Major cryptocurrency exchanges have published proofs of their crypto reserves in response to the collapse of FTX and Alameda Research. This has led to questions over the reliability and trustworthiness of other exchanges. Binance CEO, Changpeng Zhao, proposed a solution to the crypto community’s collapse in trust with the suggestion that “all crypto exchanges should do Merkle tree proof of reserves.” Proof of reserves (POR) involves taking a cryptographic snapshot of the coins and tokens held by a cryptocurrency exchange. However, even if an exchange has done thorough POR for both its assets and liabilities, there is no guarantee that customers’ crypto is safe on that exchange.
The Importance of Proof of Reserves for Crypto Exchanges
The collapse of FTX and Alameda research has left crypto holders wondering what other exchanges might be doing with their customers’ coins and tokens behind the scenes. However, the call for transparency by the crypto community has been answered by most major cryptocurrency exchanges, which have published proofs of their crypto reserves over the last two weeks. In this article, we will explain what proof of reserves means, scrutinize the crypto reserves of some of these exchanges, and examine whether decentralized exchanges will take over as a result.
What is Proof of Reserves?
Proof of reserves (POR) involves taking a cryptographic snapshot of the coins and tokens held by a cryptocurrency exchange. It is important to note that POR is supposed to be done with the help of an independent third party or protocol. Most cryptocurrency exchanges have been working with blockchain analytics platform Nanson for their PORs.
Liabilities of Cryptocurrency Exchanges
It is also essential to include the liabilities of a cryptocurrency exchange in POR, including the coins and tokens an exchange is holding on behalf of its users. The only exchanges that have included liabilities in their POR so far have been Kraken, Gate.io, and OKEx.
Binance was the first exchange to provide POR after Kraken. The top assets on Binance’s balance sheet are as follows: 31% in the BUSD stablecoin, 22% in the USDT stablecoin, 13% in BTC, just under 10% in BNB, 8% in ETH, and the remaining 16% or so in other cryptocurrencies. However, Binance has yet to publish proof of liabilities specifically of user deposits.
Crypto.com was the second exchange to release its POR after Binance. The top assets on Crypto.com’s balance sheet are as follows: 25% in BTC, 22% in USDC, 19% in SHIB, 11% in ETH, just under 4% in USDT, and around 18% in other cryptocurrencies. Similarly, Crypto.com has yet to publish proof of its liabilities, which are likely to be even larger than Binance’s given that Crypto.com claims to have over 50 million users.
Even if an exchange has done thorough POR for both its assets and liabilities, there is no guarantee that your crypto is safe on that exchange. The only way to guarantee the safety of your cryptocurrency is to keep your coins and tokens in your own personal non-custodial wallet. Moreover, POR is vital for increasing user confidence in cryptocurrency exchanges, particularly given recent crypto scandals. We may also see decentralized exchanges becoming more popular due to the lack of trust in centralized exchanges.