FTX’s downfall was a lesson for everyone, and it resulted in the crypto community calling for greater transparency and decentralization in the space. As one of the largest crypto exchanges in the world filed for bankruptcy, investors urged remaining exchanges to prove their liquidity.
Proof of Reserve is a new initiative taken by centralized exchanges aimed at showing the true state of exchange’s coffers. Investors want to know if their funds are backed by real assets and whether they can redeem them at any time. Binance, the world’s largest cryptocurrency exchange, created the Proof of Reserve initiative in wake of the FTX drama.
This article discusses the Proof of Reserve concept and its effectiveness in bringing back trust to the industry. You will learn how exchanges prove liquidity, which exchanges have published proof of reserves, and how the concept will evolve in the near future.
Proof of Reserve is an initiative taken by Binance in wake of FTX’s insolvency. Changpeng Zhao, CEO of Binance, decided to publish the exchange’s cold wallet reserves as proof of their digital asset holdings worth more than $69 billion.
Zhao stated that the exchange remains committed to transparency in light of the liquidity crunch caused by yet another major company going insolvent. The company disclosed its cold wallet addresses and the balances of the top six cryptocurrencies listed on Binance.
The report showed that Binance held the following assets as of November 10th:
The digital assets above were valued at approximately $69 billion at the time of their publishing. Assets part of Binance’s reserve (except stablecoins) have partially fallen in value over the week due to market turbulence.
Zhao claims that this move represents the first step in establishing greater transparency. His ultimate goal is to create a Merkle Tree Proof of Funds which would be open to the public. Such a structure would allow investors to see Binance’s state of reserves in real time and spot any changes – much luck with crypto assets on decentralized ledgers.
At the same time, the CEO has announced that he is working on implementing a new proof-of-reserves protocol developed by Ethereum co-founder Vitalik Buterin. The protocol will reportedly launch within the next two weeks and will use Binance as its first test case. Note that the protocol will work differently from the proposed Merkle Tree solution which will appear further down the line.
Cryptocurrency exchanges that chew more than they can handle often go bankrupt. This results in CEXs losing liquidity and not having the capacity to process withdrawals. As an investor, you should always keep most of your belongings in a personal blockchain wallet. But if that’s not the case, focus on placing funds on exchanges you can trust.
Under pressure by investors, a lot of exchanges have recently gone forward with disclosing their funds to the public. They have joined Binance’s efforts in joining the Proof of Reserve initiative by sharing exchange wallet addresses and the funds contained within them.
A number of exchanges have recently shared Proof of Reserves, including:
For example, Crypto.com has shared its cold wallet addresses while having its official Proof of Reserves audi underway. The reveal showed that the exchange has 53,024 BTC and 391,564 ETH. Crypto.com also has other assets which total up to $3 billion.
BitMEX has revealed their assets in a similar way by publishing a spreadsheet of all their cold wallet addresses with the balance outlined. The exchange announced that it will publish a snapshot of their reserves two times per week. Moreover, the exchange announced that it will publish a Merkle Tree Proof of Reserve feature in the future.
The Proof of Reserve initiative took place, as usual, with a little hint of drama. After Binance’s reveal, many exchanges have stated that they will publish their reserves in the following weeks, if not months. Many were distraught by this fact, given that exchanges can disclose funds instantly if their reserves have been untouched by the latest events.
Some users on Crypto Twitter have even caught exchanges trying to forge their reserves. For example, on-chain records show that Gate.io sent funds to Crypto.com right before they took a snapshot of their reserves. Crypto.com sent back the exact amount right after publishing their assets. Gate.io stated that it ‘accidentally’ sent $400m in ETH to Crypto.com.
CZ responded to the drama by stating that investors should not trust exchanges if they move large amounts of crypto before or after they disclose wallet addresses. Many inventors within the community took this as a sign to withdraw assets from dubious exchanges.
The Proof of Reserve initiative is a new step in bringing back trust to the crypto industry while simultaneously retaining decentralization. Crypto’s largest exchange, Binance, has taken the first step to making Proof of Reserve a reality. Many other centralized exchanges have followed their step by publishing cold wallet addresses.
Knowing whether your funds are backed by real money on an exchange is the first step in protecting your net worth. You should always keep your assets in a private hardware wallet. But if you hold certain sums on exchanges in order to trade, I recommend only depositing cryptocurrencies on exchanges you can trust.
A proposed merkle tree model, currently being worked on by Vitalik Buterin, will help investors trace exchange holdings in real time. But until the model is launched, many will have to rely on the reputation of exchanges. Keep track of what exchanges publish and what their speculated exposure to FTX (and other failed companies) might be. This is your only way to protect your cryptocurrencies aside from non-custodial means.
If you want to learn more about cryptocurrency wallets, I recommend reading the following articles:
Each day Shrimpy executes over 200,000 automated trades on behalf of our investor community. And joining them is easy.
After you sign up and connect your first exchange account, you’ll deploy an investment-maximizing strategy in as few as 5-minutes.
Whether you create your own rebalancing strategy or completely custom automation, the ability to walk your own path belongs in the hands of every crypto investor.
Discover 5 popular Coinbase alternatives for 2023. Compare features, pros, and cons of platforms like eToro, Kraken, and Crypto.com.
Bitstamp is Europe’s longest-standing cryptocurrency exchange. Founded in 2011 by Nejc Kodrič and Damijan Merlak, Bitstamp is, by crypto standards, a historic institution.
Robinhood vs Coinbase - Should you enjoy the flexibility of trading crypto and stocks or should you simply stick with decentralized blockchain-native solutions? A recent dramatic encounter between fervorous Reddit traders and Robinhood should clear this debate once and for all.