The Proof of Reserves, also known as Proof of Funds or Proof of Assets, is one of the proofs an organization needs to provide to show solvency. It consists in proving that the organization actually holds the total amount of assets it claims to have. Such a proof can be achieved by providing a list of wallets wherein the exchange claims they hold funds under custody, also referred to as their reserves.
Is it enough?
The Proof of Reserve shared by most exchanges isn’t enough to grant their clients the transparency and trust they deserve for the following reasons:
- It doesn’t prove actual ownership and control of the keys to those wallets. Simply pointing out wallets with assets doesn't mean that the organization holds the keys to move funds out of those wallets.
- It doesn't prove that these reserves are enough to cover liabilities. Even if the organization owns the keys to move funds off of the wallets it lists, if the reserves are smaller than the liabilities, it isn't solvent – that is, clients can't withdraw the entirety of their funds simultaneously.
That's why, at Bitso, we sign messages in a blockchain to demonstrate that we own the keys for the addresses we claim to own.
Nonetheless, to preserve privacy, we apply a cryptographic protocol to these messages, known as zk-SNARK, so the proof is provided without revealing sensitive information, like the addresses of the wallets.
You can learn more about the zk-SNARK protocol and proof of solvency here:
- What is Proof of Solvency?
- What is zk-SNARK?
- Applying the Zero-Knowledge technology to prove solvency
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