Is it possible for Crypto Currency exchanges to create coins and trading volume from nothing?
Crypto currency exchanges are starting to trade enormous daily volumes on their crypto currency exchanges.
All the transactions occur ‘off chain’, so they are not recorded on any blockchain or publicly accountable database.
Exchanges take deposits in crypto currency coins and then ‘credit’ your account with that amount ready for trading. For your deposit there is a verifiable blockchain transaction to the exchange but the crediting of your account appears to be just an entry on their database. Likewise, each trade on the exchange is just a ledger change on their own private database.
Exchanges do publish all the reported volume on their platform but how do we know if this volume is real and backed up by real crypto currency deposits? Quite frankly, we don’t know for certain so there is every chance that some of the volume or orders could be fakery. This means the crypto currency exchanges could have the power to act as market manipulators with ‘coins’ on the exchange created from nothing. We are calling this #CoinCreate .
Sound familiar? Yes, it is exactly like fractional reserve banking or a ponzi scheme. As long as they have enough coins to pay each account holder when customers go to ‘withdraw’ then we are all good. Until of course the tide goes out and we have a ‘run’ on the exchange when everyone withdraws at once. Then we can see who is swimming without any trunks on.
Audit & Accountability
Do the exchanges have auditors or any accountability? All exchanges should be registered businesses, with some even being regulated, so they certainly should have an accountant or even an external auditor. However, as we have seen time and time again, any auditor being paid by the company to check the books often overlooks or doesn’t question crucial information. It takes quite some effort for an auditor to go that extra mile to ensure every check and balance is performed, especially in something like crypto which can be difficult to understand.
It seems like exchanges could certainly do #CoinCreate but are they actually doing it? It would certainly be tempting. History tells us that if someone can cheat they usually will. Cheating often starts small at first and then it becomes addictive and profitable so the temptation to profit further kicks in. Also the more people that become aware of whats going, the more people you have to ‘pay off’.
Incentive to be honest
There is certainly some incentive to be honest and not do this. Crypto is an early stage phenomenon and any bad actors now will potentially compromise themselves becoming an extremely large company in the the future, thus disincentivising gaming the market. Crypto is a passionate and honest space with some of the best minds on the planet ready to campaign and call out any bad actors in this space. Money and their savings is the driver and motivation, as with most things. The more people get ripped off the more angry people you will create. Therefore any short term and dishonest profiteering now risks forgoing long term success for any exchange that could become a very big player in this space.
Of course, the other major incentive is the threat of criminal prosecution from operating a ponzi scheme.
There are already ‘on chain’ type solutions but the speed, expense and low liquidity means they are underused. It just shows how people are willing to forgoe security for convenience up until the point they lose money. One solution is of course BitSquare but this has next to zero volume on most available markets. Therefore what is really needed for now is an exchange to open up their business ‘Bitcoin Style’ and put all their transactions on a publicly available immutable ledger ready for inspection at any time. Sounds fanciful yes, but this would give trust and assurance that they are not cheating their customers by creating volume and moving markets with proprietary trading from free credits #CoinCreate.