The ideal situation would be building a system that prohibits crypto exchanges from withdrawing a depositor’s funds without permission.
The FTX crypto exchange collapse highlighted the necessity for proof-of-reserves to prevent users’ funds being illegally appropriated. In spite of proactively providing wallet addresses to demonstrate the presence of users’ funds, several entrepreneurs, including Jesse Powell, the CEO and co-founder of Kraken, said that the practice was pointless because exchanges failed to include liabilities.
Powell believes that an account proof-of-reserve audit must include the sum of client liabilities, cryptographic proof that each account was included in the sum, and custodian signatures proving control over the wallets. While Kraken’s proof-of-reserve does give users the ability to verify assets against the company’s liabilities, Powell continues to point out other players that have ignored accounts with negative balances.
Jesse Powell, a Bitcoin developer, denied that PoR is real. He said there are two possibilities: either the user is unaware of PoR or he is intentionally misleading others. He said that the merkle tree is just hand waving bullshit without an auditor to make sure you didn’t include accounts with negative balances. The statement of assets is also meaningless without liabilities.
Powell said in the past that CoinMarketCap shared an incomplete proof-of-reserves without “cryptographic proof of client balances and wallet control.” He stated that reserves are not the list of wallets but the sum of assets minus liabilities.
Powell was unhappy that Binance’s proof-of-reserves system did not include negative account balances, and stated that:
He also requested the media and journalists to be careful not to mislead consumers by overstating the importance of proof-of-reserves. Instead, he urged them to study the motive behind proof-of-reserves.
In contrast, few community members denied Powell’s need for a trusted auditor.
On Nov. 19, Binance CEO Changpeng Zhao revealed that he was working on a centralized exchange (CEX) venture, based on a proposal by Ethereum co-founder Vitalik Buterin.
The ideal situation in this case would be to build a system that does not allow crypto exchanges to withdraw a depositor’s funds without permission.