The crypto failures sent everyone reeling.
That may be true. But, several things happened including the invention of forms of self-regulation.
Proof-of-Reserves (PoR), a concept that ensures transparency by math has become a last stand for many crypto projects and a debating point for skeptics.
The big deal is if PoR as a concept can scale the compliance hurdles to become a standard within the industry and beyond.
Our panel of experts weighed in on the future of Proof-of-Reserves (PoR).
Here are their thoughts.
Michel Caspers, CMO and Co-Founder of Unity Network
The future of P-O-R projects looks bright in a world where banks are failing or uncertainty rises on how exchanges handle their funds. Proof of reserve can make sure that trust remains for a project because the blockchain can show how much a project/company has in its account. This shows the project is liquid and hasn’t got any problems in case someone wants to take out their funds.
This kind of system can works best for Stablecoins and exchanges themselves. Perhaps at a later stage, when regulations are more clear on crypto assets it can be a very interesting system for smaller banks. Especially to show that they are stable in an economic crisis or possible bank run.
Related:What Are E-Stablecoins And How Do They Operate?
David Waugh, Managing Editor, The Daily Economy at American Institute for Economic Research
Given the FTX fallout and following scrutiny from regulators and consumers, it would make sense for cryptocurrency exchanges to conduct meaningful Proof-of-Reserves (PoR) attestations. However, many have yet to do so- leaving the future of PoR uncertain. Out of the larger exchanges, Coinbase essentially does a form of PoR because it is a public company, and BitMEX and Kraken also provide regular PoR assessments.
The best way to implement PoR is for custodians to demonstrate their solvency by periodically releasing proof of their deposits and liabilities. While on-chain deposits can be easily assessed, proving liabilities necessitates an independent auditor’s involvement. The deposits + liabilities approach to PoR is critical because firms can conceal significant liabilities while appearing flush with deposits.
Andy LaPointe, Digital Asset Advisor, Author,”The Financial Advisor’s Digital Asset Practice Guide” and Speaker
As the crypto industry evolves from early-adopters to mass adoption, the market is demanding more transparency and accountability among custodians and exchanges. While PoR is not mandatory, it is more than likely exchanges and custodian provides will openly provide this information to differentiate themselves from the competition. In addition, voluntary PoR will also aid with oversight and regulation. This means as the industry continues to step up its self-oversight, governmental oversight may come along side the industry instead of imposing overly broad regulations.
Here are a few ways crypto custodians and exchanges can best implement PoR:
#1: Regular reporting: Traditional finance is accustom to regular quarterly reporting. Regular reporting disclosures may provide insight on holdings and management of user funds. For examples, the holdings disclosure could include information about specific cryptocurrencies and the amount of each held by an exchange or custodian. Management of users funds disclosure could provide an overview of security measures regarding security, processes and the storage of funds.
#2: Publish the public key addresses: This would also users to independently verify the amounts of funds held at an exchange or custodian. This would allow transparency as this balances in the wallets could easily be cross-referenced with regular reporting disclosures.
#3: Third-party audits: Unfortunately, the crypto industry has been plagued with many events that has diminished trust in both the industry, exchanges and custodians. From the BTC-e, MtGox and most recently the FTX implosion. Independent, third-party audits will help to rebuild trust and further increase adoption among retail investors, investment advisors and institutional investors.
Related:Crypto Firms Are Collapsing…Whats the Future of the Large Crypto Firm?
Arnaud Simeray, VP Sales & Growth at Tatum
Proof-of-Reserves (POR) is a method for verifying the solvency of a custodial service, such as a cryptocurrency exchange or a wallet company. Basically, it helps provide a proof that the service holds sufficient reserves to cover its users’ balances.
It is obvious, given recent events, that there is a growing need for trustless and transparent custodial services, meaning “am I safe?” as an end-customer.
There are a few different ways that PoR can be implemented:
One approach is to use a Merkle tree. The entity would generate a Merkle tree of all the balances it holds and provide the tree’s root to users. Users could then use this root to verify that their individual balance is included in the tree, without needing to see the balances of other users.
Another approach is to use a multi-signature scheme, where the custodial service and an independent third party each hold a private key to a multi-signature address. Users’ funds would be held in this address, and the custodial service would need to obtain the third party’s signature to move any funds. This provides an additional layer of security and transparency, as the third party can verify that the custodial service holds sufficient reserves.
As always, the magic (and the challenge) is to find a balance among security, transparency, and usability to provide the best possible experience for users while maintaining the integrity of the system.
Danny Talwar Head of Tax at Koinly
Proof-of-Reserves (PoR) serves as a technique to confirm that a cryptocurrency exchange maintains a one-to-one backing for all digital assets held on its platform. This method is crucial in the crypto sphere space, with the phrase “not your keys, not your crypto” implying that unless you possess your own private keys, an exchange could be utilizing your deposits to generate revenue or engage in rehypothecation of deposited funds.
As the cryptocurrency industry expands and matures, PoR’s importance will likely grow. With increasing adoption by mainstream financial institutions, corporations, and individuals, the need for transparency, security, and trust in digital asset management becomes crucial. PoR addresses these concerns by offering a way to confirm an entity’s claimed reserves, reducing fraud risk and bolstering confidence in the ecosystem.
Leading exchanges such as Binance, OKX, ByBit, Kraken, BitMEX, and Gate.io now implement PoR using Merkle trees or snapshots, enabling users to verify that their holdings are properly backed. In the coming years, increased automation, and the integration of PoR standards into financial regulations will make this practice far more commonplace.
The demand for third-party audits, both for Proof-of-Reserves and other aspects of the cryptocurrency ecosystem, will likely grow, leading to the emergence of new businesses and services tailored to cater to this need. Overall, the future of Proof-of-Reserves appears promising, with the potential to bring increased transparency and trust to the rapidly expanding world of digital assets.
Related:Interest in Proof of Reserves is Strongest in these Countries- CoinGecko