Why Crypto and Binance Needs Proof of Liabilities And Less PoR Smoke and Mirrors

After the FTX collapsed, centralized exchanges pledged to release proof-of-reserves to boost user confidence. Binance, the largest crypto exchange by trading volumes, has released a PoR mechanism, but the crypto community is unsatisfied.

Binance releases a proof-of-reserve mechanism

The exchange issued an announcement on its website outlining how users could use the PoR mechanism to verify their holdings. The Binance Merkle-Tree-based system currently supports Bitcoin only. However, the exchange said that support for more coins would be added in the coming weeks.

Binance has also added that it will take more measures to boost transparency, such as involving third-party auditors to audit the PoR results and implementing ZK-SNARKS. Binance announced the intention to have a PoR mechanism after FTX collapsed and released public details of its wallet addresses thereafter.

Binance is joining the list of exchanges releasing proof to show users that they still hold their funds. Bitfinex, OKX, KuCoin, Crypto.com, and Bybit have already released their proof of funds.

Other crypto firms have announced their support for this initiative. Chainlink Labs offered to conduct PoR auditing services for exchanges in the space to build traders’ confidence in centralized exchanges. Crypto price tracker CoinMarketCap also added a PoR Tracker feature for exchanges that have released the data.

Despite these efforts, there is controversy over whether the data that these exchanges have released is factual and whether they are being 100% transparent with their users.

Controversy over exchanges’ PoR data

Some of the exchanges criticized because of their PoR information include Gate.io and Huobi. These exchanges published data that included loaned funds. Grayscale, the largest digital asset manager, has also hesitated to release wallet addresses because of security concerns.

The co-founder and CEO of Kraken, Jesse Powell, has said that providing the PoR data was “pointless”, adding that exchanges deliberately failed to include liabilities.

Powell has added that a complete audit of the PoR data was needed, including the client liabilities and verifiable cryptographic proof that every account was included in the sum. Signatures were also needed to prove that the custodian had control over wallets.

Kraken started offering proof-of-reserves data even before the collapse of FTX. The Kraken proof-of-reserve system supports the verification of assets against the liabilities of a company, and Powell is now calling out the exchanges that are deliberately failing to include this data.

“I’m sorry but no. This is not PoR. This is either ignorance or intentional misrepresentation. The merkle tree is just hand wavey bullshit without an auditor to make sure you didn’t include accounts with negative balances. The statement of assets is pointless without liabilities,” Powell said.

Binance has defended the data, with the CEO, Changpeng Zhao, saying that the exchange would release an audit verifying the data on the exchange’s reserves. $2 billion worth of Bitcoin has been transferred from Binance to an unknown exchange, with CZ saying that the transaction was part of the audit.

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