In the bustling world of cryptocurrency, trust is paramount.
Yet, as the digital landscape expands, so do the shadows that cast doubt on the platforms where we trade and store our digital assets.
The recent collapse of the FTX exchange was a stark reminder of the vulnerabilities inherent in centralized systems, intensifying concerns about the safety of other exchanges.
Amidst a whirlwind of online rumors, skepticism, and outright fear, it’s essential to separate fact from fiction and tread with caution.
Understanding “Proof Of Reserves”
Imagine walking into a bank and asking the manager to show you all the money they claim to have.
In the world of cryptocurrency exchanges, this is called “Proof of Reserves.”
It’s a digital mechanism allowing exchanges to demonstrate they possess the coins or tokens they claim.
If an exchange hesitates or fails to provide this proof, it’s akin to a bank admitting a shortage of funds—a glaring red flag for any investor.
However, even this “proof” can sometimes be misleading, with some exchanges using creative accounting or other tactics to present a rosier picture than reality.
“The PoR relies on a snapshot of assets at a given date. This means that, even if properly executed, the picture drawn by PoR is only valid at a specific point in time; this ignores what might have happened before and after that point.”
For example, some exchanges appear to be pooling together resources as needed to prove their reserves equal a total, moving assets around to each other when it’s their turn.
Major accounting form PWC released a great report on this, check it out here.
What’s more, Proof of Reserves is only a recently implemented mechanism, gaining popularity since FTX’s collapse in 2022, that many exchanges still don’t publicly provide.