Binance, a cryptocurrency exchange, has unveiled a new website that details its proof of reserves method. What does that mean and why did the corporation do it, though? Here is an explanation of why the phrase has recently become popular.
What took place?
A liquidity problem caused the bankruptcy of the well-known cryptocurrency exchange FTX two weeks ago. As a result, the exchange ceased handling withdrawal requests from investors and customers. Since the collapse of FTX created a great deal of distrust within the cryptocurrency industry, crypto exchanges, like Binance, have begun to provide more details about how it manages users' assets.
What are reserves proofs?
One method by which Binance provides users with this transparency is through Proof of Reserves. It alludes to a separate audit carried out by a third party to confirm the possession of the assets for users. Binance has cash to cover "all of our users' assets 1:1, as well as certain reserves," according to the company website, which provides proof of reserves.
Cryptocurrencies and other liquid assets are considered reserves. It informs users that regardless of market conditions, the corporation may sell its assets to pay for withdrawals if necessary.
Additionally, it demonstrates that Binance has a small amount more Bitcoin BTCUSD, -2.37% in its control wallets than what consumers have deposited.
These figures do not include corporate holdings, according to Binance, which are stored on a different ledger. In addition, Binance asserts that it has no debt in its capital structure and a reserve money for dire circumstances.
How does it function?
Binance uses a Merkle tree (also known as a hash tree) to demonstrate proof of user assets and enables users to confirm the assets they own on the platform. An outside auditor conducts the verification. An anonymous snapshot of each client's balances is taken by the auditor, who then compiles them into a graphic to show all of the balances as of the snapshot's capture without disclosing any personal information.
What are the drawbacks?
Although proof of reserves provide some financial transparency, the approach has certain drawbacks. It only displays assets that are stored on the blockchain; it conceals any potential off-chain activities. In addition, there isn't a continuous, live update of balances; there is only one snapshot. Additionally, it is hidden where the balances come from and whether or not they were borrowed for the audit.
source: marketwatch.com/story/what-are-proof-of-reserves-explaining-why-binance-launched-a-proof-of-reserves-system-for-bitcoin-holdings-11669407087