Some cryptos exchanges are rushing to publish proof-of-reserves in an apparent effort to reassure investors that their funds are safe if fellow exchange FTX melts.
Proof-of-reserves (PoR) are independent third-party audits that aim to provide transparency and evidence that a custodian holds the assets it claims to hold on behalf of its clients. Accountants then aggregate balances into a so-called Merkle tree, which entails all client balances.
FTX exploded this week after a CoinDesk report revealed that the June 30 balance sheet of its affiliate trading company, Alameda Research, consisted largely of FTX’s native token, FTT. All of this could have been prevented with PoR, Sergey Nazarov, co-founder of Chainlink, told TBEN.
“There was a balance problem and it became known to many depositors at once,” Nazarov said. “And because it was a surprise, there was a bank run that led to insolvency.”
But imagine if depositors knew from the beginning what the balance sheets of FTX and Alameda Research were.