Binance proof of reserves is ‘meaningless without liabilities:’ The CEO of Kraken
A full proof-of-reserve audit, according to Powell, must comprise the sum of client liabilities, user-verifiable cryptographic confirmation that each account was included in the sum, and signatures demonstrating the custodian’s authority over the wallets.
The demise of the cryptocurrency exchange FTX highlighted the need for proof of reserves in avoid circumstances involving the misuse of users’ cash. While exchanges have begun to share wallet addresses to authenticate the presence of customers’ assets, numerous entrepreneurs, like Kraken CEO and co-founder Jesse Powell, have dubbed the practice “pointless” because exchanges fail to include liabilities.
A full proof-of-reserve audit, according to Powell, must comprise the sum of client liabilities, user-verifiable cryptographic confirmation that each account was included in the sum, and signatures demonstrating the custodian’s authority over the wallets. While Kraken’s proof of reserve allows for the verification of assets versus obligations, Powell continues to single out other players who have failed to include accounts with negative amounts.
I'm sorry but no. This is not PoR. This is either ignorance or intentional misrepresentation.
The merkle tree is just hand wavey bullshit without an auditor to make sure you didn't include accounts with negative balances. The statement of assets is pointless without liabilities. https://t.co/b5KSr2XKLB
— Jesse Powell (@jespow) November 25, 2022
Powell previously chastised us for releasing insufficient proof of reserves because it lacked “cryptographic proof of customer balances and wallet control.” He underlined that reserves are assets minus obligations, not a list of wallets.
Binance’s newly launched proof-of-reserves technology enables customers to validate their assets using a Merkle tree. Powell, on the other hand, expressed his disappointment that the system failed to cover accounts with negative balances, claiming that:
“The entire purpose of this is to determine whether an exchange has more cryptocurrency in its custody than it owes to clients.” Without everything else, putting a hash on a row ID is pointless.”
Furthermore, he urged the media and journalists to avoid “overselling it and misleading consumers.” Instead, he advised them to take the time to comprehend why they needed proof of reserves.
Few community members, on the other hand, disputed Powell’s need for a reliable auditor. In response to the accusation, Binance CEO Changpeng “CZ” Zhao rejected it by discussing Binance’s plans, which include third-party auditors auditing the exchange’s proof-of-reserve findings.
CZ’s answer to Kraken’s CEO’s concerns received great feedback from the community. Some members, however, pointed out the inconsistency in CZ’s decision to disable public comment on the post that encouraged “questions and checks.”
On November 19, CZ revealed that it had begun work on developing a secure centralized exchange (CEX), a notion proposed by Ethereum co-founder Vitalik Buterin.
In this case, the best-case scenario would be to create a mechanism that prohibits crypto exchanges from withdrawing a depositor’s funds without the depositor’s consent.