Where does it explain how it works (proving solvency)?
I would understand how it works if the order book was in BitUSD / cryptoassets?
Good catch ... exchanges that offer a IOU cannot easily proof solvency ... technically they could issue any amount of IOUs .. unless they do multisig/corporate ids with a 3rd party accounting firm..
exactly...
let's go for a fully decentralized / counterparty free exchange with bitassets
That however has two difficulties:
a) legal issues because you cannot 'control' bitaasets as opposed to IOUs and
b) security concerns. when you get hacked you have no way to halt markets and get back the funds (which again is solved by the control you have over IOUs)
So IMHO it makes sense to issue an IOU and proof solvency differently .. e.g. by a third party that has read acceas to you bank accounts. Also, the amount of issued IOUs is known to the blockchain/smartchain