The IOUs are thus much less of a target.

On a similar note, XRPs are much harder to track, which would make them less appealing from a compliance standpoint. Gateways on the other hand can whitelist and blacklist addresses that can use their IOUs, thus having an easier time identifying anyone that uses their IOUs.

If a value of a given currency changes in value, you only need to adjust the market using that currency. If XRPs were the universal currency against which all of the currencies would be traded, any time the value of XRPs would fluctuate, you'd have to adjust the entire market.

Adding a new currency to the distributed IOU network wouldn't necessarily mean you'd have to trade it against every other currency. You could only start trading it against the most popular currency or a few currencies that are easy to make the market for (say, fiat<->USD, fiat<->EUR). Because you can easily execute multi-currency atomic transactions on the network, connecting to even one other currency connected to the network instantly means you are connected to the rest of the network.

XRPs have no transfer fees attached to them. While is possible for a gateway to issue IOUs without transaction fees (that's essentially Tether's business model, but on another network), perhaps even leveraging some other big crypto like Bitcoin or Ethereum through voting pools, the fees on those IOUs can always be changed. It seems that the network standard for transfer fees is about 0.2%, which seems to be smaller than the spread on XRP's biggest market (at the time of writing, 0.00015086 sell, 0.00015003 buy, giving about 0.55% spread). So it is possible that sending money through a very liquid FX market you would pay less in transfer fees than going through a less liquid XRP market on just the spread.

So this leaves XRPs with their primary role - paying transaction fees and fulfilling the needed reserves. All in all, about 50-100 XRPs per person / account would be enough for a lifetime of usage. That used to be less than 1 USD, and now is about 35 USD.

Conclusions

The Ripple network is a very useful Crypto 2.0 tool. However, because of the high flexibility and value propositions of the IOUs on the Ripple network, they are XRPs' main competitor in its home court. While XRPs are still needed to pay the network fees, most of the remaining value prepositions can be seen as overstated. The recent rise in the price of XRPs appears to be largely relying on market speculation (as is the case for all crypto) and a new exchange coming on the market.

Related links

• Ripple for dumdums - a layman's explanation
• Explaining Ripple XRP
• Why XRP will be valuable
• XRP & The death of Crypto
• XRP portal
• The Ripple(XRP) Effect - Fundamental Analysis

IOU price vs trust - a look at Tether

Fiat-denominated IOUs have a long history in the crypto space. Ripple launched in 2012 with its host of fiat gateways. BitUSD and TetherUS began circulating in 2014. PayCoin launched and died in 2015. It seems that recently Tether has gotten itself into some banking problems and its price started to reflect that. While the ordeal is not great for the company or anyone holding the tokens, it's still an important lesson to be learned in the crypto space - a dollar is not a dollar is not a dollar.

Related articles:

• The rise of fiat-denominated cryptos
• BitUSD vs USD IOUs
• Full Proof of Solvency - pondering Tether

Tether

Tether is a company issuing fiat IOUs on the Omni network. At the moment they offer USD and EUR IOUs and claim to be 100% backed by their assets with a proof of solvency. However, their terms of service don't inspire confidence:

"

There is no contractual right or other right or legal claim against us to redeem or exchange your Tethers for money. We do not guarantee any right of redemption or exchange of Tethers by us for money. There is no guarantee against losses when you buy, trade, sell, or redeem Tethers.

"

That being said, for a long time their USD price remained rigid in comparison to things like bitUSD. That is understandable - exchanges would accept it at par rather than trading it like any other asset.

Banking problems

A month ago, Bitfinex and Tether ran into some banking problems with Wells Fargo. The latter was acting as a correspondent bank and decided to block wire transfers between the crypto companies and their customers. Those wishing to cash their tethers out need to go through Kraken, which decided to take a ~7% premium for the service due to the market problems.

There are also some alleged shenanigans going around the actual use of tethers by exchanges and the BFX tokens (related article), but that's not directly relevant to our discussion at hand.

Dollar-dollar market

What this scenario shows is that there is that every currency needs a real market.

A long time ago, before central banks became prominent, each bank used to issue their own banknotes and the value of said banknotes would fluctuate based on the trust in the bank and so on. While that was a horribly inefficient system for the brick and mortar world of retail, wasting countless hours on currency conversions, individual counterfeit measures and so on, it could work really well in the digital space.

