Several of the largest crypto exchanges on the market have assured users they will soon publish proof of their fund reserves as fears of insolvency grew after the liquidity crisis of FTX.
The trend was started by Binance CEO Changpeng “CZ” Zhao, who on 8 November pledged to implement a Proof-of-Reserve mechanism in order to increase Binance’s transparency, and allow users to verify the exchange’s digital asset holdings. CZ also urged other industry players to follow suit and increase their transparency through the use of Merkle Tree reserve certificates.
Merkle Tree is a data structure used to encode blockchain data in a more secure and efficient way, and can be used by centralized exchanges to store each user’s asset information in a “leaf” node on the Merkle Tree. A third party can then audit the assets in the leaf nodes, verifying that all user holdings are present.
Cryptocurrency exchange Kraken — which implemented an “advanced cryptographic accounting procedure” back in February, enabling users to verify their assets — echoed CZ’s statement. OKX also stressed the importance of an “auditable merkle tree proof-of-reserve” via Twitter, noting that theirs will be published within 30 days. KuCoin also stated that this is a priority for them, and that their Merkle Tree proof-of-reserve will also be completed within a month. Justin Sun noted that Poloniex and Huobi “both have done it before”, and that Huobi was ready to conduct “a third” Merkle tree reserve test.