Is Binance’s Proof-of-Reserves Pointless Without Liabilities?

Cryptoslate | Oluwapelumi Adejumo | Nov 28, 2022

Unsplash Bastian Riccardi Crypto - Is Binance's Proof-of-Reserves Pointless Without Liabilities?

Image: Unsplash/Bastian Riccardi

Former Kraken CEO Jesse Powell criticized Binance’s Proof of Reserve, calling it an “ignorant or intentional misrepresentation.”

  • Powell argued that the Merkle Tree was pointless if there were no external auditors to ensure that the exchange did not include accounts with negative balances. He added that “the statement of assets is pointless without liabilities.”
  • Popular crypto investor Vinny Lingham tweeted on Nov. 27 that exchanges should publish their Proof-of-Liabilities alongside their Proof-of-Reserves. According to him, some exchanges could have liabilities beyond their deposits.

See:  Grayscale Won’t Share Proof of Reserves | Bitvo Escapes FTX | (Some) DeFi Platforms Benefit from CEX Exodus

  • James Lavish, the author of The Informationist newsletter, wrote that Powell’s view required third-party auditors, which means trusting human sources of information. According to Lavish, previous trusts in such parties have not turned out well for the community.
  • CZ Responds: Binance has plans to involve third-party auditors later on, and the exchange proof of reserves does not include negative balances.

The whole point of this is to understand whether an exchange has more crypto in its custody than it owes to clients. Putting a hash on a row ID is worthless without everything else.

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