.. DO NOT EDIT.
.. THIS FILE WAS AUTOMATICALLY GENERATED BY SPHINX-GALLERY.
.. TO MAKE CHANGES, EDIT THE SOURCE PYTHON FILE:
.. "api/gallery/fraud/solvency/plot_04_ftx_commingled_funds.py"
.. LINE NUMBERS ARE GIVEN BELOW.

.. only:: html

    .. note::
        :class: sphx-glr-download-link-note

        :ref:`Go to the end <sphx_glr_download_api_gallery_fraud_solvency_plot_04_ftx_commingled_funds.py>`
        to download the full example code or to run this example in your browser via JupyterLite.

.. rst-class:: sphx-glr-example-title

.. _sphx_glr_api_gallery_fraud_solvency_plot_04_ftx_commingled_funds.py:


FTX, commingled customer funds, and proof of liabilities (2022)
===============================================================

In November 2022 FTX, then one of the largest exchanges, could not meet a
rush of withdrawals and filed for bankruptcy. Its affiliated trading firm,
Alameda Research, had been allowed a negative balance on the exchange and
had spent billions of dollars of customer deposits. The books still showed
every customer's balance; the coins were gone. With reserves :math:`R` and
liabilities :math:`L`, a run pays the first customers in full and the rest
nothing once

.. math::

   \rho = \frac{R}{L} < 1, \qquad
   \text{paid in a run} = \min(R, L) = \rho L .

A proof of reserves alone could not have shown this, since reserves were
real and large; only reserves set against a proof of the liabilities can.
Exchanges began publishing Merkle-sum-tree proofs of liabilities weeks
after the collapse.

.. GENERATED FROM PYTHON SOURCE LINES 25-29

.. code-block:: Python

    import matplotlib.pyplot as plt

    import blockchainkit as bk








.. GENERATED FROM PYTHON SOURCE LINES 30-32

An exchange lends deposits to its affiliate
-------------------------------------------

.. GENERATED FROM PYTHON SOURCE LINES 32-45

.. code-block:: Python


    world = bk.contracts.World()
    customers = [f"customer{k:02}" for k in range(20)]
    for name in customers:
        world.fund(name, 1_000)
    exchange = world.deploy("operator", bk.fraud.Custodian, "affiliate", 15_000, name="exchange")
    for name in customers:
        world.transact(name, exchange, "deposit", value=1_000)
    print("before:", world.view(exchange, "reserves"), "held for", world.view(exchange, "liabilities"))
    world.transact("operator", exchange, "lend_to_affiliate", 12_000)
    reserves, liabilities = world.view(exchange, "reserves"), world.view(exchange, "liabilities")
    print(f"after: reserves {reserves:,}, owed {liabilities:,}")





.. rst-class:: sphx-glr-script-out

 .. code-block:: none

    before: 20000 held for 20000
    after: reserves 8,000, owed 20,000




.. GENERATED FROM PYTHON SOURCE LINES 46-48

Reserves against a proof of liabilities
---------------------------------------

.. GENERATED FROM PYTHON SOURCE LINES 48-54

.. code-block:: Python


    tree = bk.fraud.liability_tree(world.view(exchange, "balances"), salt=b"2022-11")
    ratio = bk.fraud.reserve_ratio(reserves, tree.total)
    print(f"proof of liabilities: total {tree.total:,}, reserve ratio {ratio:.0%}")
    assert tree.total == liabilities and ratio == 0.4





.. rst-class:: sphx-glr-script-out

 .. code-block:: none

    proof of liabilities: total 20,000, reserve ratio 40%




.. GENERATED FROM PYTHON SOURCE LINES 55-57

The run
-------

.. GENERATED FROM PYTHON SOURCE LINES 57-75

.. code-block:: Python


    results = [world.transact(name, exchange, "withdraw", 1_000) for name in customers]
    paid = [r.success for r in results]
    print("withdrawals paid:", sum(paid), "of", len(paid), "->", results[-1].error)
    assert sum(paid) == ratio * len(customers)

    fig, ax = plt.subplots(figsize=(8, 4))
    ax.bar(
        range(len(paid)),
        [1_000 if ok else 0 for ok in paid],
        color=["#16a34a" if ok else "#dc2626" for ok in paid],
    )
    ax.set(xlabel="order in the queue", ylabel="ether recovered")
    ax.set_title(f"A run on an exchange with a reserve ratio of {ratio:.0%}")
    fig.tight_layout()

    plt.show()




.. image-sg:: /api/gallery/fraud/solvency/images/sphx_glr_plot_04_ftx_commingled_funds_001.png
   :alt: A run on an exchange with a reserve ratio of 40%
   :srcset: /api/gallery/fraud/solvency/images/sphx_glr_plot_04_ftx_commingled_funds_001.png
   :class: sphx-glr-single-img


.. rst-class:: sphx-glr-script-out

 .. code-block:: none

    withdrawals paid: 8 of 20 -> withdrawals paused




.. GENERATED FROM PYTHON SOURCE LINES 76-82

Exercise
--------
The affiliate returns its loan the day before a published proof of
reserves, then borrows it again. Which checks pass, and what would a proof
of reserves need to rule this out?
A worked solution is in :doc:`/exercises/fraud`.


.. rst-class:: sphx-glr-timing

   **Total running time of the script:** (0 minutes 0.034 seconds)


.. _sphx_glr_download_api_gallery_fraud_solvency_plot_04_ftx_commingled_funds.py:

.. only:: html

  .. container:: sphx-glr-footer sphx-glr-footer-example

    .. container:: lite-badge

      .. image:: images/jupyterlite_badge_logo.svg
        :target: ../../../../lite/lab/index.html?path=api/gallery/fraud/solvency/plot_04_ftx_commingled_funds.ipynb
        :alt: Launch JupyterLite
        :width: 150 px

    .. container:: sphx-glr-download sphx-glr-download-jupyter

      :download:`Download Jupyter notebook: plot_04_ftx_commingled_funds.ipynb <plot_04_ftx_commingled_funds.ipynb>`

    .. container:: sphx-glr-download sphx-glr-download-python

      :download:`Download Python source code: plot_04_ftx_commingled_funds.py <plot_04_ftx_commingled_funds.py>`

    .. container:: sphx-glr-download sphx-glr-download-zip

      :download:`Download zipped: plot_04_ftx_commingled_funds.zip <plot_04_ftx_commingled_funds.zip>`


.. only:: html

 .. rst-class:: sphx-glr-signature

    `Gallery generated by Sphinx-Gallery <https://sphinx-gallery.github.io>`_