What are the different types of Proofs of Reserves?
You might have heard of Proof of Reserves (PoR) but did you know there are actually different types of PoR, each giving more weight to different aspects? In this article we'll cover what these are, in simple terms. 👇
Frequency
Proof of Reserves is a method that allows cryptocurrency exchange or custodian to prove they have enough funds to cover their users' deposits. PoRs should always provide information such as the amount and value of digital assets and any liabilities – but how often they are published makes a difference. Some custodians do it once or twice a year, some once or twice a week.
- Integrating PoR into the exchange or custodian's accounting system allows them to more easily produce frequent and accurate PoR reports.
- PoR do not require a third-party auditor and can therefore be produced on a more frequent basis than traditional audits.
- Frequent PoR allow to make sure the custodian really does own the funds it claims it has and reduce the risk of window dressing.
OKX currently publishes its Proof of Reserves on a monthly basis:
- OKX January PoR
- OKX February PoR
- OKX March PoR
Cryptography
Some exchanges and custodians use Merkle Tree Proof of Reserves, which relies on a mathematical technique called hashing. First, the exchange calculates a hash of the user's account balance and adds it to the Merkle tree. Then the exchange publishes the root hash of the Merkle tree, which is a single hash summarizing the entire tree. The user can then take the root hash to verify that their account balance is included in the Merkle tree, without revealing their actual balance.
- The Merkle Tree PoR is a trustless method to build greater transparency between the exchange and the user.
- It provides an efficient verification process for the user to ensure their account balance is included in the Merkle tree.
Merkle Trees do come with privacy tradeoffs, however, and can leak some metadata. This is why OKX and other exchanges are now exploring Zero Knowledge (ZK) proofs, in order to improve the privacy of their Proof of Reserves.
Learn more about what ZK proofs are and how they can improve PoRs.
Security
An important element of PoR lies in keeping customers' assets safe. Exchanges usually break down the funds between multiple wallets, sometimes tens of thousands, and use multi-signature wallets – which require multiple private keys to access. This also allows users to check the addresses on the blockchain to ensure the exchange holds enough funds to cover all of its users' deposits. In the case of OKX for example, you can check our Nansen dashboard to verify the assets we store.
NOTHING IN THIS ARTICLE IS A SOLICITATION TO BUY OR SELL DIGITAL ASSETS. OKX DOES NOT ENDORSE ANY PARTICULAR DIGITAL ASSET OR STRATEGY. DIGITAL ASSETS HOLDINGS INVOLVE A HIGH DEGREE OF RISK, CAN FLUCTUATE GREATLY ON ANY GIVEN DAY, AND MAY EVEN BECOME WORTHLESS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING OR HOLDING DIGITAL CURRENCIES IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. OKX DOES NOT PROVIDE LEGAL, TAX, INVESTMENT, OR OTHER ADVICE. PLEASE CONSULT YOUR LEGAL/TAX/INVESTMENT PROFESSIONAL FOR QUESTIONS ABOUT YOUR SPECIFIC CIRCUMSTANCES.
