Crypto number exchanges are rushing to publish proof of reserves in an apparent attempt to reassure investors that their funds are as safe as any other exchange FTX melts.
Proof of reserves (PoR) are independent third-party audits that aim to provide transparency and evidence that a custodian holds the assets it claims to hold on behalf of its clients. Auditors then summarize the balances into something called a Merkel treewhich includes all customer balances.
FTX exploded this week after a CoinDesk report which showed a June 30 balance sheet of its trading subsidiary, Alameda Research, is largely comprised of FTX’s native token, FTT. All this could have been avoided with PoR, Sergey Nazarov, co-founder of Chain linktold TechCrunch.
“There was a problem with the balance, and it became known to many depositors at once,” said Nazarov. “And because it was a surprise, there was a bank run that led to insolvency.”
But imagine if investors knew what FTX and Alameda Research’s balance sheets were from the start.