Customers and investors lost billions after the sudden collapse of FTX and a spate of crypto businesses, and they don’t seem to be making any progress toward recouping those losses any time soon. Customers scrambled to withdraw their money as the news jolted the unstable cryptocurrency market. It’s concerning that some cryptocurrency exchanges have seen such a high volume of withdrawal requests in just 48 hours.
This single action makes it quite clear how disheartened many cryptocurrency users are as a result of the events between crypto holders and the FTX exchange. Although no exchange would knowingly keep billions in customer dollars and risk a similar disaster, it does happen.
How, then, have major cryptocurrency trading platforms responded to this development? Is Binance’s PoR mechanism a workable solution for dealing with the issue? Binance has released a new website detailing its proof-of-reserves, which are denominated in Bitcoin initially.
What Happened to the Transparency Promised in Crypto Space?
The mystery of FTX’s demise keeps revealing previously unknown but critically important business details. Many crypto investors were left wondering what happened and why they couldn’t withdraw funds from their accounts despite having a positive balance.
There were rumours that FTX had transferred billions of dollars’ worth of cryptocurrencies to its sibling trading company just before it collapsed. This is reportedly the reason why FTX is unable to fulfil all of its users’ requests for cryptocurrency withdrawals at once.
How then did FTX’s “care” for its clients’ accounts lead to the loss of their money and other valuables? This has caused widespread panic because it is both unprecedented and unjust for a customer of a cryptocurrency exchange to be denied access to their own assets.
This proves that the bitcoin market is less transparent than was previously supposed, which increases the need for transparency. Customer complaints about cryptocurrency growth emphasise the critical need for a speedy solution to the lack of disclosure issue.
Some of the largest cryptocurrency exchanges have taken bold measures to protect their reputations and the trust of the bitcoin industry. If they do this, it will be clear that they care about the safety of their clients’ property. The majority of major cryptocurrency exchanges, including Binance, have heeded the crypto community’s request for more openness.
The fundamental solution is to provide evidence of reserves. By implementing proof of reserves in a single step, Binance opens up the cryptocurrency market to public scrutiny. Bybit has recently released a Merkle Tree-based proof-of-reserve mechanism, following in the steps of Binance in response to the industry’s demand for greater transparency.
What is Binance Bitcoin Proof of Reserves (PoR)?
Binance’s “proof of reserves” (POR) approach aims to provide a transparent audit of users’ reserves.
After the FTX collapse, CZ, CEO of Binance, proposed this as a solution for the crypto communities. CZ claims that by including proof of reserve, Binance gives users an accurate representation of the funds stored in reserve. The startup is beginning with Bitcoin reserves exclusively but plans to add other proof-of-reserve tokens in the future. Furthermore, it plans to release a proof-of-reserve report for ETH, USDT, USDC, BUSD, and BNB in the near future.
How Does it Work?
Independent auditors are responsible for the POR. The auditors use a cryptographic technique called the Merkle tree to reduce massive amounts of data to a single hash. Each account’s hash value is represented as a Merkle root on the Binance exchange.
After logging in, users can validate the audit type, view their Merkle Leaf and Record IDs, and check their audit date. Because of this, the audit day asset balances, your Record ID, and the assets it covers will be permanently ingrained in the database.
What are the Objectives of Proof of Reserves?
Making the cryptocurrency industry much more transparent is one of the main goals of the proof of reserve. Users can compare their deposits to their balances using POR audits. Other objectives of the POR include the following:
- Users can use it to check that the exchange’s reserve contains their cryptocurrency exchange balances.
- PoR aims to increase user trust, which is already at an all-time low following the FTX scandal.
- To make it more difficult for exchanges to engage in dubious or illegal financial activity with crypto holders’ assets.
- The goal of proof of reserve is to eliminate the possibility that companies will try to get the highest possible yield and other returns from their holdings of customer assets.
- POR shows all deposits made by its users, preventing exchanges from mismanaging users’ assets.
Who Benefits From Proof of Reserves Integration?
At its core, proof of reserves is meant to help both buyers and sellers of cryptocurrency. Cryptocurrency projects aim to deliver a transparent, decentralised, and trustworthy financial platform.
Users and markets should both stand to gain from POR. The BitcoinX trading app benefits businesses by reducing security risks, just as it benefits traders during trading.
Exchanges can use proof reserves to explain to consumers how their funds are being managed in the background. As a result, people will have more faith in and confidence in the crypto sector.