Anyone who is interested in the world of crypto, or who has a stake in crypto, is encouraged to know all that they can about the new buzzphrase – proof of reserves. This article will provide a great introduction to this topic and some insights into the notion of reduced risk in the world of crypto.
Proof of Reserves
In a nutshell, proof of reserves is an audit conducted by a third party that can verify the crypto exchange’s balance sheet. The aim is to ensure that the crypto exchange has a one-to-one backing for any digital assets and crypto that it holds.
The exchange will either show and publish a proof of reserves report and, as done by OKX.com, it will also explain the report and then state exactly what crypto is held and perhaps show a Merkel tree to prove the e-wallets held on-chain and what the value of these are. This means that every customer will be able to identify their investment or cryptocurrency, its amount, and the fact that it is indeed held by the institution or exchange that they have been dealing with. It is a means of auditing that has changed how many people now view crypto and has gone a long way to increasing the demand for crypto.
This is the latest form of additional layered safety and security in the use, purchase, and trading of cryptocurrencies. There are also several key reasons why it’s critical to have proof of reserve.
No Long Waiting Periods for Withdrawals or Exchanges
The proof of reserves can ensure that, should the user or crypto owner want to withdraw their money or make an urgent exchange, it will be guaranteed and should be immediate. The fact that this information is provided in an audited independent report for the exchange that offers proof of reserves has made it one of the most important asked-for aspects of crypto exchanges in recent times. Knowing that the money or crypto is legitimately available at any time is incredibly reassuring, and has helped with the push toward crypto adoption.
Assurances for Clients and Crypto Owners
The proof of reserves provides crypto owners with assurances that their investment is secure and that the crypto exchange that they are dealing with can cover the crypto should there be a hack or attack. It is, therefore, as mentioned, the key aspect to the growth of crypto and will be the main reason that the FTX collapse is overcome and crypto remains strong.
The proof of reserves is a critical aspect of crypto trading and the validation of crypto exchanges that now proliferate the metaverse. One of the most interesting spin-off discussions has been whether proof of reserves and similar assurance audits should now be required and regulatory for all crypto exchanges. It is also something that will affect the peer-to-peer nature of any decentralized crypto trades, in that there may not be the same assurances provided.
