Coinbase’s cbBTC uses PoR to verify that for every wrapped Bitcoin, an equivalent amount is securely held in Coinbase’s custody. PoR audits can verify asset holdings but do not account for liabilities, which can mislead users about an exchange’s solvency. Proof-of-reserves (PoR) audits have become a vital tool in the cryptocurrency industry to promote transparency and security, especially in the wake of high-profile exchange collapses like FTX. While similar in concept to traditional banking capital adequacy requirements, PoR audits come with certain limitations, especially in their inability to verify liabilities and their reliance on periodic reports. This article explores PoR audits, their role in crypto and their evolution into more robust models for ensuring exchange solvency.
Key takeawaysPoR audits are cryptographic verifications used by cryptocurrency exchanges to prove they hold sufficient assets to cover customer deposits. Using methods like Merkle trees and zero-knowledge proofs, PoR ensures transparency, similar to how capital reserves are mandated in traditional finance for stability.
PoR audits use cryptographic methods like Merkle trees to verify that exchanges hold sufficient assets to cover user deposits, but they don’t prove solvency, as they don’t account for hidden liabilities. These audits are designed to verify that cryptocurrency exchanges and custodians actually hold the assets they claim on behalf of their users.
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Author / Journalist: Cointelegraph by Arunkumar Krishnakumar
The story "What are proof-of-reserves audits, and how do they work?" has 1483 words across 70 sentences, which will take approximately 7 - 13 minutes for the average person to read.
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