Binance is among the crypto exchanges adopting proof of reserves to bring back trust into the crypto space. What is it and why is it causing a stir?
Crypto exchanges are on a path to absolve themselves of the current heat surrounding the digital assets space. On the same accord, most are adopting the proof of reserves suggestion as a regulatory step for their platforms. On the frontline was Binance, whose CEO took to Twitter to announce his decision to ‘save crypto.’
Related: Binance backs out of non-binding to save crumbling FTX
On the thread, Changpeng Zhao announced his platform wished to commit to ‘full transparency,’ rebuilding the lost trust in the crypto sector. Other centralized exchanges are on the same track, with most promising their users to embrace the proof of reserves method. In the mix are Huobi, Bitfinex, OKX, Kucoin, and Crypto.com.
CZ’s fret about maintaining the public’s trust in the industry is for a good reason. In the past, mass adoption was the primary issue in the blockchain and crypto sectors. The FTX case worsens the situation in an already plunging crypto market.
What is proof of reserves?
The proof of reserves ensures that the exchange has a detailed history of user funds. This action involves third-party auditing of an exchange’s assets, assuring users that it is holding their funds. In such a way, the exchange cannot use user funds as investments or collateral.
It includes the Merkle tree method, where an auditor aggregates all customers’ balances in order. Broken into two natures, there is a history of a customer’s current deposits and the assets held within the exchange. As such, if the exchange decides to utilize user funds for another cause, the deposits and assets will not match.
Since the on-chain information and verifiable history are accessible to third parties, anyone can map an account’s history to individual users. Notably, the auditor receives a specific cryptographic fingerprint to verify the information they look into. Users can actualize the information of assets held in an exchange with one click. Kraken is among the few exchanges providing the service readily to users.
A brighter future for the crypto sector
Besides the proof of reserves motion taking over centralized exchanges, Binance CEO, CZ, posted more guidelines for a healthy space. First, he noted that this was the moment for the chaff to separate from the grain. Likewise, he agrees that no exchange should invest customer funds.
Furthermore, he agrees with Sir Jon Cunliffe, the Bank of England’s Deputy Governor, that exchanges shouldn’t use their native token as collateral. Security of all funds also came as an important mention in the post.
As all this unfolds, it is yet unsure whether the proof of reserves will be an efficient way to ensure exchanges’ credibility. However, with suggested crypto regulations by several entities, it is still a good place to start.
