Without Liabilities, Binance's Proof-of-Reserves Are Useless: Kraken
After the fallout of FTX, several crypto exchanges have released their proof-of-reserves.
Proof of reserves is a way to verify that a platform has adequate assets to match the deposits made by its users.
Kraken CEO calls the proof-of-reserves useless if they won’t include liabilities.
FTX Collapse Highlights Importance of Proof-of-Reserves for User Funds
The collapse of the cryptocurrency exchange FTX highlighted the need for proof-of-reserves in averting circumstances involving the mismanagement of users' funds.
As a result, exchanges have begun to share wallet addresses to authenticate the existence of customers' assets. However, numerous entrepreneurs, like Kraken CEO and co-founder Jesse Powell, have called the practice "pointless" because exchanges fail to include liabilities.
Powell noted that a complete proof-of-reserve audit must comprise the sum of client liabilities, user-verifiable cryptographic confirmation that each account was included in the sum, and signatures demonstrating the custodian's authority over the wallets.
While Kraken's proof-of-reserve allows for the verification of assets against obligations, Powell continues to pick out other players who have failed to include accounts with negative amounts.
Powell previously chastised CoinMarketCap for publishing an incomplete proof-of-reserves that lacked cryptographic evidence of customer balances and wallet management. He underlined that reserves are assets minus liabilities, not a list of wallets.
Binance's recently released proof-of-reserves system enables customers to validate their assets using a Merkle tree. Powell, on the other hand, expressed his disappointment that the system failed to cover accounts with negative balances, claiming that:
“The goal is to determine whether an exchange has more cryptocurrency in its custody than it owes to clients. Putting a hash on a row ID is useless without anything else.”
Furthermore, he urged the media and journalists to avoid "overselling it and misleading consumers." Instead, he advised them to take the time to comprehend the reasoning behind proof-of-reserves.
Few community members, on the other hand, disputed Powell's need for a reliable auditor.
On November 19, Binance CEO Changpeng Zhao revealed that the company has begun working on developing a secure centralized exchange (CEX), a notion proposed by Ethereum co-founder Vitalik Buterin.
In this case, the best-case scenario would be to create a mechanism that prohibits crypto exchanges from withdrawing a depositor's funds without consent.
Read also: Binance’s Crypto Recovery Fund gets Increased to Over $2B
