Crypto Exchanges Rush To Provide Proof-of-Reserves Following FTX Crisis

After the liquidity issue of FTX, consumer fears of insolvency have increased, but some of the major cryptocurrency exchanges on the market have reassured that they will soon reveal confirmation of their cash reserves.

As reported earlier on CoinGape, CZ, CEO of Binance, initiated this trend when he announced on November 8 that he will build a proof-of-reserve method to boost Binance’s transparency and enable consumers to check the exchange’s holdings of digital assets. CZ invited other industry participants to adopt the same strategy and employ Merkle Tree reserve certificates to boost their transparency.

All crypto exchanges should do merkle-tree proof-of-reserves.

Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.

— CZ 🔶 Binance (@cz_binance) November 8, 2022

Gate.io’s Patent To Be Open-sourced

Gate.io has announced that it will open-source its patented proof-of-reserves verification method in an effort to drive the adoption of transparent operating procedures among mainstream crypto exchanges. This would help in ensuring millions of crypto investors around the world receive an added level of security.

Gate.io became the first mainstream exchange to openly submit to an independent third-party audit to showcase its Proof-of-Reserves in 2020. Dr. Lin Han, founder and CEO of Gate.io further stated that,

“As the industry’s first exchange to offer Proof-of-Reserves using Merkle Trees, Gate.io will disclose our technical solutions and open source the code used to the entire industry for free.We want to promote transparency and healthy development practices for the entire industry”

Other Crypto Exchanges Follow Suit

Kraken, a cryptocurrency exchange that enabled users to authenticate their assets in February by implementing a “sophisticated cryptographic accounting method,” echoed CZ’s assertion.

On Twitter, OKX emphasized the significance of an “auditable merkle tree proof-of-reserve” and stated that theirs will be available in 30 days. Additionally, KuCoin said that they are prioritizing this and that their Merkle Tree proof-of-reserve will be finished in a month.

Justin Sun stated that Huobi was prepared to carry out “a third” Merkle tree reserve test and that Poloniex and Huobi “both had done it before.”

But What is a Merkle-tree?

A Merkle tree, commonly referred to as a Hash tree, is a type of data structure used for data synchronization and verification. It is a tree data structure where each non-leaf node is a hash of its child nodes. It maintains data integrity and uses hash functions for this purpose.

Merkle-tree Applications:

Merkle trees are useful in distributed systems where the same data should exist in multiple places. It can be used to check inconsistencies. And therefore, Merkle-trees find their profound use in bitcoin and blockchain as well.