In the wake of the FTX Sam Bankman-Fried fiasco, many questions surrounding the future of crypto have included the need for more stringent regulation. Many in the Crypto word have scoffed at heavy government involvement overseeing digital assets from the start.
But with the massive proliferation of blockchain technology over just 5 years and the implosion of many crypto firms, it was only a matter before governments start seek greater involvement. One way to show more transparency in digital assets is with proof of reserves audits.
What are Proof of reserves?
Proof of reserves is a verification process used to prove that a cryptocurrency exchange or wallet provider has the amount of cryptocurrency they claim to have. This is done by providing evidence of their holdings, usually in the form of a digital audit that can be viewed by customers and regulators.
Why are Proof of reserves important?
Proof of reserves is important in the cryptocurrency world because it provides transparency and helps to protect investors. Without proof of reserves, there is no guarantee that an exchange or wallet provider has the amount of cryptocurrency they claim to have, making it difficult to trust them with your funds.
The types of Proof of reserves
Proof of reserves can take various forms. The most common type is a cryptographic proof, which involves a third-party auditor verifying the exchange’s or wallet provider’s holdings. This type of audit is conducted using tools such as cryptographic algorithms and hash functions, which are used to compare the exchange’s or wallet provider’s ledger to a public blockchain.
Other types of proof of reserves
Other types of proof of reserves include cold storage, which refers to the exchange or wallet provider storing a large portion of their funds in offline wallets. This ensures that the funds are not accessible to hackers and also provides an additional layer of security.
Finally, some exchanges and wallet providers opt to use a combination of both cryptographic proof and cold storage to provide additional protection for their customers’ funds.
Proof of reserves is an important part of the cryptocurrency world, as it provides a level of trust and assurance for customers and regulators. Without proof of reserves, it would be difficult to know if an exchange or wallet provider was legitimate or not, making investing in cryptocurrency a risky proposition.