Binance, one of the world’s largest cryptocurrency exchanges, has recently released its latest proof-of-reserves (PoR) report, aiming to provide transparency and assurance to its users. This report utilizes innovative zero-knowledge methods to demonstrate that Binance backs all customer assets on a 1:1 basis, ensuring that the crypto assets held by the exchange are sufficient to cover customer withdrawals.
Zero-Knowledge Proof and the Merkle Root:
Binance’s latest PoR report employs zero-knowledge proofs, specifically zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge), to verify the existence of a user’s balance in Binance’s customer wallets. This technology enables the exchange to prove that a user’s balance is included in a Merkle Root calculation without disclosing specific account details.
The Merkle Root serves as a consolidated representation of customer balance data from the Merkle Tree, simplifying the auditing process for third-party assessors.
Maintaining Adequate Reserves:
According to Binance’s PoR report, the exchange has ensured that it holds enough cryptocurrency assets to meet all customer withdrawal requests while maintaining reserves for emergencies. Notable among its overcollateralized assets are its native BNB token (114%), USDT (118%), and the BUSD stablecoin (107%). Additionally, Binance holds a 5% excess reserve for customers’ Bitcoin (BTC) and Ethereum (ETH) deposits.
However, it’s important to note that Binance’s report only lists reserves for 31 tokens, even though the exchange offers trading for over 350 different tokens.
Asset Segregation for Customer Protection:
The practice of segregating customer assets into different wallets plays a crucial role in safeguarding users against insolvency risks. By keeping customer and corporate funds separate, exchanges like Binance can ensure that user assets are not compromised in case of financial difficulties.
Challenges and Controversies:
Binance’s commitment to transparency through PoR reports has garnered mixed reactions in the cryptocurrency community. While some view these reports as a step in the right direction, others raise concerns about the lack of industry standards and the limited scope of the assessments.
In the past, Binance received both praise and criticism for releasing an attestation of its report by auditing firm Mazars. Mazars later announced its decision to cease assessing reserve reports, further fueling the debate on the effectiveness and reliability of such reports.
Regulatory bodies in various regions are beginning to address the need for increased transparency and security in cryptocurrency exchanges. Proposed legislation in Texas, Hong Kong, and Singapore highlights the importance of quarterly PoR attestations and the segregation of customer and corporate funds as essential steps toward ensuring user protection.
Binance’s latest PoR report, coupled with its use of zero-knowledge proofs and asset segregation practices, aims to provide users with assurance regarding the security and transparency of their cryptocurrency holdings on the exchange. As the cryptocurrency industry continues to evolve, exchanges are under increasing pressure to adopt robust standards and practices to protect their customers’ assets and maintain the integrity of the market. Binance’s commitment to transparency and its efforts to comply with evolving regulations mark important steps in this ongoing journey.