Definition of the Proof of Reserve
Proof of Reserve (PoR) is a methodology for proving the holding of assets on the blockchain, demonstrating proprietary cryptocurrency assets that stock exchanges, wallets, or financial institutions are likely to have in their possession. It is an independent audit conducted by a third party and used to prove that an economic entity has assets in the quantities it specifies. This methodology will increase customer confidence in the reliability of the firm providing the cryptocurrency storage platform and establish that the organization is not stealing or using the funds for its purposes.
FTX and Binance’s Case Revolving Around the Proof of Reserve
FRT’s business provided exchange services to store and circulate cryptocurrency to users, but in November 2022, the company collapsed due to token theft, credit, and solvency issues. The CoinDesk report demonstrated that FRT was withholding funds from customers who used the exchange to store cryptocurrency; this report set off a chain of events undermining FRT’s credibility and subsequent bankruptcy. In this case, the proof of reserve was essentially the CoinDesk report, as it proved FRT’s hidden activities and the mismatch between the company’s assets and the current accounts they held. Since FRT was Binance’s main competitor, the company sought to take advantage of this and stated the possibility of buying FRT’s business, not in the USA, but their audit showed the deal to be unprofitable.
Binance’s actions can be considered proof of reserve, as the company analyzed the FRT business, which was available for sale, and found inconsistencies in the volume of cryptocurrency that was declared. Consequently, Binance rejected the deal and began to point to the need for greater business transparency, which can be achieved through proof of reserves and the subsequent correction of irregularities. Binance is now turning to account firms to determine the clarity and integrity of customer deposit retention, accounting, and security – the main charges made by FRT.