The collapse of FTX, one of the major crypto exchanges, sent shockwaves through the digital asset space.

With the liquidity issue being one of the main contributors to the FTX crisis, the proof-of-reserves concept has taken over the cryptocurrency sector, with more exchanges gearing up to show more transparency. Cryptocurrency exchange Gate.io explained:

“What is Proof of Reserves? An audit by a third party that ensures a custodian owns the assets it claims. A snapshot of all held balances is taken and added to a Merkle tree, a privacy-friendly data structure that encapsulates the balances.”

As a data structure, a Merkle tree or Hash tree calls for data verification and synchronization. Therefore, it uses hash functions for data integrity and transparency purposes.

Binance CEO Changpeng Zhao (CZ) pushed the proof-of-reserve trend after noting that it would boost the crypto exchange’s transparency over its digital asset holdings. The fixed:

“All crypto exchanges should do merkle-tree reserve testing. Banks run on fractional reserves. Crypto exchanges shouldn’t. Binance will start testing reserves soon. Total transparency”.

Market analyst under the pseudonym Tajo Crypto said:

“After the FTX incident, CZ Binance introduced proof of reserve to help users know exactly how exchanges handle their funds and avoid bank runs. Many exchanges were quick to adopt the proof-of-reserves concept and promised to be more transparent.”

Binance published its latest proof of assets, which includes more than 125,000 Bitcoins and 9,900 Ethereum and 1,250,000,115 Tether tokens. Meanwhile, Crypot.com said his company will publish its audited proof of reserves, CEO Kris Marszalek said in a tweet, noting that transparency is more important than ever at this critical time for the industry, according to Bloomberg.

The rain began to hit FTX due to its lack of transparency in the cryptocurrency reserve. Therefore, proof of reserve seeks to inform the general public, especially depositors, whether deposits match user balances.

Lucas Nuzzi, head of research and development at CoinMetrics, acknowledged that the FTX bailout of his research arm Alameda has come back to haunt the exchange. The said:

“I found evidence that FTX could have provided a massive bailout for Alameda in Q2 which is now back to haunt them. 40 days ago, 173 million FTT tokens worth over $4 billion went live on chain. A rabbit hole appeared.”

Source: LucasNuzzi

For his part, market insight provider Nic Carter believes that proof of reserves coupled with proof of liability equals proof of solvency. He pointed:

“Proof of reserves is the idea that custodial companies that have cryptocurrency they must create public-facing certifications as to their reservations, along with proof of user balances (liabilities). The equation is simple (in theory): Proof of Reserves + Proof of Liability = Proof of Solvency.”

Meanwhile, Binance has revealed that it will not proceed with the acquisition of FTX, reported Blockchain.News.

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