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The audit reports are made publicly available by the crypto exchanges, so users can access them to proof of reserve audit gain confidence in the exchange’s financial standing. On the other hand, blockchain oracles can conduct these audits in a completely decentralized manner.Oracles are systems that can provide smart contracts with real-world data from off-chain sources. For example, if you want a smart contract to execute an action when a specific real-world event occurred, you would need an oracle.

• PoR helps to increase transparency and accountability in the industry, as well as reduce the risk of fraud and insolvency.
• The Merkle root is the tamper-proof cryptographic fingerprint that auditors can access to verify the balance information.
• Proof of Reserves (PoR) does an excellent job of confirming that a crypto company has enough assets to handle its liabilities.
• The blockchain, as you may know, is a decentralized and transparent ledger that records all cryptocurrency transactions.
• Proof of Reserves audits give crypto exchanges the chance to be more transparent.

Why is Proof of Reserves important?

As the name hints, the Merkle tree involves distinct data combined into autonomous branches but bridged to https://www.xcritical.com/ a single root, known as the Merkle root. The recent collapse of FTX and the bankruptcy of crypto lender Celsius highlight the importance of verifying that the crypto custodians manage the funds responsibly. Our team of over 120 experts, including 60+ engineers, is certified in leading security standards like CCSSA, OSCP, and CISSP, providing the highest level of expertise and precision in our audits. With you at the helm, your private keys, and therefore your assets, are on course for smooth sailing.

Limitations of Proof of Reserves

Thus, registered financial organizations are legally bound to conduct audits regularly. ‘Proof of Reserves’ is a specific audit for crypto institutions wherein a third party assesses the assets they own against their debt, also known as “liabilities”. The third party will count up every asset an institution can prove they own. These types of assets may include fiat assets, such as dollars or euros, or crypto assets, such as bitcoin and ETH. Following that, the auditor will collect the data on the same institution’s debt and tally up the total.

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Some may think that a unifying federal framework for exchanges might simply require better custodial practices, making something like a PoR irrelevant. As for the CPA firms that oversaw PoRs — as far as I am aware, a list that consists entirely of Armanino and Mazars — they did not represent PoRs as “audits”. In all cases, the CPA-supervised PoRs were described as “Agreed Upon Procedures” engagements (see here for an example). The AICPA defines it as “an attestation engagement in which a practitioner performs specific procedures on subject matter and reports the findings without providing an opinion or conclusion. Typically, but not always, it’s done for the private benefit of some third party, rather than the general public.

Why is Proof of Reserve Important for Assets?

Proof of Reserves audits allow crypto institutions, such as centralized exchanges, to improve transparency in the unregulated market. The blockchain is transparent, meaning everyone can track every transaction in that account’s history. Accordingly, the only thing an exchange must do to prove ownership of its assets is to prove ownership of its wallets. While the whole aim is to become more transparent, tradFi institutions will only share this important information with stakeholders and board members. The objective of any audit is to provide an impartial assessment of an institution’s financial health.

Integrate the most reliable proof of reserves solution today for automated verifications that provide unparalleled transparency to your users. With proof of reserves, you can have peace of mind knowing that your funds are always protected and readily available when you need them. So, whether you’re dealing with traditional banks or emerging digital platforms, remember the importance of proof of reserves in safeguarding your financial interests. When it comes to ensuring the safety and security of funds in the world of crypto, proof of reserves is presented with a twist. To understand how this works, I need to tell you a bit about Merkle Trees and cryptographic proofs.

These days, the ZK-liability method is gaining market share, which is more privacy-preserving than the merkle method. This is a very common objection by folks in the industry who believe (mostly erroneously) that exchanges have already cheated PoR by borrowing funds. In fact, the recent Gate/Crypto.com transfer was not actually a case of window dressing to cheat a PoR (although it was weird and puzzling). The fact is that proving asset ownership means disclosing wallet addresses.

While digital assets offer a high degree of transparency, their inherent auditability has largely been overlooked. Proof of reserves is conducted by taking a snapshot of users’ account balances at a specified time. Therefore, the exchange can always borrow assets to manipulate the audit through unethical practices as it doesn’t track real-time data.

