Binance proof-of-reserves is useless without liabilities

by Nov 26, 2022CryptoNews0 comments

A full proof-of-reserve audit, according to Powell, must comprise the total of client liabilities, user-verifiable cryptographic confirmation that each account was included in the amount, and signatures demonstrating the custodian’s authority over the wallets. The demise of the cryptocurrency exchange FTX highlighted the need for proof-of-reserves in averting circumstances involving the misuse of customers’ cash.

While exchanges have begun to share wallet addresses to authenticate the presence of customers’ assets, numerous entrepreneurs, like Kraken CEO and co-founder Jesse Powell, have dubbed the practice “pointless” because exchanges fail to include liabilities.

A full proof-of-reserve audit, according to Powell, must comprise the total of client liabilities, user-verifiable cryptographic confirmation that each account was included in the amount, and signatures demonstrating the custodian’s authority over the wallets. While Kraken’s proof-of-reserve allows for the verification of assets versus obligations, Powell continues to single out other players who have failed to include accounts with negative amounts.

Powell previously chastised CoinMarketCap for releasing an inadequate proof-of-reserves that lacked “cryptographic evidence of customer balances and wallet management.” He underlined that reserves are assets with fewer obligations, not a list of wallets.

Binance’s recently launched proof-of-reserves system enables users to validate their assets using a Merkle tree. Powell, on the other hand, expressed his displeasure that the system failed to include accounts with negative balances, stating that:

“The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.”

Furthermore, he urged the media and journalists to avoid “overselling it and deceiving customers.” Instead, he advised them to take the time to comprehend the reasoning behind proof-of-reserves.

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Few community members, on the other hand, disputed Powell’s need for a reliable auditor. Following up on the claim, Binance CEO Changpeng ‘CZ’ Zhao rejected it by revealing the exchange’s next plans, which include third-party auditors auditing the exchange’s proof-of-reserve findings.

CZ’s answer to Kraken CEO’s concerns garnered great feedback from the community. Some members, however, pointed out the inconsistency in CZ’s decision to ban public comment on the article that encouraged “questions and checks.”

Kraken, a cryptocurrency exchange, has frozen accounts associated with FTX and Alameda.

On November 19, CZ revealed that it had begun work on developing a secure centralized exchange (CEX), a notion proposed by Ethereum co-founder Vitalik Buterin.

In this circumstance, the best-case scenario would be to create a mechanism that prohibits crypto exchanges from withdrawing a depositor’s cash without agreement.

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