The recent events in the crypto market highlighted the significance of proof of reserves is for preventing the theft of customer funds. Several business owners, including Kraken’s CEO Jesse Powell, have criticized the practice of exchanges proactively providing wallet addresses to establish the presence of users’ assets, calling it “pointless” since exchanges fail to incorporate liabilities.
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Powell argues that a proof-of-reserve audit needs to contain the total amount of client liabilities, consumer’s cryptographic proof that each account was included in the total, and also signatures establishing the custodian’s authority over the wallets.
While Powell acknowledges that Kraken’s proof of reserve does permit verification of assets versus the company’s liabilities, he continues to call out other competitors who have neglected to include accounts with negative balances. In addition, Kraken has recently frozen accounts associated with FTX and Alameda.
In the past, Powell has criticized CoinMarketCap for providing insufficient proof of reserves due to the lack of “cryptographic proof of client balances and wallet control.” He underlined that cash on hand is not a list of wallets, but rather assets minus liabilities.
CZ Responds To Kraken CEO’s Concerns
Binance recently made a proof-of-reserves system available, which uses a Merkle tree to validate a user’s holdings.
Powell, however, agreed that it was a disappointment that the system did not take into consideration accounts that had a negative balance. Instead, he cautioned reporters and editors against “overselling it and misleading consumers.”
He suggested that they instead take the time to learn why evidence of reserves was necessary in the first place.
To address questions posed by Jesse P,
In the report 👇, "Upcoming Plans: Involve third-party auditors to audit PoR results", for this PoR result.
I said multiple times publicly, the bottleneck was the auditors has a few weeks wait. We move forward in incremental steps. 1/2 https://t.co/BTNa2rl3XB
— CZ 🔶 Binance (@cz_binance) November 26, 2022
CZ’s reaction to Kraken CEO’s concerns received great feedback from the community. Whereas CZ encouraged “questions and checks,” other users pointed out the absurdity of disabling public discussion on the post.
CZ announced on November 19 that it had begun developing Vitalik Buterin’s proposal for a secure centralised exchange (CEX).
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