Binance one of the most popular centralized crypto exchanges has announced the launch of 'Proof of Reserves', where people can verify that the exchange is holding the right amount of crypto tokens that they are supposed to hold in their custody. Right now the Proof of Reserves is only available for Bitcoin but according to BINANCE Proof of Reserves for other altcoins will also available in the future.
What Is Proof of Reserve & Why Do We Need it?
Let's start with the second question, as we all know about the ongoing FTX mess. FTX was the second most large centralized crypto exchange and it has grown a lot in terms of popularity, market share, and almost on every other metric available. But it is noticed that there is wrongdoing by the exchange itself, which resulted in the destruction of the exchange and it impacted the crypto market. This incident was so sudden that many investors could not assess this coming, and lots of people including large investment firms, pension funds, individual investors, and retail investors lose their money. This created a negative narrative about entire centralized exchanges and many people transferred their crypto assets from centralized exchanges to the decentralized infrastructure.
In order to tackle that negative narrative about centralized exchanges, Binance one of the largest crypto exchanges in the crypto space has come up with the concept of Proof of Reserve, which will ensure that the exchange is holding enough assets that cover all the deposits made by users. According to the Binance CEO CZ, this practice of Proof of Reserves will increase the transparency in the business and regain the trust of users. Many centralized exchanges are following the same trend and are working on showing Proof of Reserves to their users.
Binance Proof of Reserve
Yesterday on the 25th of November 2022, Binance released the Proof of Reserves for Bitcoin. Now individuals as well as third-party audit firms can audit the reserves that Binance holds. Currently, the Proof of Reserves is only available for Bitcoin and they will be available for other assets as well in upcoming weeks.
As already told many other centralized exchanges are also showing their Proof of Reserves, KUCOIN is one of the crypto exchanges that has released the Proof of Reserves for Bitcoin, Ethereum, USDT, and a few other assets on various networks.
More about - Binance Proof of Reserve
Issues With Proof of Reserves
Even though CZ believes that this concept of Proof of Reserves will bring transparency to the industry, there are a few flaws in the actual concept of the Proof of Reserves. Proof of Reserves works as follows - a third-party auditor anonymously captures the snapshot of users' assets and then combines all of that data and puts them into a graph. Now the problem with this process is -
- This audit will not be live at all times, this is just a snapshot so we can say that there is no real-time Proof of Reserves available.
- Since the data does not capture where it is coming from, means exchanges can borrow some assets only for some time only for audit purposes.
- One of the most important flaws is that this captures all the on-chain activity, not the off-chain which means all the off-chain activity will not be seen in the proof of reserves and most of the exchanges do shady things off-chain!
Conclusion
Even though Proof of Reserves possesses some flaws but it certainly provides some financial transparency to the centralized exchanges which is a good thing and definitely a very good first step. Another good thing is many of the exchanges are following the trend and working on providing Proof of reserves for their users. This concept will surely bring some sort of transparency and will help to grow the centralized crypto industry.
Hope you found this article informative and helpful in understanding something about Proof of Reserves. If yes then do follow me and share your views on this in the comment section.
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