How can run risk in digital asset markets be reduced?

Abstract

This paper reviews the proof of reserve methodologies employed by crypto exchanges that attempt to demonstrate cryptographically that assets exceed liabilities so that there is no reason for participants to run on the exchange. The paper suggests a number of enhancements to these methodologies using a cryptographic statistical proof, proof of knowledge methods and other techniques. Although this paper reviews the proof of reserve methodologies of crypto-native institutions, its goal is not to address the risk management challenges of crypto exchanges alone, but, rather, to illustrate how enhanced versions of these methods might be used to mitigate run risk of digital assets on the nascent regulated crypto platforms being developed by banks and other financial institutions. A simplified version of the techniques that could be used to reduce the run risk of stablecoins is presented as an example.