The capsize of a financial institution holding billions of customer funds is an experience nobody wants to have, not the customer or the exchange. Conditions like the one that the FTX collapse put customers and the crypto space at large into can quickly damage a company's reputation.
This is already happening in the crypto space after customers lost funds in the recent FTX collapse. And others are racing to cut ties with other cryptocurrency exchanges.
Concerns about the reliability of other exchanges have unavoidably emerged in the wake of FTX's collapse. Also reports FTX transferring cryptocurrency worth billions to support its sister trading company made the situation worse. Reportedly, this is the reason FTX could not satisfy all of its users' requests for cryptocurrency withdrawals.
If a customer's account says it encompasses cryptocurrency, but the platform is unable to deliver it when they need it, where is the cryptocurrency then? This demonstrates that there is less transparency than previously believed in the crypto market and the need for transparency increases.
Following the FTX collapse, the crypto space has begun taking steps to ensure that the credibility of the crypto market is assured. Most significant cryptocurrency exchanges have complied with the call for transparency made by the crypto community.
The first solution to the problem is proof of reserves. Binance makes the crypto market transparent by adopting proof of which from its one action makes the crypto market transparent
So what exactly is proof of reserves? Read on to learn more about the proof of reserves.
What is Binance Bitcoin Proof of Reserves?
The Binance proof of reserves (PoR) is an open auditing procedure that offers a fair report of user assets in reserve.
Following the FTX collapse, Binance CEO Zhao, also known as CZ, suggested this as a solution to the crypto communities. By incorporating proof of reserve, CZ claims that Binance gives users an unbiased view of the assets held in reserve.
However, BTC will be the first network and token included in the launch of this feature, with other tokens to follow in the coming weeks.
How Does it Work?
The PoR is the duty of third-party auditors, who use cryptographic techniques to demonstrate that user funds are securely held in company reserves. These auditors use a Merkley tree, a cryptographic method that compresses large amounts of data into a single hash.
Every single hash is represented as a Merkle root to aid in identifying each account on the Binance exchange. Users can also use this to confirm specific contents in a specific set of "sealed" data.
After logging in, users can access their Merkle Leaf and Record IDs from the page, choose the audit date to check, and then get confirmation of the audit type. This will embed your Record ID, the assets it covers, and the asset balances on the day the audit was conducted.
What are the Objectives of Proof of Reserves?
PoR audits help users see how their deposits match up with their balances. Users can use it to check that the balances they have on a cryptocurrency exchange are present in the reserve of the exchange. It also encourages exchanges to adhere to transparency standards, which makes it more difficult for them to engage in dubious or illegal financial activity.
The objective of proof of reserve is to eliminate the risk of businesses maximizing the yield and other potential returns from customer asset holdings. Exchanges won't mismanage users' assets because PoR demonstrates all deposits made by its users.
Again at the peak, PoR aims to build user trust, which is already at breaking point after the FTX saga. And ensure crypto enthusiasts continue investing in cryptocurrencies.
Who Benefits From Proof of Reserves Integration?
Fundamentally, the purpose of proof of reserves was to assist cryptocurrency owners. However, POR should ideally be advantageous to both users and exchanges. It protects users while also helping businesses keep customers by reducing security risks and preventing dangerous players.
After the failure of FTX and Alameda's research, cryptocurrency investors are now curious about what other exchanges might be doing with their users' coins and tokens in secret. But this is no more a challenge. Exchanges now have a way to let users know what is happening to their money in the background, thanks to the addition of proof of reserves.