Why Proof of Solvency Will Change Finance

The big idea here is that most large institutions (especially banks and governmental organizations) are seriously technologically behind modern times. This, combined with the people in these organizations (and their auditors) not paying attention to what is going on behind the scenes (i.e. literally doing their jobs) cause these dramatic crises. For example, being able to mark assets to market is something that should be done much more frequently but that institutions don’t do very often because it’s a lot of work and not necessarily required by law.

Doing this more often, or even though automated technology, would allow institutions to constantly check to make sure they are above water and have enough assets to cover their liabilities. This solution would prevent future bank runs and massive solvency issues like we have seen around the world lately. While this adoption is likely several years away, large institutions and governments are already starting to work on this, and we urge them to start implementing technology-based controls like this sooner rather than later.

Some other traditional finance sectors that come to mind that could significantly benefit from these protocols are equities, real estate, and bond markets. Institutions could use a technology like this to prove (in live time) that they have sufficient assets to cover their liabilities to investors/bondholders/shareholders. 

A potential application of this protocol beyond the traditional finance and cryptocurrency industries is in the field of decentralized finance (DeFi). DeFi platforms allow users to access financial services such as borrowing, lending, and trading without the need for intermediaries like banks. However, DeFi platforms are still subject to risks such as smart contract bugs and insolvency of underlying assets, especially in obscure liquidity pools. The “Proof of Solvency” protocol could help to mitigate some of these risks by providing a way to verify the solvency of DeFi platforms. As the tech improves, there’s no doubt these technologies will work in tandem to establish a new age of financial transparency for institutions and individuals alike.  

In summary, Vitalik’s “Proof of Solvency” proposal has the potential to increase transparency, trust, and operations across various industries beyond just the world of centralized cryptocurrency exchanges. While the protocol is still in the theoretical stage and requires further development and testing, it has the potential to become an invaluable tool for verifying solvency and mitigating risks in live time across a variety of financial contexts.