• For crypto investors, the question arises as to where their digital currencies are kept most securely
• “Proof of Reserves” was introduced at Kraken last year
• Jesse Powell on Binance: “This is not PoR. This is either ignorance or intentional misrepresentation”
This is why proof of reserves is so important
Digital currencies are safest in your own wallet. Crypto owners who have a non-custodial wallet hold the private keys themselves, t3n explains. However, other users rely on external providers to store their digital assets. This becomes problematic and risky in cases like the FTX scandal. The crypto exchange is said to have embezzled billions of dollars in customer funds to save a sister company. Eventually, this led to the bankruptcy of the crypto exchange. So it is not surprising that some crypto investors are wondering whether their assets are safe with external providers and how they should store their digital currencies.
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Proof of reserve
Exchanges are therefore currently working more and more on providing evidence of customer funds. The crypto exchange Kraken introduced the “Proof of Reserves” last year. As explained on the company’s website, Proof of Reserves is an independent verification process performed by a third party to ensure that a custodian actually holds the assets it claims to hold on behalf of its clients. This verifier takes an anonymized snapshot of all balances held and summarizes them in a Merkle tree, a privacy-friendly data structure. The verifier then collects the Kraken-generated digital signatures that prove ownership of the on-chain addresses with publicly verifiable credits. Finally, the verifier compares and verifies that these balances exceed or match the customer balances represented in the Merkle tree and that the customer balances are therefore held on a full reserve basis.
Jesse Powell criticizes Binance procedures
While Kraken’s Proof-of-Reserve allows for a cross-check of the company’s assets with its liabilities, Kraken co-founder Jesse Powell points to other vendors who have failed to include accounts with negative balances. Most recently, for example, he criticized Binance’s recently published proof-of-reserves system because the system would not include accounts with negative balances.
This is simply “here’s a hash of your record in the BTC spreadsheet”. ok… but what’s the point? The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.
– Jesse Powell (@jespow) November 25, 2022
“The point of this system is to understand if an exchange holds more cryptocurrencies than it owes its customers. Putting a hash on an ID is worthless without everything else,” he explains in a tweet. “I’m sorry, but no. This isn’t a PoR. It’s either ignorance or intentional misrepresentation. The Merkle tree is just flagrant bullshit without an auditor to make sure you haven’t included accounts with negative balances.”
However, Binance CEO Changpeng “CZ” Zhao denied the allegation, as Cointelegraph reports. According to him, one of Binance’s plans is to have the exchange’s proof-of-reserve results checked by external auditors.
E. Schmal / Editor finanzen.net
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