CRYPTO EXCHANGES PLEDGE TO SHOW PROOF-OF-RESERVE

FTX creates its own native token which they leverage, borrows against it, and lends out customers' deposits. There reason this is a terrible thing is that FTX is supposed to be transparent because, unlike other crypto companies that have failed in the past, they told their customers that they lent out their assets and that they made their interest. Unfortunately, the FTX terms of service say that they don't lend their customer's assets, now we know that that is not true and they have gone against their own term of service.

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There is one of the Bitcoin and other cryptocurrencies are crash even further because investors were afraid of what it would mean if FTX went bankrupt. There is a system of money that has been run for a very long time. It was not invented by crypto, it was only borrowed from the traditional system and it is called the fractional reserve banking system. For some of you that might think that crypto is a Ponzi scheme, what you don't know is that we are all part of a Ponzi scheme that has been running for a very long time.

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This is how it works, if you deposit $1,000 into your bank account, your bank can legally lend up to 90% of the amount you deposited. For instance, if someone else comes to take a loan of $900, the bank takes out that to deposit it into the same bank to keep the money. That same bank can now lend out $810 and they can repeat the process until the deposit is reduced to a penny. In other words, a bank can create $10,000 worth of value out of $10. If people decided to withdraw all their money simultaneously, that bank will collapse and it would need to get a bailout. That is the same thing we see happening in the crypto world right now.

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The is huge difference between crypto and banks is people trust the dollar because it backed by faith in the government. Another thing is that dollar represents debt while crypto represents nothing. Crypto companies required no checks and balancing, no reserve requirement, and no transparency. This also applies to all banks around the world and that is why some people consider a bank to be a Ponzi scheme. The banking system and Crypto require people to have faith in it in other for it to function properly. Both crypto and banks promise guarantees for some because banks give out people's money as loans to people who hope to make more money.

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The fractional reserve doesn't work with crypto because the moment a crypto company collapse, there is no one coming out to bail them. The contagion effect has spread to companies like crypto.com which stopped the withdrawal of USDC, USDT, and Solana last week. The trust and confidence of people will be set back for years but they will definitely bounce back. We are seeing over nine crypto exchanges pledging to show their proof-of-reserve with something called Merkle Trees. Merkle trees allow exchanges to see their customers' hash number which them to know all that their customer has. That number will then be audited by an extension party.

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