Oddbean

In order to for the custodian to be solvent liabilities have to be less than reserves, so for every Bitcoin "claim" I have there must be one real Bitcoin on chain able to be redeemed. It's not too difficult to prove how much Bitcoin you have on chain actually - You can just publish your addresses somewhere. Several exchanges and ETF:s already do this. For example Bitwise, Fidelity, Kraken. The sticky part is proving liabilities, I.E how much Bitcoin is owed to your customers. This info is not on the chain itself so it's harder to prove. The best way at the moment to do this is a 3rd party audit, but then you have to trust the auditor is not colluding with the custodian to hide some liabilities.

Shouldn't is be possible to instantly lock sats equivavent to orders as soon as they came in? That would make it possible to see the balance. Only orders that locked sats would be valid. By continually publishing a list of the balance, one would see if they had a deficit or a surplus of bitcoin holdings

I'm not sure I understand what you mean by locking sats for orders, but I don't think it matters. The problem is you can prove that your list of deposits / orders is complete and you didn't delete a entry. Let's use a simplified example: Let's say you and I both have 1 BTC deposited on Kraken. Kraken in turn publishes a list of deposits stating they owe account A and account B 1 BTC each, and they have a list of addresses that have 3 BTC. Then it looks like they are 130% reserved, because they need to provide up to 2 BTC on request but have 3. However Kraken actually has one more account C that is owed 2 BTC - Meaning they're actually 3 / 5 = 60% reserved, not 130%. Now if everyone takes out their BTC at once the last person will be rugged. The problem is basically you can prove how much Bitcoin you have, but not how much Bitcoin you owe. Because you'd have to prove a negative, I.E "prove you don't have more deposits than you published".

I'm talking about an exchange that doesn't hold anyone elses bitcoin. It buys enough bitcoin to meet the demand with its own holdings. Is that doable and can it be profitable? I guess, if we see a major exchange collapse now, people would pay a littlebit more for the kind of service I describe