How does Proof of Reserve work?

The failure of cryptocurrency exchange, FTX led to the creation of the phrase “Proof of Reserve”. Changpeng Zhao (CEO of Binance), stated that all crypto exchanges should have Merkle-tree proofs-of-reserves on November 9. Crypto exchanges shouldn’t be running on fractional reserves like banks. Soon, Binance will begin to provide proof-of-reserves. Transparency in every detail
What is Proof-OfReserve?
PoR is also known as Proof of Reserve. It is an audit process that verifies centrally managed cryptocurrency reserves. PoR verifies the fund reserve of a central platform using cryptographic evidences, checks the legitimacy and conducts routine third-party audits. This information can be used by customers to determine if the platform is in a strong financial situation and whether customer deposits are eligible for matching. PoR uses blockchain technology but it still relies upon the accuracy of accounting processes and the appraisals of off-chain assets.
How does Proof of Reserve work?
Proof of reserves (PoR), an independent audit by a third party, is used to verify that a custodian holds the assets it claims to be in possession of. This auditor compiles all balances into a Merkle tree by using an anonymized snapshot.
Merkle is a cryptographic commit scheme that identifies the cryptographic hash for each “leaf” or node. They are used primarily to verify data that has been sent, stored, or handled between computers. The idea was first used in 1979 but is still widely used in peer-to-peer blockchain networks.
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The auditor then obtains the Merkle root, which is cryptographic fingerprint that allows him to identify the specific combination of these balances in the snapshot.
Next, the auditor gathers digital signatures from cryptocurrency exchanges that attest to who controls on-chain addresses with publicly available balances. The auditor then compares the balances and checks to make sure they are equal or greater than the client balances in the Merkle tree.


The PoR method was well-received by the crypto community and was hailed as a step towards a more transparent crypto ecosystem. Central exchanges can track each account’s liabilities by using transaction records and assets. They would need to publish their accounts with a tag that only their account owners can see in order to keep their anonymity.
The effects of FTX’s collapse have prompted calls to tighten regulatory oversight of the cryptocurrency market. Experts believe that proof of reserve cannot be relied upon alone, even though major market participants are still transparent in their efforts to win back public trust.

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