A dollar from one bank or exchange is not worth the same as a dollar from another. A faster, more efficient exchange would have their tokens valued more favourably than a slow, clunky one. Eventually, the market would settle at some price that would indicate the level of confidence or quality of the exchange and that metric would be clear for every customer to see. We had that with the final days of MtGox.

At the current time, the only place we can see a clear market like that is Ripple - you can actually trade USD IOUs from two different gateways for one another (at the time of writing, the exchange rate between Gatehub and Bitstamp USDs is about 1.11). While each gateway accepts their own tokens at par and allows you to withdraw the USD to your bank account, the price is driven by market makers that decide what premium to charge. If someone else finds a way to close that gap, they have a chance to make some money and bring the market into a more realistic exchange rate. In the end, the market decides what each IOU is worth, not some exchange.

Conclusions

While the current Wells Fargo problem is an important issue for Tether and Bitfinex, it is an important example for why we need a liquid market for all tokens, even those denominated in fiat. That and why correspondent banking is a thing that needs to be replaced by cryptocurrency networks.

A dollar is not a dollar is not a dollar.

Cryptocurrencies as protection from the government

Recently, International Monetary Fund released a report on Virtual Currencies. Overall, it's not a bad report - it discusses whether virtual currencies such as Bitcoin should be considered money, what the regulatory approach should be and what are some of the challenges related to dealing with cryptocurrencies. It has its share of misconceptions (for example: "VC schemes are difficult to monitor. Their opaque nature makes it difficult to gather information, including statistical data, or to monitor their operation." - yeah, no, that's the current banking system you are describing there), and overall it paints a cautionary picture of virtual currencies. However, I think the report is missing one important feature of cryptocurrencies that a lot of people might find interesting - they are a protection from the government. Let me explain what I mean...

Government power over money

When you stop and think about it, a lot of governments have nearly orwellian power over money. The monetary policy is not something that is often discussed by a lot of people, and often we are not equipped with the vocabulary to talk about it (like trying to form complex thoughts in newspeak). They get to decide whether savers or borrowers have it easier by controlling the rate of inflation. They get to determine how much your labour is worth by engaging in currency wars and a "beggar thy neighbour" race to devalue its currency the most. Then we have the incompetent governments that let their currency devalue in hyperinflation like Venezuela (reaching about 100+% in 2015). The fiscal and monetary policies are thrust upon us.

In short, the governments can effect our savings, future income, as well as many other factors just by controlling how money is created and spent.

Lack of trust in the government

For those and other reasons, some people resort to moving away from the government-issued currencies and adopt new forms of payments. Whether they take the form of local currencies, gold or something else, they can be an expression of lack of trust in the government.

However, there are limitations to a lot of those currencies in the modern world. Local currencies are often low-tech and they are not usable globally. Physical currencies can be seized by force (like in 1933 in USA, by the Executive Order 6102).

At the moment it would appear that only native cryptocurrencies such as Bitcoin can be a viable protection from the government in the modern world.

Protection from the government

While some people would jump to thinking that "protection from the government" necessarily means breaking the rule of law and engaging in illegal activities, that's not what I'm talking about here. What I'm discussing is withdrawing at least partially from the fiat-fuelled economy and moving into the cryptocurrency economy. One can and should still pay taxes, obey the law and so on, but that doesn't mean one has to keep one's wealth in the potential house of cards that various banks and government currencies are (look no further than the 2013 Cyprus crisis and the related bank bail-ins).

I am a saver, not a borrower. I wish for my money to at least keep its value, or be worth more. I want my wage to be stable no matter which government I work under. I don't want the currency I use to be created as debt by the banks, or even let the banks take any part in the money creation process. As such, I know of no fiat currency in the world today that satisfies my preferences, hence why I choose Bitcoin over fiat.

Conclusions

Native cryptocurrencies like Bitcoin offer a way for people to de-leverage the power governments hold over the currency and shape a new economy for themselves.

The IMF and similar organizations need to understand that asking "should the government regulate cryptocurrencies?" might be less important than "if cryptos will succeed, why would anyone continue to use fiat?". Probably for the first time ever, fiat currencies have a worthy competitor in the global Internet economy. They can either focus on becoming the best currencies they can be to compete (akin to Steam trumping free torrents), or go the way of the Kodak.

