Cryptocurrency exchange firm Binance has released a new site explaining its proof of reserves system. The company is starting with reserves of BTC. At this time, Binance has a reserve ratio of 101%. It means that the company has enough bitcoin to cover all user balances.
This move comes a couple of weeks after the collapse of FTX, another popular cryptocurrency exchange. In the case of FTX, the company faced a cash crunch. It stopped processing withdrawals because it was unable to meet the demand from investors and end users.
Since then cryptocurrency companies, and cryptocurrency exchanges in particular, have tried to be more transparent about user funds. It means sharing more information about hot and cold wallets. But there is still a lot of work to be done before you can fully trust cryptocurrency exchanges and how they handle funds.
A few weeks ago, Binance started sharing wallet addresses with billions of dollars worth of cryptocurrencies. With this move, the company has shown that it really does hold a lot of assets and can process a lot of withdrawals. But the company hasn’t clearly stated whether it’s user assets, or Binance’s balance sheet, or a mix of both.
With today’s new proof-of-reserve site, Binance clarified this point by stating that BTC wallets included in the proof-of-reserve system do not include Binance’s own funds.
“It is important to note that this does not include Binance’s corporate holdings, which are held on a completely separate ledger,” the company says. You will have to take Binance’s word for it as you cannot verify this with a blockchain explorer.
Binance is starting with BTC holdings. Adding up the amounts in each Binance wallet is easy. When it comes to user assets, the company uses a Merkle tree to include all individual user accounts and generate a cryptographic seal.
As of November 22 at 23:59 UTC, Binance users collectively held 575742.4228 BTC, or approximately $9.5 billion at today’s exchange rates. And Binance had enough bitcoin in their wallets to cover 101% of these funds. In other words, if everyone withdrew their BTC at the same time, Binance would have enough BTC to process all withdrawals.
Thanks to the Merkle tree, individual users can use the root hash to check if their accounts are included in the user balance snapshot. Binance says it includes users’ balances on various products: Spot, Funding, Margin, Futures, Earn and Options Wallets. The company also provides a short Python script so you can check yourself.
“Given recent events, it is understandable that the community will demand more from cryptocurrency exchanges, far more than is currently required of traditional financial institutions. That’s why we’re delighted to provide this latest feature for our users to verify their funds,” said Binance founder and CEO Changpeng Zhao ‘CZ’ in a statement. “Because Binance’s user community is exponentially larger than the next largest exchange, this is a huge undertaking and it will take a few weeks to develop the data for the majority of our assets under custody. We are working to get the next update as quickly as possible to meet community expectations.”
The company already has plans to release similar test reserve information for ETH, USDT, USDC, BUSD, and BNB in the future. Binance offers hundreds of different cryptocurrencies, so we hope they can cover withdrawals for lesser-known cryptocurrencies as well.
Likewise, the firm should partner with independent financial and security audit firms so that you don’t just have to trust the firm blindly. There is still a long way to go, but at least today’s new reserve test system is a step in the right direction.
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