​Proof-of-reserves. Which exchanges confirmed their solvency after FTX’s collapse

The fast-moving bankruptcy of the FTX exchange was accompanied by a tense exchange of Twitter posts from its now-former FTX CEO Sam Bankman-Fried and Binance CEO Changpen Zhao (CZ). In one of the tweets, Zhao said that his company was starting to prepare “proof of reserves” of funds available on the platform’s wallets.

The term “proof of reserves” instantly caught on in the crypto community. Zhao suggested that the practice of proving the availability of funds on exchanges could transform the entire industry through a new level of transparency. He said it could discourage internal fraud at crypto companies, such as those that led to the collapse of FTX.

“Accidental” transfers. Where did FTX’s billions go

Speaking at the FinTech Summit conference in Indonesia on November 11, Zhao said that proving reserve reserves will be important given the increased regulatory attention. “That is absolutely going to be where the focus is for the next little while, which is right. We have learned from our mistakes,” he said from the stage.

During Binance’s official broadcast on Twitter Spaces on November 14, Zhao said that he would work jointly with Vitalik Buterin to develop a new method of proof of reserves for cryptocurrency platforms. Binance itself will test a pilot version of it.

What is Proof of Reserves

In the first tweet about transparency, Zhao urged exchanges to publish proof of reserves based on the Merkle Tree algorithm, a data validation structure on the blockchain. Despite the transparency of blockchain data, centralized exchanges typically do not disclose all wallet addresses. As conceived by Binance’s CEO, the open publication of the Merkle tree to prove reserves would provide a compliance map for customers’ assets on exchanges’ wallets.

Merkle trees organize data (such as transactions in smart contracts or transfers between accounts) into hashes arranged as a series of parent and child nodes. This is a complex cryptographic concept that could theoretically allow a third-party auditor to verify the relevance of reserves in cryptocurrency services. After Zhao’s tweet, eight other exchanges announced support for the concept and plans to publish data on reserves.

OKX, Huobi, KuCoin, and Gate support Binance’s proof-of-reserves initiative

Without going into the details of FTX’s bankruptcy, its main problem was that most of the exchange’s reserves were held in its native token FTT, the collapse of the rate of which was a prerequisite for mass withdrawal requests from users. As a result, it quickly became clear that the exchange does not really have enough reserves in its wallets to pay them off. So FTX collapsed in just a few days, being unable to repay billions of dollars in liabilities.

With proof of reserves, exchanges could offer more transparent information about the assets on the accounts to confirm that they do have a liquidity buffer and do not use user funds.

Exchanges publish data

Binance itself was the first to provide public information about reserves. As of November 10, the company had more than $69,39 billion in several digital assets on its hot and cold wallets. The list and addresses of the wallets are available on the exchange’s website.

Bitfinex published its data on reserves on November 11. The exchange’s CTO Paolo Ardoino confirmed on Twitter that the exchange has 204 338 BTC ($3,4 billion) and 1,2 million ETH ($1,5 billion), posting a link to a GitHub page with a list of 135 Bitfinex wallet addresses in a series of tweets.

Huobi revealed details of its hot and cold wallet balances, revealing a total value of about $3,5 billion. According to the exchange, its assets include 32 000 BTC, 274 000 ETH, 820 million USDT, and 9,7 billion TRX. The platform’s website also has addresses of all of its crypto wallets.

Cryptocurrency exchange Crypto.com published data on the composition of its reserves on November 11. The platform holds more than $2,9 billion in digital assets on its balance sheet, with the share of Shiba Inu (SHIB) meme coin accounting for about 20%.

OKX announced that the final data on its reserves will be released in the coming weeks after scrutiny by an involved auditor. But immediately a list of addresses for BTC and ETH was posted to the official Twitter, confirming the presence of part of the exchange’s assets worth about $2 billion.

KuCoin CEO Johnny Lyu also announced that his exchange will provide proof of reserves “in about a month.” According to him, KuCoin will work with “authoritative auditing institutions” to make sure the proof of reserves accurately reflects the available assets.

Analytics platform Nansen has added a page to its interface with visually presented proof of reserves of crypto exchanges, decentralized autonomous organizations, and foundations. The wallet data is constantly updated, and Nansen encourages crypto services to join the initiative.