A valid proof of solvency is the combination of two proofs:
- Proof of liabilities, that properly accounts for liabilities of a company in relation to the balance of all of its customers.
- Proof of reserves, that demonstrates the total amount of reserves a company has.
Learn more about these two types of proof here:
If Bitso were to issue a Proof of Solvency via a traditional method, we'd have to undergo a financial audit involving an independent third-party auditor to examine our financial statements and records. In this process, the auditor would typically examine our balance sheet, income statement, cash flow statement, and other relevant documents to gain a comprehensive understanding of our situation.
After a thorough review and assessment, the auditor would theme a report confirming or denying the solvency of the organization.
While the traditional method can provide a comprehensive assessment of an organization's financial health, it can be slow, time-consuming, and expensive. Assessments like this can't be made often, hence, you can't have proofs of solvency every month. In contrast, the Zero-Knowledge method can be more efficient, privacy-preserving in demonstrating solvency, and a proof can be generated even daily. That's possible thanks to the principles of the zk-proof: completeness, soundness and sealed.
When applying this cryptographic methodology, Bitso can provide a proof of solvency that can be confirmed without revealing all of that information to a third party. All an auditor needs to do is run the zk-SNARK protocol to come to the conclusion that the proof is true.
Additionally, a zk-proof of solvency can be validated by anyone using the zk-SNARK, not only auditors. Since it works based on a mathematical protocol, anyone utilizing it can confirm the proof issued.
In other words, using Zero-Knowledge technology to prove solvency can be faster, less costly and more private.
Learn more about the Zero-Knowledge technology here:
- What is a Zero-Knowledge proof (zk-proof)?
- How is Bitso providing a Zero-Knowledge proof?
- What is Bitso's solvency report? How should I interpret it?
- What is zk-SNARK?
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