Related topics:

• The need for a new measurement of value

Full Proof of Solvency - pondering Tether

Tether (currently in beta) is a fiat gateway allowing its users to transact in USD IOUs on Omni and internally in Tether's shared wallet. One of the core features the platform advertises is its 100% backing of the issued assets, coupled with frequent solvency reports. This used to be a big issue in the Bitcoin world a few years back, when MtGox, once biggest Bitcoin exchange in the world, became insolvent and shut down. After that incident, a few exchanges (1, 2, 3) started looking into creating proof of solvency to bolster consumer confidence in their platforms. Today I would like to talk about what constitutes a full proof of solvency, how Tether approaches it in a multi-platform system, as well as some potential pitfalls one might face while designing proof of solvency.

Proof of Solvency

A quick recap of what is a Proof of Solvency. In simple terms, its a way for exchanges and other companies holding their customer funds to prove their liabilities to their customers never exceed their cash and crypto reserves. It stands in stark contrast to fractional reserve banking, where by definition, there isn't enough cash or precious metals to cover all of the outstanding deposits. Historically, this is an important concept for Bitcoin - the Genesis Block created by Satoshi quotes a newspaper headline talking about a bank bailout.

Since we're dealing with cryptocurrencies, the modus operandi is always "trust but verify" - claiming that you have a certain amount of money but not having a strong, verifiable and falsifiable proof usually raises red flags.

Proof of Solvency can be broken down into two parts - Proof of Liabilities, wherein the company proves how much they owe their customers, and Proof of Reserves, where they prove how much liquid fiat and crypto they have to cover those deposits.

Proof of Reserves

Proof of Reserves is usually quite tricky for the Bitcoin exchanges as it often involves interacting with "the old financial world" - banks and their banking system. To prove they are solvent, an exchange would publish statements from their banks indicating how much money they have in a segregated account. As banks usually don't focus on creating cryptographically authenticated documents or balances, this is usually the hardest part of the proof to verify outside of a full audit.

However, when we get into the cryptographic world, things get a lot easier. An exchange needs only to state which addresses they own, what is their current balance, and sign the message with those stated addresses. This proves they have access to those addresses, and anyone can go onto the blockchain and verify how much money is really in them at all times.

The last part can also be very important - being able to verify the reserve balance at all times, or at least very frequently, is a lot more reassuring than one-off statements. After all, one could borrow the money for a day to create the proof, therefore misleading everyone.

In the Bitcoin world, one might try to similarly falsify the reserves by asking someone else with deep pockets to sign the proof of reserves statements, creating a false belief that those coins form the reserves. However, this problem can be mitigated with Voting Pools.

All in all, Proof of Reserves is fairly straightforward, at least when it comes to cryptocurrencies. Banks still need to catch up.

Proof of Liabilities

Proof of Liabilities can be tricky for the Bitcoin companies as it often touches on their customer records and databases.

If we're dealing with cryptographic IOUs, things are fairly simple - one only needs to point to the issuing address, count the total number of outstanding liabilities, and sign the statement. Anyone can verify it in real time, just like in the Proof of Reserves for cryptocurrencies.

When it comes to shared wallets and private databases, as is usually the case for many exchanges, the things get a bit more complicated. The companies usually don't want to reveal the balances of every individual account, and the dumps could get quite sizeable (back in 2011, MtGox's database leak was said to contain 61'016 user accounts).

There are a few ways of compressing the data, but the most popular one appears to be creating a merkle tree consisting of account IDs and balances. A single account-balance pair would be a tree leaf. One would then combine the two balances together and pair that with a hash combination of the IDs to form a node higher up the tree. This would continue until we would get one hash and one balance at the very end.

This merkle tree would be hard to fully verify without access to the full account list, but it would also be combined with another interesting trick - every user would be able to request an SPV-like balance branch connecting their account to the merkle root of the tree. If the exchange would fail to provide the branch, the balances would not add up, there would be some negative balances or the branch would not match the latest published root - one would have a cryptographic evidence of foul-play. Now if we only had something like this for the banks...

All in all, Proof of Liabilities is a bit harder than Proof of Reserves, unless we're dealing with pure cryptos once more. Combined with Proof of Reserves, we create a Full Proof of Solvency - the company in question is completely liquid, at least for the time being. Now, lets take a look at how Tether does this...

Tether

A good chunk of this discussion is based on a few conversations I had with the company last year. Since the product is in beta and some time has passed since I spoke with them last, this description might not be indicative of the final product if and when it launches. I bring this example up mainly because it raises some insights into a few important design choices for gateway design.

