Proof-Of-Reserve (PoR)
Required reserves are the minimum funds that a bank must maintain in a checking account at the central bank or at a correspondent bank. Banks cannot use it to make loans. The amount of reserve funds varies according to the mandatory reserve ratio set by the central bank. Banks are regulated and forced by government authorities to report how much assets they have in their annual reports, so that customer funds are not compromised. In crypto currency this minimum reserve is referred to as Proof-Of-Reserve.
What is Proof-Of-Reserve?
Proof of Reserve is an independent audit conducted by a third party to ensure that a custodian (such as a centralized crypto exchange) actually owns the assets it claims to own. Currently, most other CEX centralized exchanges, such as lenders and custodians, store their asset data in private and proprietary databases. As such, they can claim that their users’ funds are safe, but these claims are difficult to verify.
Why is Proof-Of-Reserve important?
Proof-Of-Reserve ensures that crypto custodians, exchanges and lenders do not engage in confidential financial transactions that compromise their customers’ funds. As well as ensuring that crypto lenders don’t lend more money than they have collateral, so their lenders can be fully compensated if something happens.
Proof-Of-Reserve ensures that crypto exchanges:
- Not secretly bankrupt
- Will not secretly place user coins in third parties who may go bankrupt
- Guarantees users to be able to withdraw their funds whenever they want.
The following is data from Proof-Of-Reserve on several active Exchanges :
The first position is still held by the Binance exchange with reserves of $ 72 billion and the second position by Bitfinex with $ 7.95 billion. The more mandatory reserves an exchange has, the more liquid the exchange will be in paying funds or making loans. Ranking and history can deceive an exchange are liquid or not.
