Proof of Reserves
An audit method by which an exchange shows it holds enough assets to cover what customers are owed.
The technique pairs a cryptographic snapshot of customer balances, often a Merkle tree, with on-chain proof of the exchange's holdings. Match the two and, in theory, every deposit is backed.
Demand for it exploded after FTX failed in November 2022 with an estimated 8-billion-dollar hole. Many exchanges rushed to publish attestations. The honest critique: most show assets but not liabilities, so they prove reserves exist without proving debts don't exceed them. A full audit covers both sides.
Related terms
A structure that hashes transactions in pairs up to a single root, letting you verify one without all.
CustodyThe safekeeping of crypto assets and the private keys that control them, often handled by a regulated third party.
Centralized Exchange (CEX)A company that runs an order book, holds your funds, and matches buyers with sellers for a fee.
On-ChainData or activity recorded directly on a blockchain, visible to anyone and validated by the network.