Proof of Reserves: it is not the solution, not the only one at least
Updated: Apr 14
The last crypto jargon, Proof of Reserves, or PoR, comes after the disastrous history of FTX.
The last events of 2022 - such as the bankruptcy of Celsius Network and the ripple effect caused by the collapse of Terra-Luna - have raised the importance of transparency in CEX operations.
To maintain a relationship of trust and reliability with their users and to build and improve transparency, many centralized exchanges have decided to make their reserves public and release their proof-of-reserves audit.
What is Proof of Reserves in blockchain?
What does Proof of Reserve mean?
Proof-of-Reserve is a verifiable auditing procedure by an independent third party that helps enhance transparency to centralized cryptocurrency platforms.
PoR offer financial transparency regarding customers’ funds on the balance sheets of a crypto company or, more specifically, of a centralized exchange.
Reserves include cryptocurrencies such as altcoins and stablecoins and other assets that can offer strong liquidity, such as, for example, income assets or cash.
CoinMarketCap has launched a new feature: Exchange’s Proof of Reserves tracker
A few days after the scandal of FTX, several centralized exchanges provided their Proof-of-Reserves, and CoinMarketCap decided to launch a helpful feature on its platform: Exchange Reserve Data.
This tool lets users keep track of exchange reserves by displaying a list of total assets and public wallet addresses of exchanges, along with their current value, balances, and current price.
There was a guide posted to Twitter on Nov. 22 by CoinMarketCap that explained how to use the tool and navigate it and underlined how these trackers would update data every five minutes.
Recently, the exchanges that conducted PoR audits included Huobi, Binance, Crypto.com, Deribit, KuCoin, OKX, Kraken, BitMEX, CoinfloorGate.io, and Giottus.
How does Proof of Reserves work?
Proof-of-Reserves is a method of verifying that a cryptocurrency exchange or wallet has the reserves it claims to have by checking the balances on the exchange or wallet. In a few words, a PoR is a snapshot of the crypto company that certifies that the exchange or that wallet has enough assets to cover its liabilities. This procedure allows for preventing any form of fraud or liquidity crisis.
The PoR uses cryptographic proofs, checks the ownership of public wallet addresses, and recurring third-party audits to certify a centralized platform’s fund reserves.
This proof helps customers to understand the platform’s financial position and whether it has adequate funds to match customer deposits. Users can also check their account balance using the cryptographic method.
“Proof of reserves employs a secure data structure known as a Merkle tree, which aggregates all customer balances without exposing private information. The total aggregate data is accessible via the Merkle root, the tamper-proof cryptographic fingerprint that auditors can access to verify the balance information. The Merkle tree hashing mechanism that underpins blockchain technology keeps the data secure and protected from tampering or hacks. These checks and balances ensure that a crypto company has the reserve assets to serve all customers and that liquidity is maintained no matter the market conditions.”
Understanding Proof of Reserves
Is Proof of Reserves the lasting solution?
PoR is certainly a step towards transparency for a poorly regulated sector like the crypto industry, but it is not a lasting solution. The Merkle tree only matches the snapshot at that specific time, and as the reserve balance changes, it will require a newly updated Merkle tree to reflect the change.
People still have to trust the exchange’s security protocols, wallet addresses, and off-chain transactions.
Yanda’s goal is to build an agnostic protocol to prevent problems like FTX from happening again, damaging and taking over the entire crypto industry.
The CeDeFi YandaProtocol is a tool that promotes interoperability between different chains. It can be helpful and also used by regulators to make the crypto industry more transparent.
Yanda aims to save all the off-chain operations made by brokers on-chain with the ID of validators, allowing users, customers, and businesses to understand what brokers do with their funds.
Have you already used CoinMarketCap’s tracker feature?
What is your opinion about PoR?
Do you think it’s enough for transparency?
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