Glossary

A proof of reserves (PoR) is an independent third-party audit of an exchange’s reserves done via a mathematical data structure known as the Merkle tree.

A proof of reserves (PoR) aims to check the integrity of customers' balances held by the custodian through an independent audit of the exchange’s reserves conducted by a third party via the Merkle tree.

 is a privacy-focused mathematical data structure, consisting of hashes of various data blocks, that helps to streamline the blockchain data encrypting process. With the Merkle tree, users can easily verify specific transactions without having to download the entire blockchain.

With a branching structure, the Merkle tree consolidates all transaction data, from the bottom leaf nodes and non-leaf nodes up to the top hash, called the Merkle root. The Merkle root then acts as a cryptographic fingerprint, representing all of the stored data. Data that has been tampered with can be easily detected by comparing the nodes with the Merkle root.

In PoR, the auditor first takes an anonymous snapshot of all held balances on the exchange and combines them into a Merkle tree. Next, the auditor collects the customers’ digital signatures, verifying the balances against those stored in the Merkle tree to ensure that all assets are completely stored in the reserves. 

If needed, customers can also verify that their assets are included in the Merkle tree PoR by comparing select data with the Merkle root.

Hence, through the implementation of a Merkle tree PoR, an exchange’s holdings can be made fully transparent to the public.

Proof of Reserves (PoR)

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