Amid the recent downturn in cryptocurrency markets, regulators have been trying to gather several crypto companies’ Proof of Reserves (PoR). PoR is necessary for customers to discover the number of digital assets an exchange has to cover potential withdrawals.
Skepticism of companies’ Proof of Reserves arose after FTX’s bankruptcy, and other companies started disclosing doubtful PoR.
How Proof of Reserves work
On that note, Jesse Powell announced via a tweet that he fulfilled his commitment to be more assertive with calling out problems, including proof of reserves.
Powell said that reserves are equal to assets minus liabilities and reserves also include a list of wallets.
“The Proof of Reserves AUDIT requires cryptographic proof of client balances and wallet control.” Powell said.
The CEO of Kraken exchange also noted a few more things that the Proof of Reserves audit must have. They include a sum of client liabilities (auditor must exclude negative balances), user-verifiable cryptographic proof that each account was included in the sum, and a signature proving that the custodian has control of the wallets.
However, one person asked how to know those assets have not been borrowed against.
Powell answered, “You don’t. The audit is not intended to prove more than the custodian has control of assets or the sum of client balances.”
He added that exchanges simply producing a list of wallets don’t tell us whether: they control the wallets or if the sum of the wallets is equal to client balances.
On the other hand, CoinMarketCap detailed that its Proof of Reserves included “the total asset, public wallet address ownership, balance, price, and value of public wallets, and is updated every five minutes.
Moreover, CoinMarketCap’s new Proof of Reserves feature also shows the data of the market pairs listed on CPDs.
The need for companies to disclose PoR
The collapse of FTX revealed some fishy schemes, like how it funneled user funds to mitigate its own risks; since then, crypto companies have developed a transparency solution called Proof of Reserves.
Binance CEO Changpeng Zhao supports PoR and urges all crypto exchanges to do a Merkle-tree proof-of-reserves. It is a cryptographic commitment strategy where each node is labeled with a data block’s cryptographic hash.
The scheme aims to verify data handled, sent, or stored between computers.
The auditor takes a snapshot and then obtains a Merkle root – a cryptographic fingerprint that unambiguously identifies the combination of these balances when the snapshot was created.
Many crypto exchanges have lauded the PoR strategy; however, some are still skeptical, and the crypto community is questioning if other companies would try to fake any audit.