Powell is right saying Proof-of-reserve is pointless without proof of liabilities?
The collapse of Cryptocurrency Exchange FTX has attracted so much attention to Crypto Exchange Proof of Reserve. This FTX saga resulted in a loss of trust in the centralized exchange as a whole, and people are now calling for every crypto company to provide their Proof-of-reserve to regain user trust.
Proof-of-Reserve is a mechanism that shows that the crypto exchanges still hold their funds. Binance, Bitfinex, Kucoin, Crypto.com, OkX and Bybit have proven that they have already released their data, apart from the fact that we have seen many crypto companies have announced their support for this initiative to restore the trust of traders in centralized exchanges to win.
Coinmarketcap has added a Proof-of-Reserve tracker feature to the platform in support of this initiative to help track any exchange that has already released their data. We also heard another big support from Chainlink Labs. The labs provided proof of reserve audit services for Crypto exchanges and alerted everyone if something goes wrong with a centralized exchange.
Despite all these efforts of centralized exchange to regain the trust that was lost during the FTX saga, there is controversy whether the data released by the Crypto exchange is 100% accurate and transparent to their users. But from what Binance has added, I can't say it can't be true or not. Binance has released the Proof-of-reserve mechanism to verify users with multiple measures to increase transparency, involving external auditors to verify PoR results and implementing ZK-SNARKS. But this Merkel-Tree based only supports Bitcoin at the moment, so the question is: what about others?
This controversy goes so far that some of the Crypto exchanges that released data to publish included their borrowed funds, which is not supposed to be, and why one of the largest grayscale digital assets refused to release its wallet addresses by use security vulnerabilities as an excuse.
Even Jesse Powell, co-founder and CEO of Kraken, who has provided Proof-of-reserve data even before the FTX incident, also criticized some of the exchanges that have just released their data information. He said the information released failed to include liabilities
“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,” Powell said.
Well, there is a good reason for this Merkel-Tree based Powell response. I think he is trying to figure out how the Crypto space will be good and safer for investors in the future and this will ultimately help users to have more trust in centralized exchanges. Asking exchanges with a full audit of PoR records, customer commitments and verifiable cryptographic proofs that give the sum of each account will be necessary to build that trust, and Powell had this information about asset verification in relation to the liabilities of a company for Kraken even before the FTX saga.
There is no response yet from the crypto exchanges that have already released their data, whether they will include it in the future or not. Only Binance CEO CZ have defend the published data, and the amount of money transfer to unknown address as part of reserve. Further saying that the exchange is working to release an audit that verifies the data on the exchange's reserves in the future.
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