Bitcoin exchanges are a vital component of the Bitcoin ecosystem. They are a gateway from the classical economy to the cryptocurrency economy, facilitating the exchange between fiat currency and bitcoins. However, Bitcoin exchanges can also be single points of failure, operating outside the Bitcoin blockchain. This will require users to entrust them with their funds in order to operate.

So how can Bitcoin exchanges be improved for users? In this research, a new solution is presented. Along with a proof-of-concept implementation,that allows exchanges to prove their solvency, this research provides an insight into becoming more transparent – without publishing anything of strategic importance.

The authors of this paper propose to perform a software-based audit of Bitcoin exchanges without revealing any information about the bitcoins that are possessed by either the exchange, or its customers to the public. This is achieved by replacing the human financial auditor by a piece of software. They argue that the software executes orders of magnitudes faster than humans, and the execution of a piece of software is generally not costly at all and it becomes feasible to provide daily audits of a Bitcoin exchange.

To find out more about how a Bitcoin exchange works, how it can be improved, and how software could play an important role, download this whitepaper!