What are Proof of Reserves?
Proof of reserves are a method of verifying the funds of a given crypto exchange to protect investors from exchange collapses and improve investor trust. Learn everything you need to know in our proof of reserves guide.
What are Proof of Reserves?
An audit of an exchange’s balance sheet
Conducted by a third party
Verifies that a custodian holds the assets it claims to hold
Results are published in a report
Proof of Reserves (PoR) are a method of verifying that a cryptocurrency exchange has a 1:1 backing across all digital assets that are held there.
This can be done by the exchange either publishing a “proof of reserves” report to detail the amount of cryptocurrency they hold or by proving ownership of wallets on-chain via an audit or “Merkel Tree”. Usually, exchanges hold most user funds in cold storage wallets, with hot wallets for more immediate liquidity.
Proof of Reserves are an integral part of the crypto space, as the phrase “not your keys, not your crypto” means that unless you hold your own private keys, an exchange could be loaning out your deposits in order to earn yield or “rehypothecate” deposited funds.
Why are Proof of Reserves important?
Say an exchange is facing a “bank run”, if they do not have the appropriate funds or 1:1 backing of the digital assets deposited, liquidity issues may arise, causing depositors to wait long periods of time to get their deposits back - if at all.
Proof of Reserves can help to provide some assurance to users of exchanges that their funds are secure; however, this doesn’t prevent issues from arising in the event of a hack or attack.
While Proof of Reserves isn't a perfect solution, it is likely to force greater transparency within the space, with many exchanges now moving to show PoR or having their wallets audited by independent parties.
What is a Proof of Reserves audit?
A Proof of Reserves audit sees all deposits on an exchange rigorously vetted to ascertain if the ownership of the wallets sits under the exchange and if the funds add up 1:1 to user deposits. Cryptocurrency exchanges may publish Proof of Reserve audit results periodically (weekly, monthly, quarterly) or have real-time PoR available on their website.
It is important to note that “snapshots” or audits of holdings by exchanges may be sufficient to prove solvency at a point in time; however, having real-time access to Proof of Reserves is superior, as any users or members of the public can ensure that funds indeed are held and custodied correctly by an exchange.
What is Chainlink proof?
Chainlink is a decentralized oracle network built on Ethereum. It is used to facilitate the transfer of data from “real-world” off-chain sources to on-chain smart contracts, such as price feeds of tokens and other information, such as weather, sports scores, and more.
Exchanges can also use Chainlink Proof of Reserves in order to provide security around the guarantees that they cannot mint more tokens than assets stored in reserves. Chainlink Proof of Reserves are also used by DeFi protocols to transparently show how much is deposited, borrowed, and staked at any point in time.
What is a Merkle Tree?
In simple terms, a Merkle tree (or a “hash tree”) is a data structure that allows for efficient and secure data verification. In the cryptocurrency space, it acts as a way to verify the validity of user balances and transactions, combining cryptographic hashes of small balances and encapsulating them into one.
The digital signatures produced by a Merkle tree can be verified by an independent auditor or users of an exchange, with proof of ownership over on-chain wallet addresses demonstrating balances that match 1:1 user deposits or exceed these amounts.
Merkle trees can form an important part of Proof of Reserves, as they allow for secure, efficient, and provable verification of balances.
Which crypto exchanges have Proof of Reserves?
Here’s a list of some of the top crypto exchanges and what kind of Proof of Reserves they currently have:
Kraken (Merkle tree)
Coinbase (Financial Statements)
Binance (Snapshot)
Bitfinex (Snapshot)
ByBit (Snapshot)
BitMEX (Merkle tree)
Crypto.com (Snapshot)
OXK (Merkle tree)
Gate.io (Merkle tree)
Huobi (Snapshot)
How do I view an exchange’s Proof of Reserves?
Depending on which exchange you hold your crypto on, you can check what type of Proof of Reserves they have, as well as how to find more information on their websites below.
Kraken (Merkle Tree): Kraken Proof Of Reserves Audit
Coinbase (Financial Statements): Coinbase Financials - SEC Filings
Binance (Snapshot): Binance - Our Commitment To Transparency
Bitfinex (Snapshot): Bitfinex GitHub
ByBit (Snapshot): Bybit Press Release
BitMEX (Merkle Tree): BitMEX Proof of Reserves & Liabilities Snapshot
Crypto.com (Snapshot): Crypto.com Nansen Portfolio
OKX (Merkle Tree): OKX Proof of Reserves
Gate.io (Snapshot): Gate.io Proof of Reserves Audit Certificate
Huobi (Snapshot): Huobi Snapshot
