Proof-of-Reserve Algorithm Is “Pointless”

Kraken’s CEO criticized Binance and other major crypto exchanges, accusing them of misleading users. He stated that the Proof-of-Reserve (PoR) audit algorithm cannot prove a platform’s collateralization because it does not consider its liabilities. 

Kraken CEO Criticizes Proof-of-Reserve Algorithm and Binance

Jesse Powell, CEO of cryptocurrency exchange Kraken, called the PoR audit introduced by major crypto exchanges “pointless” because it only shows assets without considering the trading platforms’ liabilities to users.

According to Powell, the Proof-of-Reserve audit used by his colleagues only misleads users. He also asked the media to refrain from inflating the news about the collateralization of crypto exchanges. Instead, Powell advised journalists to pay attention to the motives that guide the CEO of Binance and heads of other exchanges publishing such reports.

As a reminder, the collapse of the FTX crypto exchange led to user concerns about the safety of their assets on CEXs. To reassure their customers, major crypto exchanges began publicly sharing reserves in their portfolios.

Powell noted that for valid proof of collateralization, crypto exchanges must provide not only the addresses of wallets with assets but also the number of liabilities to customers. In other words, the amount of assets on an exchange’s balance sheet minus the amount of the site’s liabilities is Proof-of-Reserve. According to the CEO of Kraken, this is the only way users will be able to understand whether the exchange has assets that exceed its liabilities to customers.

Changpeng Zhao, CEO of Binance, whose direct involvement in the events preceding the collapse of FTX is quite obvious, responded to Powell’s accusations. He claimed that Binance is not limited to the already released data and will soon provide the public with a full report from an independent auditor. Zhao also stressed that a “full” Proof-of-Reserve audit takes several weeks. Despite the community’s positive reaction to Zhao’s statement, some users noticed that the CEO of Binance has disabled public comments on his Twitter post.

Recently, Vitalik Buterin proposed to improve the Proof-of-Reserve algorithm by incorporating zero-knowledge succinct arguments of knowledge technology, which has the potential to reduce the likelihood of trading platforms using user funds without their consent.

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