After the market chaos that ensued earlier this week, Binance, and many other firms have pledged to soon start a Proof-of-Reserves audit system to allow verification of its digital asset holdings.
CEO of crypto exchange Binance, Changpeng “CZ” Zhao, on Tuesday tweeted that the exchange pledges to implement a Proof-of-Reserve mechanism to provide “full transparency” using Merkle Trees. Merkle Trees, also known as “binary hash trees,” is a data structure that is used to encode blockchain data more securely and efficiently. Using these data structures allows exchanges to store each user account’s hash value of assets in the “leaf nodes” of the Merkle Tree and thereby verify all users’ holdings by a third party.
CZ vowed to implement Proof-of-Reserves after Binance agreed to buy rival crypto exchange FTX on Tuesday. FTX was rumored to be on the brink of financial collapse despite CEO Sam Bankman-Fried dismissing any such claims. Since CZ made the announcement, many other firms have agreed to also implement this verification mechanism. Over the past 24 hours, eight other exchanges – Gate.io, KuCoin, Poloniex, Bitget, Huobi, OKX, Deribit, and Bybit, issued separate statements saying that they would publish their Merkle Tree reserve certificates to increase transparency according to reports by CoinDesk.
All crypto exchanges should do merkle-tree proof-of-reserves. Banks run on fractional reserves. Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.
— CZ 🔶 Binance (@cz_binance) November 8, 2022
CEO of Chainlink, Sergey Nazarov, took to Twitter to express his view that the cryptographic-based Proof-of-Reserves mechanism could provide investors with a clearer view of the solvency of a trading venue or financial firm, and is “becoming the new industry standard.”
It is clear that cryptographically proving the solvency of trading venues and financial institutions is becoming the new industry standard. Proof of Reserves is a great example of a cryptographically guaranteed financial world that starts in crypto going on to mainstream finance. https://t.co/eZw1pj5706
— Sergey Nazarov (@SergeyNazarov) November 8, 2022
Fellow cryptocurrency exchange Kraken already implemented its “advanced cryptographic accounting procedure” allowing users to verify their token balances in February 2022.
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