I’m sorry. You’re right. Lemme ‘splain.

The “hole” is created by how the exchange accounts for fees. It’s a little wonky, so stay with me for a second as I explain it.

Bitfinex has their Bitcoin fees and it’s been shown they are most likely trading on their own books. This means that for every $1 in volume created by the sale of their own fees, they cannot collect more fees. The more successful you are, the more you have to cash out on your own exchange, the greater the percentage of volume of your own trades which will never generate new fees, etc, etc, etc. In any given timeline of sufficient length, the only actual volume on your exchange is … you.

The accounting required to keep that mess anything other than spaghetti is utterly impossible at worst, and Herculean at best.

To solve this (and their banking issues), when you deposit USD into Bitfinex you’re actually “buying” USDT tokens. Now Bitfinex can maintain a slush of cash for operating expenses while at the same time collecting fees from USDT and BTC (depending on maker/taker)… and accounting for them as assets in their books. The “black hole” problem is seemingly solved so long nobody is allowed to withdraw USDT tokens in an amount that cuts into the op-ex slush fund too deeply.

I say the problem is “seemingly solved” because the obvious result is that USDT is an under-securitized asset, becoming the cryptoeconomic equivalent of a “collateralized debt obligation” (or CDO) which was the cause of the 2008 financial collapse.

Developer, Father, and Friend .:. CEO of AltMarket, Inc. .:. My views are my own.

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