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What Is Purpose behind Binance’s Proof of Reserves Website?

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by Andy Watson · 6 min read
What Is Purpose behind Binance’s Proof of Reserves Website?
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Binance has already started the PoR system with BTC, and the company plans to release reserves for different coins like BNB, ETH and USDC in the future.

Binance, the top crypto exchange in the world, has recently launched a website dedicated to its proof-of-reserves system. The company started with BTC reserves, stating that other coins will be added in the following weeks. According to Binance, Proof-of-Reserves (POR) describes the assets held in custody for crypto users. They prove that the exchange’s funds can cover all the users’ assets. Currently, Binance has a BTC reserve ratio of 101%, which clearly shows that there’s sufficient supply. More specifically, on the 22nd of November, users held 575742.4228 BTC – which translates into $9.5 at the current exchange rate, and Binance was able to process all of these funds. This means that the exchange can cover all the withdrawals if all users withdraw their BTC simultaneously.

Wise Move after the Collapse of FTX

After the downfall of FTX – a popular crypto exchange, several other companies have taken action to increase transparency regarding users’ funds. FTX experienced a liquidity crisis and could no longer process withdrawals because the demand from end users and investors was too significant to handle. After the company collapsed, around 1 million creditors suffered losses of billions of dollars. No one ever wants to go through such a devastating experience; users want to know they are safe when using an exchange for their crypto investments. Fortunately, those who want to buy bitcoin can now rest assured this won’t happen with their funds, as Binance launched proof of reserves as a way to commit to transparency and show users that the ecosystem is reliable. The company has continuously upgraded the platform to ensure a smooth experience for users and provide all the information they need to invest in crypto effectively. For instance, on the Binance platform, users can view real-time data on Ethereum price, which can help them decide whether it’s the right time to trade their ETH.

Understanding PoR

PoR or proof of reserves refers to a transparent auditing practice that allows crypto companies to provide an unbiased report of their assets in reserve. A third-party auditor performs proof of reserves by creating a snapshot of the company’s balances. This shows that the crypto company can’t run out of assets when it comes to covering its liabilities at every moment. This helps build customers’ trust, as they are offered a guarantee that the company doesn’t risk facing a liquidity crisis, and thus, they can keep withdrawing their funds whenever they want. Proof of reserves is based on a secure data structure called Merkle tree, designed with users’ privacy in mind. The aggregate data can be accessed through the Merkle root, allowing auditors to verify the balance information. Since PoR is based on blockchain technology, it is a safe auditing method that doesn’t expose users’ personal data.

The Pros of PoR Audits

Simple cash flow analysis isn’t 100% effective because it doesn’t cover every aspect, such as unaccounted liabilities. However, PoR provides an accurate picture of users’ balances, thus benefiting crypto exchanges significantly by helping them gain people’s trust. Hence, proof of reserves ensures increased transparency and quality. But it has yet another advantage: it’s a crucial safeguard against cybersecurity threats targeting the crypto industry. PoR audit equally benefits users and custodians – while consumers can use it as a powerful instrument to audit their asset reserves, custodians earn users’ trust, which increases user retention.

Moreover, PoR is also appealing to regulators, and that’s because it’s a self-regulating measure that aligns with their overall vision of the industry. Ultimately, proof of reserves creates a win-win situation for everyone involved: the crypto industry, users and even the government.

How Users Can Verify Their BTC Holdings

There are two ways crypto users can verify their BTC holdings: through the trading platform using a provided link or via Binance’s Merkle Tree. As Binance explained, users must log into the exchange, click ‘wallet’ and then’ audit.’ After doing this, the exchange will generate a personal record ID, confirming their assets are covered while proving the asset’s balance during the audit period. Binance further stated that users can go one step further and verify their funds themselves by using a python application and copying the source code there.

Binance Puts Users’ Experience at the Forefront

Binance has proven to be a reliable exchange throughout time, and that’s mainly because they value customers’ experience and thus, they always strive to improve it. They have made several operational changes over the years with the purpose of better-addressing user needs.

A critical factor impacting user experience in the crypto universe is the exchange they use to trade their crypto assets. There’s a lot to consider when choosing an exchange, such as fees, reputation, profitability, and of course, security. Users want to know they can rely on an exchange and that their coins are safe at all times.

The ideal exchange should always provide clarity to users; everything from the terms and conditions to the fee schedule should be as understandable as possible. It should ensure that users’ funds are safely stored and no one can access their personal information. Other crypto exchanges should embrace the user-focused approach, too, as this is the key to building trust within the crypto ecosystem. If another crypto exchange collapsed, investors would lose faith quickly, which would be a huge step backward – and nobody wants that. Thus, it’s imperative to take the right steps to avoid such a scenario. Boosting transparency is necessary now more than ever in the aftermath of the FTX collapse in order to restore confidence in the long run and prevent periodic runs.

Final Thoughts

Proof of reserves is the right step in ensuring the safety of customers’ funds. It proves that companies have sufficient liquidity, putting users’ minds at ease, as they don’t have to worry about losing significant amounts. Binance has already started the PoR system with BTC, and the company plans to release reserves for different coins like BNB, ETH and USDC in the future. Given recent events, there’s no doubt that the community will expect more from crypto exchanges, and prioritizing transparency is necessary to ensure the crypto market will still flourish.

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