A short history of the crypto audits

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In 2014, a former Bloomberg programmer named Changpeng "CZ" Zhao Chief Technology Officer at OKCOIN, a Chinese start-up token exchange.

The Community Cheer leader of OKCOIN was a large part of the role. The price of Bitcoin had crashed after the collapse of the Mt. Gox exchange, Beijing's hostility to crypto had intensified and Miner had switched off worldwide.

OKCOIN played a central role in the revival of interest in crypto as a gambling token by adding derivates and staking, while CZ used his social media profile to strengthen trust among the glowing believers. He was often found on Reddit, as in this now deleted but archived post, in which he denies that OKCOIN used bots to fake volume. And he was regularly in podcasts like this, where CZ (at about 25 minutes) explains that Wash Trades on the stock exchange were due to the fact that Chinese dealers had tried to win a car.

CZ left Okcoin in February 2015 after only eight months.

First of all, everyone seemed to be mutually agreed, with CZ said that the exit was "a difference in direction". Then came a Reddit contribution (deleted, but archived), in which CZ provides dozens of accusations against OKCOIN and his founder Mingxing "Star" XU, including the alleged use of bots to bloze the volume.

okcoin replied to Reddit to deny what it called CZ's "lies and desperate nonsense", and added numerous own accusations.

It is easy to dismiss the public mud battle as a relic from the border era of crypto. The trade in insults-which was allegedly due to a contract dispute between Okcoin and Roger Ver, known as Bitcoin Jesus, was fought in typical message board, using technical language, which can often appear intentional impenetrable. Nevertheless, the struggle for the question of the auditing is relevant today.

in August 2014, a few months before CZ left, Okcoin published what it described as the "first proof-of-reserves audit" in the industry. The report was written by Stefan Thomas, who at that time CTO of the Crypto Payments Group was Ripple and was known to the community. He came to the conclusion (with numerous reservations) that his Bitcoin credit seemed to cover the user money for more than 104 percent.

To call this an audit was not helpful. There are many good explaners for the mechanism used; The very simple version is that Thomas carried out integrity tests to databases provided by OKCOIN, which listened to his Bitcoin assets and liabilities. These tests generated a kind of test sum of assets, which is known as Merkle root, on the basis of which the inserters were able to check whether their own stocks were present in the chain. It offered an absolute minimum of transparency, as Thomas warned:

Note that this type of examination is subject to restrictions. It does not checks the Fiat assets and liabilities of a stock exchange or other aspects of their balance sheet. It is also difficult to definitely prove that the bitcoins in question actually have the stock exchange instead of being loaned, for example.

In an interview with CoinTelegraph, CZ rejected criticism of the "Audit" and denied suggestions that Okcoin Thomas may not have given all relevant data.

Then the story changed. The Reddit contribution by CZ described the exam as "fake" and claimed that Okcoin underestimated the liabilities by hiding its own bot accounts. "Essentially, these bots act with fractions (or fictional) reserves," he said. "Thomas was lied to during the audit. This is an unfortunate restriction of the method of proof of the reserves."

In response to this, Okcoin claimed that hiding the bots served to avoid a double count of borrowed coins. CZ "doesn't even understand what an exam is," she added.

eight years later CZ wants to emphasize that he knows what an audit is:

binance, today the largest crypto trading place in the world by far, was pushed through the collapse of FTX to create transparency. But what it delivered last week can no longer be seen as an exam than the efforts of OKCOIN in 2014.

According to a letter from the South African subsidiary of the Mazar accounting group to "Binance Capital Management Co. Ltd" on the British Virgin Islands, Binance seemed to be 101 percent on an underlying level on November 22nd. The term audit is not used in the letter. Instead, Mazars states that it has carried out an agreed procedure (AUP), which means that his employees could only make factual findings within the parameter predefined by Binance. The auditing company did not apply any additional research, did not form any opinions and offered no assurances - including the validity of the entire exercise, as the introduction to its five -page letter tries to clarify:

The management of Binance acknowledges that the AUP are suitable for the purpose of the order and are responsible for the object to which the AUP are carried out. [. . . ] We do not provide any assurance regarding the appropriateness of the AUP.

This AUP order is not a business examination. Accordingly, we do not submit any examination or an examination conclusion. If we had carried out additional procedures, we might have noticed other affairs that would have been reported.

There is no information about which Binance's nomadic business units has been tested. It only covers the self-registered Bitcoin assets and liabilities and, according to an article by Wall Street Journal, exclude the US business. Improvements of the Merkle-Tree methodology from 2014, such as B. the use of dummy transfers to check an indefinite number of wallets are at most incremental.

And even then Binance failed.

"We found that Binance is 97 percent secured," writes Mazars partner Wiehann Olivier. Required pass brands "taking into account the in-scope assets given by customers as security for the assets given by the margin and credit services offered in scope assets, which leads to negative balances in the customer liability report". In other words, the headlines of 101 percent was based on the fact that Bitcoin was excluded from the liabilities side, Binance said that was awarded.

This is a plausible excuse. Securities that are considered to be Bitcoin loans would be kept in other currencies or tokens as Bitcoin and would therefore break the framework of Mazar's report. Nevertheless, it is difficult to give an audit that is all the more tight parameter to give a lot of trust Still no good answer than to ask more blind trust.

Binance says that in the coming weeks there will be information about other tokens than Bitcoin-the most important of them are the native BNB token and the Binance USD and Tether Stablecoins. Shortly after the Implosion of FTX, Binance reported that on November 10, coins worth around 69 billion dollars and that these three tokens made up more than 70 percent of the reserves in terms of value. Diagram below from Mike alfred :

© Mike Alfred /Twitter

The failure of FTX triggered a race between the crypto exchanges to avoid that "Not Your Key, Not Your Coins" becomes an existential threat. The OK group from Star, to which the stock exchanges OKCOIN and OKX belong, is one of many that advertise to transparent evidence of the reserves by a token validation supported by auditors, although it is based on the same basic method as their 2014 examination.

But even compared to the data of his smaller competitors, the efforts of Binance have not convinced many commentators. The research group Mysten Labs (which was financed by Binance) published a report last month in which it identified "potentially exploited weaknesses", which could mean that liabilities were undervalued.

what comes closest to a public mood measurement in Binance, its BNB token, came under pressure on Monday, after a Reuters report reported that the US Justice Ministry could file charges for money laundering as part of a long-term criminal investigation. Binance has published a long answer on its website and CZ replied on social media in its characteristic style - with a swipe at an opponent and an appeal to the community.

But after almost a decade of the CZ's pussies, it looks as if the community wants to have new material:

© Coinmarketcap


Source: Financial Times