Several centralized crypto exchanges have indicated in recent days that they will offer proofs of reserves, a system that will allow users to check the amount of funds held on the platforms, but not necessarily their liabilities.
A “merkle proof,” a cryptographic tool that aids in the creation of a summary of funds in an exchange’s wallets and generates a proof that can be verified on-chain, all without exposing sensitive customer information, facilitates this.
The collapse of the FTX exchange, which most traders considered trustworthy, has eroded trust in centralized exchanges.
FTX CEO, Sam Bankman-Fried, never disclosed that the company was lending out customer deposits for venture investment and lending purposes. Much of the current skepticism is due to FTX’s mismanagement of customer funds.
According to a WSJ report, the exchange used about $10 billion of the $16 billion in customer deposits to finance other activities.
Binance, the largest crypto exchange by daily trading volume, provided a snapshot of its crypto wallet reserves, both internal and public facing, in an effort to be more transparent.
Nansen, an on-chain data provider, created a dashboard that displayed Binance’s reserves, which are currently worth more than $60 billion. Other exchanges want to follow suit and are working hard to assure users of their transparency.
Nansen’s research analysts are currently collaborating with exchanges to display their reserves proofs. According to Alex Svanevik, CEO of Nansen, his team has received requests from exchanges to display their proofs on its platform.
Given the pressing concerns about the backing and safety of funds on centralized exchanges, representatives from OKX, Crypto.com, Kucoin, and Bybit have stated that they will either publish a list of their crypto addresses or implement a proof of reserves system similar to that of Binance.