Proof of Reserves - What The Heck Is This All About, and How Will It Help Us?

“Merkle Proofs” Put The Screws to Crooked Centralized Crypto Exchanges

The recent FTX disaster has shown the crypto world that it's time for exchanges to step up and prove they aren’t running a complete scam on the people they claim to serve. So, they came up with Proof of Reserves - a fancy way to show they actually have the assets to cover our crypto deposits.

How the heck does this work? Exchanges use something called “Merkle Proofs” to show that their assets match up with our deposit balances. Basically, they anonymously publish a list of our balances using cryptography, so we can check to see if our money is actually there.

To make sure the exchange is legit, an “on-chain auditor” can take a snapshot of the exchange's balances and include them in what they call a “Merkle Tree” report. This makes it possible for customers to verify their own balances against the information in the tree. It's like a digital detective checking if the exchange is telling the truth.

Vitalik Buterin, the braniac Ethereum dude, has written about this in great detail. You can Google his articles if you’re really wanting to dig into the nerdy nuts and bolts of it all and get to the expert level.

But in short, “Proof of Reserves” simply stated is the new standard to make sure centralized exchanges ain't trying to pull a fast one on us like our altruistic champion, Mr. Scam Bank-Run Fraud. Obviously, this is a desperate need during these days of the Wild, Wild West of crypto.

Be careful out there.

Carlton Flowers
The CryptoPro

https://www.youtube.com/c/CryptoProCarlton