Proof-of-Reserve 🗂️

Banks are regulated and compelled by government authorities to report how much assets they have in their annual reporting so that customer funds are not jeopardised. But how do crypto exchanges and custodians, which are not regulated by the government, provide this assurance? The answer is Proof-of-Reserve, Lets set the scene 🚀

What is Proof-of-Reserve?

A Proof of Reserve (PoR) is an independent audit conducted by a third party to ensure that a custodian (such as a centralized crypto exchange) actually has, in its ownership, the assets it says it has.

With a Proof of Reserve, customers don’t just have to take their word for it but have indisputable assurance of that claim, going back to the core tenet of crypto–“don’t trust, verify.”

Why Should You Care That Your Crypto Exchange Has Proof-of-Reserve?

Proof-of-reserve ensures that crypto custodians, exchanges and lenders do not engage in secretive financial transactions that put their customers’ funds at risk.

How does Proof-of-Reserve work?

What makes Proof of Reserve work is something called a “Merkle Tree” (also called “hash tree”). A Merkle Tree provides a cryptographically secured (i.e. tamper-proof) method of verification of assets on reserve.

As a hash-based data structure, it is hypersensitive to the smallest change and can thus be used to prevent data fraud and manipulation.

That's it for the day nerds, Web3Shala Signing Off ✌🏻

Have a nice day :)Keep Learning 🙏🏻