Tether at the moment is a gateway focused on issuing USD-backed IOUs. Those IOUs can be transferred both on the Omni network, as well as from inside of the Tether shared wallet. In the future, it would be possible to see Tether issuing similar assets on other Crypto 2.0 networks, such as Ripple or Ethereum.

We can see their outstanding balances on their transparency page. Here we come to the first design question - what does this number represent? Is it the balance on Omni, in the shared wallet, a sum of both or something else?

In case of Tether, the number corresponds to the assets issued on Omni. Their shared wallet balance is then a subset of that amount, and as I understand, balances on any other network like Ethereum would also have their own separate balances on the Omni network.

Since we're dealing with multiple networks, the Full Proof of Solvency would be dependent on all of them. In case of Tether, we would start with Proof of Reserves to figure out how much the company has in deposits. The number would be compared with Proof of Liabilities from the Omni network. If that passes, our job is still not done. Now we would use the Omni balance of the shared wallet as a PoR to compare against the PoL of that wallet, and use similar methods for any other connected networks.

The Proofs are valid top-down. If any part is invalid, anything relying on those Proofs are also invalid (which might be more relevant for bigger constructs, like exchanges relying on Tether).

Another interesting issue to consider would be the transaction lag when moving between the different networks. As Tether's top-level settlement network is Omni, which in turn is sitting on Bitcoin, the transactions that move assets between network would have to go over one of the slowest cryptocurrency network (at least in comparison to things like Ethereum or Ripple), which might not be ideal. Since Tether as a company already needs to provide Proofs for all of the network as well as its own wallet, it would make the most sense to make the fastest element be the top level, which in this case would be the wallet.

Conclusions

Full Proof of Solvency is an interesting concept that came out of the Bitcoin world in reaction to shoddy business practices of using fractional reserves at an exchange. It can be tricky to implement when dealing with non-cryptocurrency systems, but becomes trivial on publicly auditable blockchains. It would be interesting to see something similar implemented in a traditional bank...

Reverse BitPay - receive fiat payments, get paid in Bitcoin

There are a lot of projects in the Bitcoin space that act as Bitcoin to fiat bridges - they accept Bitcoin and sometimes other currencies on your behalf and pay you in fiat at the end of the day. However, there doesn't appear to be anything out there that does the reverse for you - allow you to accept fiat payments and pay you in Bitcoin (the closest would probably be BitWage, but that project is aimed at employers paying their employees, rather than anyone being able to accept wire payments seamlessly). A project like that may be a useful part of the "rebittance" space.

So how might a project like this look? I would imagine it would be a mix between a bank and a Bitcoin exchange. You would sign up for an account, probably verify your identity for KYC purposes, and then you would be ready to start accepting payments. You would receive a segregated bank account number, similarly to what you would get in a bank or a credit union, and whatever funds would be deposited to the account through a wire transfer (or whatever other means commonly used in US and other countries that are averse to wire transfers for some reason) would be instantly converted into BTC at the current rate.

This approach, if deployed in some key countries, would allow for much easier flow of funds internationally. Perhaps paired with a mailbox rental service, you could potentially create a virtual presence in any country, receive local payments and get paid internationally. This would allow you to tap into the global marketplace from anywhere in the world and still get paid in a timely and affordable fashion. You could either keep your earnings in Bitcoin, or convert it on the spot back into your local currency through a rebittance service or perhaps a local exchange.

Now, if you extend this solution into the Crypto 2.0 space, the service would essentially work as a fiat -> fiat-denominated crypto gateway. This would allow you to receive payments in any currency while still having an easy way to convert between everything, rather than using Bitcoin as the intermediate currency.

How likely is it that we will see a project like this any time soon? Pretty unlikely in the form described. You would probably need to start with some forward-looking bank or a credit union that has access to the legacy banking system, figure out whether it is legal for them to set up accounts for entities in another country and see if they would be willing to take the risk associated with handling money like this. Maybe once the crypto space is better established we would see something like this come about, but that can be still ways away.

EDIT:

Relevant discussions:

• https://www.reddit.com/r/Bitcoin/comments/3hack0/reverse_bitpay_receive_fiat_payments_get_paid_in/
• https://www.reddit.com/r/CryptoCurrency/comments/3hack1/reverse_bitpay_receive_fiat_payments_get_paid_in/
• https://twitter.com/MeherRoy/status/633180115183235072