Crypto glossary
Proof of reserves
Proof of reserves is a check showing that a custodian such as an exchange holds enough crypto on-chain to cover what it owes its customers.
A typical proof of reserves has two parts. The exchange proves control of a set of wallets, for example by signing a message or moving funds, so the assets can be verified on the blockchain. It also publishes a Merkle tree of customer balances, which lets each user check that their own balance was included without revealing anyone else's. Some versions use zero-knowledge proofs to show that no balance is negative and the total adds up.
Proof of reserves became widespread after the collapse of FTX in November 2022, when major exchanges began publishing reports, often with an accounting firm attesting to them. Stablecoin issuers publish similar reserve attestations for the assets backing their tokens.
The method has limits. A snapshot can be dressed up with borrowed funds on the day it is taken, and showing assets says little about debts the company owes elsewhere. A full audit of assets and liabilities, published regularly, gives a much clearer picture.
Example
An exchange reports 100,000 BTC in user balances and proves control of wallets holding 103,000 BTC, a reserve ratio of 103%; each customer can verify their own balance in the published Merkle tree.
Related terms
Latest articles on Proof of reserves
- Unitas Launches Real-time USDu Proof of Reserves
- Binance Confirms Massive Crypto Holdings in Latest Proof of Reserves
- Gate Boosts Trust as Proof of Reserves Shows 124% Coverage
- VALR Successfully Completes Proof of Reserves Audit by Hacken
- Binance’s Proof of Reserves Highlights $120B Asset Pool and Growing Bitcoin, Ethereum Holdings