Asset IssuersVentures minting on-chain tokens backing off-chain or cross-chain assets can use our Proof of Reserve solution to ensure inflated token minting is impossible. It doesn’t trace back the origin of these assets or check if they were borrowed just for the audit. A “Proof of Reserve” uses a mini Merkle tree to show an exchange’s assets and liabilities on-chain. Plus, these detective reports (audits) give the decentralized finance (DeFi) ecosystem an extra blanket of safety and privacy. Users gain confidence in the knowledge that their platform’s liabilities and the amount of cryptocurrency they hold are backed by similar assets.

The independent auditor will compare the exchange’s finances with on-chain assets to see if the exchange has the real asset backing that it claims. It means that the auditor entirely relies on the data provided by the exchange while conducting the audit. There are possibilities of the exchange supplying false information deliberately or through negligence, resulting in the audit’s inaccuracy. The auditor must also ensure that the exchange owns all the addresses they gave.

In our technology-driven era, it’s obvious that we need a software solution to automate this process. A solution that cultivates a sense of trust and transparency in the DeFi industry. By using the Merkle tree technique this way, a “Proof of Reserve” audit ensures that everything’s on the up and up. It’s all about verifying that the institution’s holdings are accurate, and that customer funds are properly backed.

Additionally, service providers who regularly undergo proof of reserves audits demonstrate their commitment to compliance and are accountable for their actions. Whether you’re entrusting your hard-earned money to a traditional bank or a digital asset platform, you want to ensure that your funds are always protected. Similarly, in the world of cryptocurrencies, proof of reserves crypto audits can also be conducted by credible third-party firms. It is critical to conduct regular Proof of Reserve audits so that users’ trust is built, their assets are secure, and cashouts are efficient.

Unfortunately, this means you don’t really own the assets stored at the corresponding address. Instead, the centralized exchange keeps control of the private keys on their platform, meaning they can revoke access to your account at any time. By leveraging data generated by professional auditors, Chainlink PoR provides smart contract applications with collateralization data regarding the off-chain reserves of fiat-backed stablecoins. As an example, the TUSD Reserves provides DeFi users and applications with data regarding the reported offchain reserves for TUSD, as well as the supply of TUSD tokens minted across multiple blockchains. There are no formally accepted rules or procedures that define a proof of reserves audit.

Since pioneering PoR audits in 2019, Hacken has conducted numerous audits for industry leaders such as Gate.io, Crypto.com, and Bybit. Our proven PoR methodology ensures complete transparency by validating on-chain assets against user liabilities, providing exchanges with the tools to build user trust and ensure solvency. Proof of reserve (PoR) is like a receipt that shows a crypto exchange has the digital assets it claims to hold for its users. PoR proves the solvency and liquidity of a centralized custodian and assures investors that the custodian can fulfill their withdrawal requests when the need arises.

Receive a detailed, easy-to-understand audit report that provides a transparent snapshot of your platform’s financial health, along with actionable insights for continuous improvement. Ensure the integrity of staked assets, prevent double-counting, and verify validator set security for a transparent staking process. Ledger’s hardware wallets are the prime example of safety and accessibility. Your private keys are safely stored on a physical device only you can access. Further, Ledger’s secure element chip ensures your assets are safe from physical and software hacks.

These audits verify that the bank’s declared reserves match the amount of money their customers have deposited. The purpose of these audits is to ensure that the bank is not engaging in fraudulent or risky practices, such as lending out more money than it should. So, the whole idea behind “Proof of Reserve” is to make sure there are actual, real-life assets backing up the digital coins. It’s all about addressing any concerns about how transparent the assets held on crypto exchanges are. Custodial platforms reigning the crypto space keep their users’ assets in a hot wallet, which is used to serve withdrawal requests of users. A portion of the user’s deposits is then safely kept in cold wallet storage.

All of the big four as well as RSM, in my esteem, have the technical competency to undertake a PoR but have thus far appear to have been unwilling to on a perceived risk basis. Proof of Reserve sounds better, and Solvency is a much higher bar to clear. Ideally a PoR would be paired with a full accounting of liabilities, known and hidden, and stronger solvency assurances would be obtained.