Ever since the downfall of FTX investors and centralized exchanges in particular are making concrete steps to improve fund transparency. In this article we discuss the importance of Proof of Reserve as well as two large exchanges that have recently released their numbers.
Proof of reserves is a mechanism used by cryptocurrency exchanges to transparently prove that they have the amount of digital currency that they claim to have. It is often used in conjunction with proof of solvency, which verifies that an exchange has enough funds/ capital in its account to cover all of its user's deposits.
An independent auditor usually oversees the entire process to assure its integrity and anonymity.
Centralized crypto exchanges are the key to growing crypto interest and adoption around the world. They provide liquidity and allow people to trade tokens with ease. However, there have been several instances where an exchange claims to hold a certain amount of cryptocurrency when in fact they don't at all—or they simple fake their funds and backed crypto assets to look solvent and relevant. A clear fraud of this kind has caused massive losses for investors and can make it difficult for people to trust any exchange or even believe that their holdings are secure. Proof of reserves proves that a centralized entity has in fact the reserves and forces exchanges to follow the ethos of crypto Satoshi outlined almost a decade ago.
Crypto.com and Binance are the first centralized exchanges that have released their proof of reserves after the crash and burn of FTX
Crypto.com released their Proof of Reserves on December 7th, which left users relieved because they have plenty of reserves.
Therefore it can be seen that their major holdings are all over the minimal collateral amount (100%) which restores much needed trust into the ecosystem as a whole.
Binance recently revealed their PoRs as well where an external auditing firm found some interesting facts.
For example, Binance’s Bitcoin reserves are overcollateralized, after the proof-of-reserves and proof-of-liabilities assessment on the centralized exchange.
But some users were not impressed. It is also found that Binance was 97% collateralized without taking into account the Out-Of-Scope Assets pledged by customers as collateral for the In-Scope-Assets lent through the margin and loans service offering resulting in negative balances on the Customer Liability Report.
Mazars disclosed its audit report on Binance's Bitcoin reserves on Dec. 7 and it is learned that the Binance possesses over 575,742 Bitcoins belonging to its customers and is deemed all-in-all as 101% collateralized.
Regardless of what an exchange claims their PoR is, we strongly recommend that you store your crypto in a ledger wallet or cold storage. However, if you are unable to do so, make sure you conduct your research and consider their PoR to avoid the bloodshed that so many experienced as a result of the FTX crash.