Since this week, Binance has had customers check whether the bitcoins they store at the exchange really belong exclusively to the customers. Binance, like many other crypto companies, uses a ‘Proof-of-Reserves’ for this. But there are some snags to this – Kraken CEO Jesse Powell even thinks the concept is pointless.
Proof-of-Reserves deliberate deception?
De top man writes on Twitter that Binance’s Proof-of-Reserves shows indifference or even deliberate deception. The world’s largest exchange uses so-called ‘Merkle Trees‘, a model with which you can demonstrate cryptographically that certain information is correct. They are also known as hash trees.
But Powell calls the system complete nonsense and emphasizes that under the guise of Merkle trees it is not noticeable that debts are not counted:
A statement of assets is meaningless without liabilities [te vermelden]. [Binance’ Proof-of-Reserves] says no more than ‘here’s your hash in the bitcoin spreadsheet [van de exchange]’. The whole point of this is to show that an exchange has more cryptocurrencies than it owes to customers. Adding a transaction receipt to a list is worthless without everything else.
This is simply “here’s a hash of your record in the BTC spreadsheet”. ok… but what’s the point? The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.
— Jesse Powell (@jespow) November 25, 2022
Proof of reserves is popular
vdifferent crypto exchanges have already announced or are planning to show a Proof-of-Reserves in some form. In addition to Binance, these include Bybit, Huobi and OKX, for example. Bitvavo is also planning it. On crypto data platforms such as CoinMarketCap, you can now also see what they have at some exchanges per asset, in a slightly more extensive way than what Binance now shows.
It is striking that Kraken itself also has such a function, despite the CEO’s criticism of it. Powell isn’t alone in his criticism either. Bank of America stated exactly the same; what you see is a snapshot, and it is not clear what debt an exchange has. In any case, Kraken often puts its best foot forward. The company says it is in favor of neutral regulation and of keeping your coins yourself.