Crypto exchange platforms such as Kraken, Coinbase, and Gate IO topped the list of premier exchanges owing to their proof of reserves feature. Such a feature also includes liabilities as a part of the audits. After the collapse of FTX, the CEO of Binance, Changpeng Zhao, suggested providing all exchanges with Merkle-tree proof-of-reserves.
But what are Merkle-tree proof-of-reserves?
What are Proof of Reserves?
With rampant scams and frauds, it is continuously becoming challenging for the crypto industry to trust the safety of their assets. There are several instances of bankruptcies in traditional financial organizations as well but governments often bail out such institutions. However, that is not the case for crypto institutions as the government does not bail out such institutions.
Thus, the concept of Proof of Reserve brings in the best of both worlds: the transparency of asset management and the privacy of customer assets. Proof of reserves is a method that maintains the transparency concerns of the assets that are held on the exchange by shareholders or cryptocurrency dealers. It is a user-friendly and much-needed technique that helps ensure real assets successfully back crypto.
Functioning of Proof of Reserves
The proof of reserves uses miracle trees and a data structure design for encrypting blockchain data securely and safely. Proof of reserves is an independent audit primarily conducted by a secondary user or a third party.
They ensure that a conservator or superintendent of a transaction is holding the assets that it cleans to on behalf of the clients. This is a popular method amongst several exchange agencies as there are several recent events taking place in the industry which have dragged down the crypto market leading to several tokens dropping 10% or more of their worth.
Why are exchanges publishing it?
Many exchange houses, such as Kraken, Coinbase, and Gate, have opted out of the proof of reserves technique. This is because it allows their customers to continuously check the balances of exchange and stay assured of the safety and security of their assets.
Besides that, it provides trust among crypto dealers and ensures transparency and the risk exposures involved while exchanging. The technique also allows traders to make decisions in an informed manner about which platforms they want to use while trading their assets.
What Lies Ahead?
Due to massive fallouts and undergoing crisis around the FTX liquidity in the recent past, traders are skeptical about crypto exchanges. However, Binance declared that the proof of reserves technique would be a keystone towards restoring traders’ trust in the crypto industry.
All custodial crypto exchanges should adapt to the proof of reserves policy as it will help them gain more traders and build trust. However, after the entire fiasco about FTX, the traders of crypto should inquire about their service providers. Doing this can ensure even better security actions. If they cannot provide them, the users must take custody of this matter into their own hands.