What is Proof of Liabilities? Is it enough?

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Liabilities refer to the total sum of customer balance in Bitso. In other words, they represent all combined balances clients hold in their Bitso accounts, with the aggregated of the individual amounts owed to each of our clients. 

Therefore, the Proof of Liabilities is a method that aims to provide transparency on the total amount of user deposits in the exchange. This is important because every single balance must always be at our customer’s disposal in case they ever require to make use of their funds.

This can be achieved by generating a Merkle Tree Root Hash assembled by combining individual “leaf” hashes representing each balance. Although a Merkle Tree is a more complex method to generate Proof of Liabilities, it is more reliable in terms of the privacy of user's data.

Through this method, clients are able to confirm that their exact balance, backed on a 1:1 ratio per coin they hold, actually exists within the calculation of combined balances contained in the Merkle Tree.

Most Proof of Liability reports today provide trust by engaging an independent third party, such as an auditor, to recreate the Merkle Root hash by replicating all individual “leaves” based on user deposits and balances.

 

Is it enough?

Although it seems appropriate, relying on a trusted third party to validate that all data contained in the Merkle Tree is correct has a shortfall. Here's why:

  • Proof of Liabilities is only valid for the specific point in time in which the audit was undertaken. This means that clients can’t verify that an exchange has an updated version of their liabilities at all times and depend on the audit’s periodicity to trust the data’s reliability.
  • Proof of Liabilities doesn’t prove actual ownership and control of the keys to funds either. Hence, showing accountability for liabilities doesn’t show that the exchange holds the keys to move funds out of those wallets.

 

The Proof that Matters:

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