Proof of Reserves
What does Proof of reserves mean?
Proof of reserves (PoR) is a method used by cryptocurrency exchanges and other financial institutions to demonstrate that they have the assets on hand to at least match up with their customer’s balances. This is usually performed by a third-party auditor in which an independent proof of reserve auditor verifies that the audited company is sufficiently liquid and solvent.
Principally, proof of reserves is an important concept in the cryptocurrency industry, as it helps to ensure the institutions’ transparency and accountability to their customers and the public. It is done to build trust and credibility, which is essential for a healthy and sustainable business.
Proof-of-Reserves is done using the ‘Merkle Tree, allowing anyone to cryptographically verify that the institution holds their funds and that their account balances are included in the PoR.
Which Centralized Exchange uses Proof of reserves?
The most prominent example is Binance as it has deployed a proof of reserve method recently in November 2022. And most recently, ByBit, a well-known cryptocurrency exchange that launched PoR method a few days back in December 2022 allows its users to verify ByBit’s holdings along with their personal assets deposited into the exchange.
Some examples of cryptocurrencies that use proof of reserves exchanges to demonstrate that they have sufficient reserves of various cryptocurrencies to meet the demands of their users are Kraken, BitMEX, Bitfinex, and ShapeShift.
Does DeFi need proof of reserve?
With the real-world adoption of Decentralized Finance comes a growing demand for new types of collateral other than native on-chain assets, for instance, USD-backed stablecoins, cross-chain tokens, tokenized equity and more.
As developers in the Decentralized Finance space continues to build more revolutionary financial products in the digital asset ecosystem, a more transparent and automated proof of reserve process is required. This brings us to "Chainlink Proof Of Reserve"
What is Chainlink proof of reserve?
Chainlink is a decentralized oracle network that allows smart contracts to securely access off-chain data feeds, web APIs, and traditional bank payments. It is designed to provide a secure and reliable connection between smart contracts and external resources, such as data feeds and other APIs by utilizing a network of nodes to retrieve and validate data before it is written to the blockchain.
Chainlink’s proof of reserve crypto enables real-time auditing of collateral ensuring that users’ funds are protected from fraudulent activities from off-chain custodians. To provide proof of reserve, Chainlink generally creates a smart contract on a blockchain that allows users to verify the balance of the assets in their reserve. The smart contract typically includes a list of the assets being held, along with the total amount of each asset. Users can then use this information to verify that the assets are being held as claimed.
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