Cryptocurrency

What is Proof of Reserve exactly and why is everyone talking about it?

The crypto market has seen some of the worst periods in its brief history since the inception of Bitcoin. The beginning of Covid launched one of the largest bull runs which was quickly followed by the current crypto winter we are currently facing right now – that began in early 2022. 2022 also saw some of the biggest crashes, ranging all the way from the Terra LUNA crash, Axie Infinity Ronin bridge hack and recently, the collapse of the once, third largest crypto exchange by volumes in the world – the FTX exchange.

And this FTX collapse has resulted in the call for something called ‘Proof of Reserves’ – but before we get into that, let us first do a short recap into the events that led to the FTX crypto exchange collapse.

The FTX Collapse: A Recap

The FTX collapse took place over a brief 10 day period that began when crypto news publication firm, CoinDesk published a scoop that revealed that FTX’s sister company, Aladema Research – a trading firm also run by SBF – held a position in FTT worth $5 billion – which is FTX’s native token. This triggered a chain reaction of events that began with Binance’s CZ selling his company’s stake in the token, and three days later saying he intended to acquire the company to protect its users. Then immediately a day later, Binance backed out of the deal post corporate due diligence where the firm was found ‘mishandling customer funds’.

To know all about the entire debacle, read: FTX Collapse Explained

Now, what is ‘Proof-of-Reserves’? And, how does a Proof-of-Reserves Audit work?

Binance’s Changpeng Zhao, amid the crumbling FTX collapse came out with the term ‘Proof of Reserves’ – essentially claiming that crypto exchanges should come out with proof-of-reserves on a regular basis. A Proof of Reserve audit is nothing but at an exchange employing the services of a third party crypto auditor to ensure that it has assets on its balance sheet and balances the customer holdings. This is carried out in a cryptographic manner in a process called ‘merkle tree’ technique.

Hence this is essentially a way of ensuring that a crypto exchange is not misusing customer funds and the funds presented on the company’s balance sheet can be directly tallied to the value of real assets are at least equal to the cryptos held by the exchange.

Also read: CoinDCX has ZERO Exposure to the FTX Collapse Fiasco 

But, can Proof of Reserve have prevented the FTX fiasco?

Ever since the post by Binance’s Chanpeng Zhao calling for crypto exchange to publish audited reports of their Proof-of-Reserves – crypto exchanges all across the world have been hurrying to do their own due diligence and create their reports. Several exchanges have even published their own reports to stay ahead of the curve and align to the trend.

While, proof-of-reserves isn’t necessarily a bad thing, let us fully understand what it means. It is simply looking at one side of the story, checking how much reserves a crypto exchange holds as against the customer funds that they are currently custodians of.

Yes, the proof-of-reserves could potentially have prevented the FTX fiasco because if the exchange had been publishing these reports, it would have been clearly evident from them that FTX was rerouting customer funds to raise capital from them in an attempt to make more money off the same cryptos. While that works in a bull market, the bear market can potentially destroy such an over-leveraged position and that is exactly what happened with FTX.

Also, how far has Solana’s DeFi TVL been affected due to this incident?

This happened due to the fact that the Solana Foundation had deep exposure in assets directly related to FTX and its native crypto token, FTT. According to a press release by the Solana Foundation:

“These assets were held on FTX.com accounts, and continue to be held there, as of 11/6/22 when FTX.com ceased to process withdrawals; ~3.24m shares of FTX Trading LTD common stock, ~3.43m FTT tokens, ~134.54m SRM tokens.”

Additional read: FTX Price Prediction

So can Proof-of-Reserves restore trust in centralized crypto exchanges?

To some extent, yes. Proof-of-reserves in crypto would directly let people know if a certain exchange is participating in activities that could be detrimental to users’ funds and actions can be taken early on. Initiatives like this will certainly help to restore confidence of market participants on centralized exchanges but there are certain limitations in this method too – but this is a good starting point for the same.

Sumit Gupta, CoinDCX CEO & Co-Founder’s Opinion on Proof-of-Reserves

This recent collapse of the FTX crypto exchange, which was once the third largest crypto exchange and valued at about $32 billion at one point – has raised a lot of questions around centralized crypto exchanges. To answer all those questions, and more – we had Sumit Gupta, CEO and co-founder of CoinDCX, with Kashif Raza of Bitinning discuss everything from exchange revenues to issuing exchange tokens and much more. Watch it now!

Can’t watch a video? Read it here: Top Questions around the FTX Collapse & Proof of Reserves addressed by Sumit Gupta

Positive feedback from all across!

CoinDCX has been at the forefront to publish authentic Proof of Reserves and the people have spoken! Everything from reserves to address details will be published in the report for the community to see.

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