The collapse of cryptocurrency exchange FTX has revealed the importance of evidence in avoiding situations involving the embezzlement of user funds. While exchanges have begun aggressively sharing wallet addresses to prove the existence of user funds, several entrepreneurs, including Kraken CEO and co-founder Jesse Powell, have warned that the exchange will be able to pay off its debt. It says the practice is “pointless” because it cannot be included.
According to Powell, a full on-holding audit includes customer liability totals, user-verifiable cryptographic proof that each account was included in the total, and proof that the custodian was in control of the wallet. It must contain a certifying signature. Kraken’s proof of reserve allows verification of assets against company liabilities, but Powell continues to call out other players who have missed including accounts with negative balances.
Sorry, no. This is not PoR. This is ignorance or willful misrepresentation.
The Merkle Tree is a hand-waving bullshit without an auditor to make sure no accounts with negative balances are included. A statement of assets is meaningless without liabilities. https://t.co/b5KSr2XKLB
— Jesse Powell (@jespow) November 25, 2022
Powell noted that in the past, CoinMarketCap has shared incomplete evidence of its reserves because it lacked “encrypted evidence of client balance and wallet management.” He reiterated that reserves are assets minus liabilities, not a list of wallets.
Binance recently released a Proof of Reserve system that allows users to validate their assets using Merkle trees. But Powell shared his frustration when the system failed to include accounts with negative balances.
“The whole point of this is to understand if an exchange is storing more cryptocurrency than it owes its clients. There is none.”
Additionally, he urged the media and journalists to refrain from “overselling it and misleading consumers”. recommended.
On the other hand, few community members disputed Powell’s need for a trusted auditor.
Related: Crypto exchange Kraken freezes FTX and Alameda accounts
On November 19th, Binance CEO Changpeng Zhao confirmed that it has begun work on building a secure centralized exchange (CEX) advocated by Ethereum co-founder Vitalik Buterin.
In this case, the best-case scenario is to build a system that does not allow cryptocurrency exchanges to withdraw depositors’ funds without their consent.
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