With cryptocurrency frauds seemingly on the rise, investors seem to have upheld the importance of financial accounting. From what it’s understood, Proof-of-Reserves (PoR), which refers to authentication of crypto deposits held by trading platforms through auditing methods, can enable transparency between companies and customers.
According to Binance, a cryptocurrency exchange, its PoR ensures legitimacy of crypto platforms through their 1:1 backing across digital assets belonging to customers. The process is done through the Merkle tree method, which helps to see the total amount of completed transactions through a digital fingerprint. “I believe PoR is a way where crypto exchanges and custodians can show their customers that they have a specific amount of cryptocurrency funds which can help in building trust and increasing transparency,” Edul Patel, founder and CEO, Mudrex, a crypto-investing platform, told FE Blockchain.
Market study has shown that PoR can be a tool for developing mainstream adoption of cryptocurrencies through betterment of cryptocurrency security practices. Insights from 101 Blockchains, a blockchain-based platform, mentioned that PoR’s demand increased post FTX debacle, as figures have shown a $10 billion discrepancy between user balances and assets in FTX accounts. It’s been further highlighted that PoR can provide assistance through asset custody verification, transaction balances’ clarity, building of users’ trust, among others.
“I think crypto industry is interdependent, with protocols and applications relying on each other to function. As a result, failures or security breaches in the ecosystem can have consequences. PoR can help mitigate these risks by providing a way for exchanges and other custodians to demonstrate their financial solvency,” Rajagopal Menon, vice-president, WazirX, a cryptocurrency exchange, mentioned.
Reportedly, cryptocurrency exchanges such as Coinfloor, Bitmex, Kraken, Gate.io and HBTC have completed their PoR formalities. Moreover, PoR has been backed by researchers to be made compulsory for sustaining cryptocurrency platforms in the long-run. As stated by BitPay, a cryptocurrency application, PoR can help with long-term growth of custodial cryptocurrency facilities.
“Customer interest and safety are believed to be at forefront of exchanges now. The establishment of PoR should be one of the first steps in this direction. The exchanges adopting this system can create an ecosystem for crypto investors,” Punit Agarwal, founder, KoinX, a crypto taxation platform, concluded.