<strong>What is Proof-of-Reserve (POR)?</strong>

After the bankruptcy of crypto exchange FTX, “Proof-of-Reserve” originated. Several exchanges filed solvency reports to prove their users’ funds are backed by assets to bring more transparency. According to the statements made by Changpeng Zhao, CEO of Binance, “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”.

Now FutureFi is also working diligently to ensure full transparency of asset management. And will soon introduce it on our crypto exchange TradeKIA.

What is Proof-of-Reserve?

Proof-of-Reserve, also known as PoR is a verifiable auditing process that increases the transparency of many centralized cryptocurrency reserves. The third party ensures that the custodian holds the assets it claims, on the behalf of its clients. Auditor compliance all the held balances into a Merkle tree (a tree where node is labeled with the cryptographic hash of a data block) using an anonymized snapshot of all balances.

With PoR our exchange TradeKIA will literally show users evidence that it has funds to cover all the assets of its users plus some reserves. Although it uses blockchain technology it still needs the accuracy of the accounting procedures and the valuation of off-chain assets.

What is the Merkel tree?

It is a cryptographic tool that allows the consolidation of huge amounts of data into one hash. This single hash is known as Merkel root and it plays the role of a cryptographic seal that “summarizes” all the inputted data. 

Merkel tree enables users to verify specific contents that were included within a particular set of “sealed” data.  

Merkel tree enables users to check the root hash to see whether their accounts are included in the snapshot of user balances. 

Why is this step important?

After a popular exchange crashes due to a liquidity crisis, other crypto exchanges are becoming more transparent about users funds and that means sharing more information about hot and cold wallets. That’s where PoR helps the users, with this move companies can prove that it indeed holds assets and can process tons of withdrawals. Even the world’s largest crypto exchange in trading volume, Binance released its PoR system, which is said to be the next step of commitment and trust in the ecosystem. The auditor sought to prove that the exchange can actually move a large sum of money without affecting its operability. 

It gives investors confidence when the exchange work towards bringing transparency. The exchanges that conducted PoR audits recently include Binance, Kucoin, Huobi, Okx,Kraken, etc.