The importance of Proof of Reserves

Umbrella Network building a solution toward transparency.

The recent FTX collapse has shaken the industry, and has put a spotlight on the need for organizations like Centralized Exchanges to be more transparent. Trust has been lost and must be restored.

As stated by Binance CEO Changpeng Zhao, or CZ, a few days ago, there must be public proof of reserves to ensure customer funds integrity and a return to normality in the industry.

Proving the liquidity of protocols or exchanges is critical to regaining trust. Merkle Trees can be part of the solution.

Proof of solvency and beyond

Following on CZ’s post,

Ethereum’s Vitalik Buterin released a PoC for Proof of Solvency.

https://hackmd.io/@vbuterin/proof_of_solvency

The concept is another step towards addressing this problem with cryptographic techniques for crypto companies and projects, may they be Centralized Exchanges or DeFi applications.

A Merkle sum tree architecture is one of the tools considered alongside ZK SNARKS to ensure transparency, accountability as well as privacy.

Umbrella’s Merkle Tree architecture

Umbrella Network is well positioned to tackle the proof of solvency problem given 1) our Merkle tree architecture 2) our ability to process large volumes of data efficiently and 3) our community network of validators. Our Umbrella Network’s Oracle is a layer-2 solution which leverages a decentralized network of validators who are responsible for gathering data from different sources (off-chain and on-chain) and come to a consensus about what is the right value for each data point supported by the oracle. Values are merkelized and stored as Layer-2 data (L2D).

In Umbrella Network’s Oracle, each leaf on the Merkle tree represents a data point. The Merkle Root Hash is a unique identifier for the entire set of transactions within the Merkle tree. A proof of authority consensus is conducted on each individual leaf of the Merkle Tree. The validator designated as the leader for the round is responsible for submitting the Merkle Tree root hash. Third party smart contracts can run the root hash proof for any L2D injected into the blockchain.

More technical information about Umbrella Network’s Merkle Tree architecture can be found here.

Collaborative solution

Most applications for proof of solvency will need to handle a huge amount of wallets and balances securely. Merkle Trees are perfectly suitable to compress large volumes of data.

Umbrella Network already utilizes Merkle trees within its architecture, and is well positioned to apply it to proof of solvency. Our strength lies in the consensus run amongst Umbrella’s validators and in anchoring the root hash on-chain.

Umbrella Network is working with various CEX’s and technology partners to explore Vitalik’s PoC in more detail and develop a solution for this critical trust issue.

Others in the industry who wish to collaborate whether you are a technology partner or a CEX looking for a solution, please feel free to contact us at ed@umb.network.

About Umbrella Network

Umbrella Network is a scalable, decentralized, and community-owned oracle that utilizes Layer 2 technology to integrate real-time data into smart contracts for accurate and timely reports. Umbrella Network brings the world’s data to blockchains to enable DeFi applications to perform at the optimum level regarding precise information dissemination. It believes a decentralized oracle is paramount to creating a truly decentralized financial space.

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