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Proof-of-reserves: Can reserve audits avoid another FTX-like moment?

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cointelegraph.com

In the wake of the FTX collapse that came about as a result of the now-bankrupt cryptocurrency exchange funneling user funds to mitigate its own risks, crypto exchanges came up with a transparency solution called proof-of-reserves.

A practice, which was recently endorsed by Binance CEO Changpeng Zhao, offers a way for exchanges to show provide transparency to users in the absence of clear regulations.All crypto exchanges should do merkle-tree proof-of-reserves.

Banks run on fractional reserves. Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.Proof of reserves (PoR) is an independent audit conducted by a third party that seeks to ensure that a custodian holds the assets it claims to own on behalf of its clients.

This auditor takes an anonymized snapshot of all balances held and aggregates them into a Merkle tree.A Merkle is a cryptographic commitment scheme in which each “leaf,” or node, is labeled with a data block’s cryptographic hash.

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