Proof of Reserves

Proof of Reserves refers to a mechanism by which an exchange proves to users, through on-chain signatures or third-party audits, that the assets it holds are sufficient to cover user deposits.

Leading exchanges such as Binance have periodically published reserve reports, but such reports usually reflect only a snapshot at a single point in time and can hardly eliminate information asymmetry entirely.

The proof-of-reserves mechanism was widely called for across the industry after the FTX collapse, but because exchanges disclose on inconsistent bases and audit standards are lacking, no unified standard has yet been formed.

The common practice of proof of reserves is for exchanges to publish on-chain address balances, with third-party auditors using cryptographic methods (such as Merkle trees) to verify whether the sum of user deposits matches the assets held by the platform.

For users, PoR can only prove an asset snapshot at a certain point in time and cannot reflect the liability side, making it difficult to guard against misappropriation and leverage risks.

Proof of Reserves (PoR) is a mechanism by which exchanges periodically publish a snapshot of the assets at their on-chain addresses, aimed at verifying the coverage ratio of user deposits held by the platform.

Proof of Reserves is an audit method that uses technical means such as Merkle trees to prove to users and the public that the assets an exchange actually holds are sufficient to cover all customer liabilities, and it was widely adopted by the industry after the FTX incident.

Proof of reserves lets exchanges publicly disclose the correspondence between their address assets and user liabilities to prove solvency, but it has limitations such as the snapshot point in time and the opacity of the liability scope, and there have historically been disputes in which the proof was valid but the funds had long since been moved, so it is better suited as cross-validation rather than an absolute guarantee.