What Is Proof of Reserves (PoR)?
Also known as: Proof of Reserves, PoR
In short
Proof of Reserves (PoR) is a verification process that aims to show, through cryptographic methods and auditing, that a cryptocurrency exchange or custodian truly holds enough assets to cover its users' balances.
A typical proof of reserves consists of two parts. The exchange first discloses the wallet addresses it owns or proves control of these addresses with signed messages; this way, the assets on-chain can be seen by everyone. Then, user balances are placed in a Merkle tree in which each user can check that their own balance is included in the total. The assets are expected to be equal to or greater than the total liabilities shown at the root of this tree.
The concept gained great importance after the collapse of FTX in 2022; the revelation that user funds had been used for other purposes led many exchanges to publish regular reserve reports. Some exchanges try to protect user privacy in this process by using zero-knowledge proofs.
The limits of proof of reserves are important. Most implementations show only the state at a specific moment; assets can be borrowed just before the measurement and returned afterward. The exchange's off-chain debts and other liabilities are generally out of scope, so proof of reserves is no substitute for a full financial audit. Keeping assets in a wallet under your own control is an alternative approach that removes the counterparty risk tied to the exchange.
Last updated: · This content is for information purposes only and is not investment advice.