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On-chain accounting is the future
And how finance pros can lean into blockchain technology...
Happy Thursday! ☕
The FTX debacle has been a tumultuous ride for the web3 world, but it exposed the huge potential for harnessing blockchain technology to revolutionize the accounting industry.
Yes, you read that right.
Now that we have access to such powerful tech, innovation and accounting go hand in hand.
Let's take a closer look at how this can benefit us all.
This Week’s Topic
⛓️ On-chain accounting is the future
Ever since the FTX catastrophe, crypto custodians are under a microscope to prove their liquidity and solvency. The contagion runs deep, seemingly all the way up to public companies like DCG.
That’s why new accounting and tech solutions are needed now more than ever.
With on-chain accounting, organizations can reduce the risk of fraud and create a more efficient and transparent accounting process for their team and external stakeholders.
The beautiful part is that the entire crypto space is built on the value of cryptographic verification. We’re able to use on-chain proof to show that an exchange’s assets are greater than their users’ deposits.
Why it matters: The crypto industry lost a lot of trust this month, especially in our exchanges. But the most logical way forward is to generate solutions to hold crypto’s financial institutions accountable both in CeFi and DeFi.
The big question: In response to the FTX contagion, crypto accountants and operators are asking one overarching question: how can we prevent this from ever happening again?
3 proposed on-chain accounting solutions:
Coinbase: how crypto companies can provide proof of reserves
Coinbase’s Chief Security Officer Philip Martin committed a $500,000 grant for builders working on on-chain accounting solutions. They also gave four viable pathways for crypto companies to prove their reserves and liabilities:
Self-attested proof-of-reserve (PoR) or third party audited PoR: proving you have access to on-chain assets and private keys (less desirable solutions).
Self-attested PoR-and-liability (PoRL) or third party audited PoRL: proving both on-chain assets and liabilities (more desirable solutions).
Martin also points out flaws in each of these approaches. For example, the problem with solely providing PoR’s is that you cannot prove your liabilities are less than your assets (as we saw with Binance recently). That’s why PoRL is more desirable. Even then, PoRL still doesn’t track off-chain liabilities like lending.
Vitalik’s Proof of Solvency
Vitalik offers similar solutions as Coinbase but using zero-knowledge proofs (ZKPs) to incorporate privacy into proof of reserves. No one wants their personal funds leaked to the public, especially in the crypto space, and ZKPs can help prevent this.
Chainlink’s Proof of Reserve Chainlink is already ahead of the curve here with an autonomous solution to prove your reserves. It’s already used by organizations like Paxos, Armanino, and BitGo. According to their website, they “bring end-to-end transparency to your on-chain and off-chain reserves.”
Moreover, crypto organizations are wasting no time proving their solvency. Exchanges like Kraken have implemented Proof of Reserves for years and others like Binance and CoinMarketCap are just starting to show this crucial accounting data.
Bottom line: The smartest people and companies in the world are putting their money where their mouth is and investing in on-chain accounting solutions.
Blockchain has the ability to transform accounting as we know it for the first time since the advent of double-entry accounting. And that should make the accounting world really, really excited for the future.
From the DeOps World
📚 What we’re reading
Vitalik on what he’s most excited about in Ethereum
The impact that Ethereum will have on the world is much more concrete than it was even two years ago, according to Vitalik Buterin. Here are the areas he’s most excited about: money (the first and still most important app), DeFi, identity ecosystem (ENS, POAPS, SBTs, etc), DAOs, and hybrid applications.
Stripe releases an embeddable crypto on-ramp
With the whirlwind of bad news recently, it’s reassuring to see web2 companies like Stripe double down on their crypto efforts. The release of their new, customizable crypto on-ramp is a huge step in bringing in new users to the crypto ecosystem.
Crypto exchanges verify reserves, but more questions remain
Not tired of proof of reserves yet? Learn more about the issues surrounding this new type of on-chain accounting and how we move forward as an industry.
Listen & Learn
🎧 How to Pay Employees in Bitcoin with Henri de Ram
What's the best way to pay your team in Bitcoin or other cryptocurrencies? Henri de Ram from Exodus spoke with me on the Decentralized Ops podcast to discuss the process and reasoning behind Exodus' Bitcoin payroll process, and much more.
Work in Web3
👾 Crypto Accounting Job Alert
Alchemy, the developer platform designed to make building on the blockchain easy, is hiring an Accounting Manager. If you’re an accounting pro looking to make the leap into crypto, apply to work with one of the most respected dev companies in web3.
Want to see more jobs in web3 accounting and finance? Check out the job board from our friends at Multisig.
That’s all for this week. Thanks for reading and I’ll see you next Thursday!
Brought to you by Gilded 💡
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This newsletter is strictly for informational purposes only and does not constitute financial, investment, or tax advice. As always, do your own research.