Yesterday, the leading crypto exchange Binance announced that it had added eleven new tokens to its Proof of Reserves (PoR) system. The tokens include Dogecoin, MASK (Mask Network), CHR (Chromia), Enjin Coin, SSV (SSV.network), 1INCH (1inch Network), GRT (The Graph), CVP (PowerPool), Hashflow (HFT), WRX (WazirX) and CRV (Curve DAO Token).
With this update, Binance's reserve swelled to more than $63 billion stored in 24 assets. The largest part of the reserve fund consists of Bitcoin, Ether, and Tether.
The addition of new assets to PoR followed another upgrade - the introduction of zero-knowledge verification method zk-SNARKs in February, which, according to Binance's February 10 blog post, "allows one party, the prover, to demonstrate to another party, the verifier, that the prover had executed certain computations accurately with certain inputs under certain constraints, all without disclosing the inputs."
Crypto companies use PoR to prove that their customers' deposits are backed 1:1. A common PoR system is based on a Merkle tree cryptographic technique, in which a single hash value is created for a large number of integrated records of customers' balances and addresses to represent the entire dataset.
The Merkle tree-based proof contains a list of hashes that customers can use to verify that their balances are included. At the same time, the method eliminates the possibility of other balances being revealed.
Binance's PoR also relies on the Merkle tree. In the same post, the company claimed that by using the technique together with zk-SNARKs, they can prove that "all leaf nodes of the Merkle tree have contributed to Binance’s claimed total user balance of each asset," and "there is no user with a negative total net balance (an overall USD value of all assets the user holds) included in the Merkle tree."
Binance promises to publish the Merkle tree, which contains the hashes for each user of the platform, as well as "zk-SNARK proofs and public input (a hash of the list of total net balances of each asset and the Merkle root) of the circuit for all users" every time the company will be providing the proof of its reserves.
Customers expect more transparency
Although Binance appears to take the financial safety of its customers very seriously, some investors still concerned that the company provides rather limited financial disclosure. For example, Binance is often compared to another major crypto exchange, Coinbase, which is officially registered as a publicly traded company in the United States. This status forces Coinbase to undergo regular audits and disclose its financial results.
Despite auditing Coinbase, Deloitte, along with other leading accounting firms such as KPMG, Ernst & Young, and PricewaterhouseCoopers, resigned from working with Binance. Binance tried audits from Mazars Group, another auditor often chosen by crypto exchanges, but the firm stopped working with all crypto clients last December following the collapse of FTX.
A finance blogger Frances Coppola published an article on February 16, outlining her belief in the inability of PoR to prove that customers' deposits are safe, regardless of whether the business is audited by a third party. Coppola called the PoR method a "proof of nothing":
"Proving Binance was fully reserved at all times across all assets would be a formidable undertaking. Even Mazars' limited proof of reserves covering BTC and two derivatives on four blockchains failed to prove that Binance was holding the same quantity and mix of assets as its customer balances. A full proof of reserves would need to cover every coin traded on Binance, with its derivatives, on every blockchain supported by Binance."
According to Coppola, there are strong doubts that "any exchange, let alone an external auditor, is capable of proving a reserve position as complex as this."