Proof of Reserves (PoR) Definition
Proof of Reserves (PoR) is a process that enables cryptocurrency exchanges and wallet services to provide evidence to the public that they have sufficient funds to cover the value of the customers’ digital assets they hold in storage.
Proof of Reserves Key Points
- Proof of Reserves is a transparency protocol for crypto exchanges and wallet services.
- To prove solvency, a service must prove it holds more than what is owed to customers.
- PoR is not an official requirement in the crypto industry, but adopted voluntarily by trustworthy businesses.
- There is no standard PoR protocol, but a few common methods are used.
What is Proof of Reserves (PoR)?
Proof of Reserves originated due to the unique need for increased transparency in digital asset management. Unlike traditional banking systems, where regulatory bodies can perform audits to ensure solvency, cryptocurrency exchanges and wallets operate largely under self-regulation. Therefore, the PoR emerged as a self-imposed transparency mechanism to provide evidence of solvency, highlighting that the provider holds sufficient assets to cover its customers’ balances.
Why is Proof of Reserves (PoR) Needed?
The need for PoR is rooted in the need for trust in cryptocurrency services. After several instances of crypto-exchange fraud and bankruptcy, the crypto community had a demand for increased transparency and security. PoR serves as a trust-building tool that enables service providers to prove that they are solvent and capable of refunding customer deposits if needed, thereby increasing user confidence.
When is Proof of Reserves (PoR) Used?
Although not a mandatory regulation, some cryptocurrency exchanges and wallets voluntarily use PoR as an ongoing transparency measure. Typically, they are used when customers or stakeholders need assurance about the organization’s solvency or in response to ransomware attacks or hack attempts.
Who Needs Proof of Reserves (PoR)?
Both users of these services and the service providers themselves need PoR. Users need it for assurance that their funds are secure, while service providers need it to build trust with their customers, maintain their reputation, draw in potential users, and remain competitive in the market.
How Does Proof of Reserves (PoR) Work?
There is no standard PoR protocol and different services use different methods based on their business model and particular circumstances. However, there exist common methods like publishing the total balances and permitting customers to match their individual balances, utilizing blockchain analytics companies, or using a Merkle tree to create a combined, hashed proof. Despite the method, the essence remains the same- provide evidence to customers/stakeholders that they have the funds to cover customer deposits.
