Blockchain

Following FTX's recent bankruptcy announcement, proof of reserves or PoR has never been more relevant. Discover how it could alter the crypto landscape.

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If there's one thing we can all agree on, it's that 2022 has been a rough year for everyone in the crypto industry — traders and exchanges alike. Unfortunately, the bearish streak doesn't look to be ending any time soon. Following the FTX saga, which culminated in a 

, proof of reserves, or PoR, has been thrust into the spotlight. 

What exactly is PoR, and why does it matter?

 refers to a background check (or an independent audit) conducted on crypto exchanges by a third-party auditor. This advanced cryptographic accounting procedure uses a structure called a 

, which breaks down complex data into smaller, more digestible chunks for faster and more efficient processing.

The end goal is to ensure that the exchange is financially stable, and carries an amount either equal to or greater than the sum of the clients' balances.

Ensures 100% Transparency & Protects Client Assets

Laying everything on the table deters a crypto exchange from making secretive financial transactions, such as loaning out more money than the collateral it holds and risking 

. In doing so, the clients’ assets are protected as well.

Proof-of-reserve audits provide an unbiased and completely honest picture of a crypto exchange's funds/financial backing, thereby helping users make more informed decisions. The presence of a PoR reassures users that their money is backed by real assets — while a larger user base translates to greater potential profit, making it a win-win situation.

The Trigger: FTX's Collapse: What Is FTX, and What Happened?

On November 2, 2022, the balance sheet of one of the biggest exchanges in the world — FTX — was leaked. With it came the revelation that its funds/reserves consisted largely of its native token, 

 The issue is that FTT is printed directly by FTX and Alameda Research… Meaning the value of the exchange was likely to have been inflated, with many misled into thinking FTX was doing better than it actually was.

Due to unspecified “recent revelations,” Binance CEO Changpeng Zhao said his firm would liquidate its holdings of FTT. A stop was put to FTX withdrawals on November 8, 2022. The same day, Binance offered to buy out FTX, but withdrew its offer the very next day. On November 11, FTX officially announced that it had filed for Chapter 11 bankruptcy in the U.S., with its CEO Sam Bankman-Fried resigning from his position.

Due to Solana’s association with Bankman-Fried and his firm, Alameda Research, the price of 

 also took a beating. As of November 14, 2022, 1 SOL token is now valued at less than half of what it was a month ago (October 14, 2022), tumbling from the $30 range to around $13.

Since FTX announced its bankruptcy, the industry has plunged into a state of frenzy. In a bid to soothe frazzled nerves, crypto exchanges worldwide — including Coinbase, Binance and Bybit — have either made their Merkle tree reserve certificates public, or plan to do so in the near future.

In a tweet dated November 9, 2022, Ben Zhou, CEO of Bybit, reassured clients that Bybit has always [been] committed to client fund safety and guarantees 1-to-1 reserves.

With more crypto exchanges jumping aboard, proof of reserves will hopefully be cemented soon as a standard practice in the industry. In the meantime, if any of your assets are stored directly on crypto exchanges, consider transferring them over to hardware wallets (

Overall, proof of reserves is just one criterion with which you can assess the trustworthiness of a crypto platform. As the saying goes, an ounce of prevention is worth a pound of cure. We encourage you to be proactive by reading up on ways in which 

Proof of Reserves (PoR): Rethinking The Exchange-User Dynamic

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