The collapse of FTX, once one of the leading cryptocurrency exchanges, sent shockwaves through the cryptocurrency space.

The liquidity issue is a major factor in the FTX crisis, as the proof-of-reserve concept has swept the crypto sector, with more exchanges preparing to show more transparency to their users.

Cryptocurrency exchange Gate.io explained:

What is Proof of Reserve?

Proof of Reserve is an audit by a third party to ensure that the custodian has the assets it claims to have.

All existing balances are snapshotted and aggregated into a Merkle tree, a privacy-friendly data structure of credits.

As a data structure, the Merkle tree, or hash tree, motivates data verification and synchronization.

Hence, Merkle Tree uses hash functions for data integrity and transparency purposes.

CZ, Binance’s CEO, encouraged the proof-of-reserve directive after noting that Binance would submit a transparency report on its digital asset holdings, saying:

All cryptocurrency exchanges must display reserves via a Merkle tree.

Banks operate on fractional reserves.

This should not be the case for cryptocurrency trading platforms.

Binance will soon start proofing reserves to provide full transparency.

Binance has published its latest proof of assets which includes 125,000 Bitcoin, 9,900 Ethereum and 1.25 billion Tether.

Meanwhile, Crypot.com has informed Crypot.com that it will publish its accounting guide to reserves, the company’s CEO said in a tweet, adding that transparency is more important than ever at this critical moment for the industry.

Negative news is starting to hit FTX based on the lack of transparency in crypto reserves.

Hence, Proof of Reserve tries to inform the general public, especially the depositors, whether the deposits match the user’s balances or not.

Lucas Nuzzi, Head of Research and Development and Coinmetrics, has admitted that FTX’s defense of its Alameda research arm has negatively impacted the FTX platform.

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