Fraudulent activities as well as bankruptcy are particularly rampant in the cryptocurrency space now. The FTX exchange incident resulted in the loss of funds and investments as the exchange faced bankruptcy which led to its extinction in the cryptocurrency space.
As of today, the new trend is a possible closure of the AAX exchange with the exchange shorting down all withdrawals and transactions, and deleting its posts and videos on YouTube leaving investors and traders stranded and in panic.
CEX is now considered too risky and many are switching to DEX. To curb this happening, various factors to ensure transparency Which is customers focused are emerging and welcoming. One of them is Proof of Reserve (POR) inspired by Binance CEO, Changpheng Zhao.
What Is Proof Of Reserve?
Proof Of Reserve suggests that cryptocurrency exchanges and organizations dealing with investors and traders fund carry out a regular audit of their assets on reserve to the public.
These regular audit reports should be continuous to show that the reserve isn't borrowed for temporary show-off as some cryptocurrency organizations can borrow or hide liabilities in their proof. This is also a setback in proof of reserve that regular and continuous proof of reserve can solve.
Proof of Reserve ensures transparency is maintained by CEX and they do not intend to use investors' and strangers' funds to pay liabilities in the future. It also shows that they are accountable for users' funds
Users will be more confident to invest in cryptos in exchanges that carry out regular POR than those who do not because. Exchanges such as Binance have adopted POR as a way to build trust in their users.
Proof of Reserve shows that the exchange reserve balance is equivalent to depositors' funds. It is also more effective if it has passed through custodial procedures and is backed by law.
Proof of Reserve is much more trusting when it gives users the right to verify their balances and exchanges to face an audited Proof of Reserve.
Proof of Reserve is beneficial to both the exchange and the users.
The following are benefits to note:
- Transparency is the first word that comes to mind when Proof of Reserve is mentioned. The fact that the exchange's assets are audited and publicly reviewed shows that the exchange is transparent with its users.
- Security is another word that comes to mind when Proof of Reserve is mentioned. Security threat in cryptocurrency is higher than normal and Proof of Reserve is one way to show that transactions are secured.
- Cryptocurrency exchanges and projects can gain the trust of their users through Proof of Reserve validation. Users are more relaxed Investing and trading in an exchange where their assets are equivalent to or more than users' funds.
- Proof of Reserve is a form of regulation for exchanges that are not in a regulated area.
- Proof of Reserve is a way of retaining users since they have proved their accountability and backup them.
Conclusion
Some cryptocurrency exchanges, especially CEX, are operating in a location where they are not regulated and this gives them the freedom to have total control of users' funds. In a situation where they encounter bankruptcy which is mostly caused by a lack of reserve, they tend to fold up and freeze users' funds.
The implication of these actions can be devastating to users. Proof of Reserve is just one of the many ways users can entrust their funds in these exchanges.
Although Proof of Reserve can be falsified, it can be effective if it is audited. If audited, it serves as an automatic regulation of the exchange.
From the above discussions, it is clear that Proof of Reserve is especially necessary now that the cryptocurrency space is encountering exchange fraud.
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