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I am curious of how would one audit the mgwBTC multigateway for nxt to make sure they aren't doing fractional reserve. They say its backed by 100% deposits, but how can we verify such claims? i want to use the platform, but I'm sure others have similar concerns of trust.

They say this eliminates another mtgox fiasco, but just to be sure everyone should be able to audit multigateway's internal books to make sure its really 100% backed by deposits.

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I'm no user, and just discovered multigateway, I've read their docs, using my understanding, it seems that when you deposit Bitcoins (or anyother coin) to them, they create a new Bitcoin (or anyother coin) address for you only for which they hold the private key.

You [edit] would [/edit] therefore monitor, that your mgwBTC amount match exactly the coins at the public deposit address, at all times (just give it a little time for transactions to settle). If this is true for any anounts and at all times, they are not doing fractional reserve.

[edit] If they transfer the coins on the deposited address to another address (which is a better practice (see below)) you can't prove anything for sure, as you have no vision on the total of mgwBTC in circulation (and issuance process), nor can you know for sure that they really own the public address, and not for example rent some payment services from an address which has lot of bitcoin to inspire confidence (unless their whole book is public (and proven so), you then aggregate all transactions, see where the funds are coming and check it started at 0 and everything adds up the way it should)[/edit]

But a word of caution here, them not doing fractional reserve is not an all risk guarantee. It may even be considered bad practice. Their keys may get stolen at any time. All coins are 'live' (because of the no fractional reserve guarantee), this means if they get (self?) hacked, 100% is gone almost instantly. Whereas exchange usually have most of the cash on frozen addresses, whose private keys are not stored on a device connected to internet.

If there is a bug in their system, and for example their transactions are not really 'transactional' which is kind of hard to do in a distributed system and some mgwBTC got double spent, their transaction algorithm will automatically adjust your BTC deposit to match the mgwBTC. Which means if someone can steal some mgwBTC they can steal your deposited BTC.

An other word of caution: they seem to only release binaries of their software, which is not good for inspiring trust (but they are still beta).

  • i guess it would be wise not to store alot of BTC in their servers, but that goes for any exchange. supposedly its harder to hack the multigateway due to them using multiple server or some sort. – Patoshi パトシ Nov 3 '14 at 16:46
  • @duckx: Supposedly duplicating data, depending on implementation, may make it easier to steal keys , if keys are present on multiple servers, you just need a security hole on any one of them. In the end, with any currencies it comes down to do you trust the issuer or not. – darkblue Nov 4 '14 at 0:23
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    i tested it out and it seems that they first generate a btc address thats linked to your nxt account and then when you send btc to that address, they issue you mgwBTC on the asset exchange which represents the BTC you upload. Just checked the btc address i uploaded and it seems that the funds actually stay in my btc address instead of getting it mixed with a pool of other peoples funds compared to typical exchanges. still figuring this out... – Patoshi パトシ Nov 4 '14 at 15:21
  • It's cool that you tested it. So you have the "no fractional reserve guarantee" by design, but as previously stated this comes with potential security risks. If you were to audit their security (be aware of law as unsolicited security audits may be classified as attacks and may be illegal), create a few accounts and issue some transactions in mgwBTC to transfer funds between those accounts. Do a lot a transactions simultaneously (with a consequent fraction of the amount on the account so some transactions may fail depending on execution order). If bug -> sum of mgwBTC may increase or decrease. – darkblue Nov 4 '14 at 23:27

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