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Liability Meaning

A legal or financial obligation to pay a debt or fulfill a responsibility. In a corporate balance sheet, liabilities are things like loans, accounts payable, and mortgages.

In a personal context, it might be credit card debt or a car loan. In the context of "Custody," if an exchange holds your Bitcoin, that Bitcoin is an "Asset" for you but a "Liability" for the exchange.

They owe it to you. If the exchange goes bankrupt and their assets are less than their liabilities (the total amount they owe to users), you may not get your money back.

This is why "Proof of Reserves" is so important. It allows an exchange to prove that they have enough assets to cover all their liabilities.

A healthy financial institution always maintains a "Surplus," ensuring that even if many people withdraw their money at once, the institution remains solvent.

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