The world’s largest crypto exchange, Binance, released its proof-of-reserves (POR) system earlier today, just two weeks after pledging to develop a POR mechanism in response to the FTX bankruptcy fiasco.
According to a post on the exchange’s official website, the feature will be available for BTC, with integration plans for other tokens and networks scheduled in the coming weeks.
Binance defines POR as assets held in custody by the exchange for its users. It specifically provides evidence that all the customer funds are backed by assets in a 1:1 ratio, along with some additional reserves.
“What this means in actual terms is that Binance holds all user assets 1:1, we have zero debt in our capital structure and we have made sure that we have an emergency fund (SAFU fund) for extreme cases,” reads the post.
Merkle Tree Verification
The system uses a Merkle tree that allows users to verify their assets using a self-generated Merkle hash/record ID within the platform.
Merkle trees summarize all the inputted data and provide the ability to verify specific data from an extensive database.
After logging into Binance, users can select “wallet,” followed by “audit,” which will display the Merkle Leaf and Record ID that can then be used to verify assets for any specific date.
Additionally, those who wish to verify their hashes independently, can do so by copying the source code into a Python application and cross-referencing.
The exchange also provided a snapshot of its account holdings as of Nov. 22, which stands at 582,485 BTC, resulting in a reserve ratio of 101%.
Reaction
Even though majority of the community members reacted positively to the development, Kraken CEO Jesse Powell lashed out, calling the feature pointless as it lacked “proof-of-liabilities.”
This is simply "here's a hash of your record in the BTC spreadsheet". ok… but what's the point? The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.
— Jesse Powell (@jespow) November 25, 2022
Binance CEO Changpeng Zhao responded to a similar remark on Twitter, suggesting that the exchange doesn’t owe any loans, etc.