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Crypto Exchanges with Merkle Tree Proof of Funds and Reserves

Crypto exchanges have realized they must introduce the Merkle tree proof of funds.

The discussion accelerated after the FTX collapse. However, other failures in the industry have also contributed to highlighting the need for this in the crypto industry. Some of these failures are Celsius Network, BlockFi, Voyager, Three Arrows Capital, Alleged and last FTX.

Crypto Exchanges with Merkle Tree Proof of funds

Gate.io was the first crypto exchange implementing a 3rd party auditor for proof of funds.

Nexo was the first crypto lending platform to hire a 3rd party auditor for full transparency regarding proof-of-reserves.

After, they have pushing other crypto-related companies to do the same and Kraken did follow in August 2022. However, after the FTX collapse in November 2022 the topic is superhot and almost all major crypto exchanges are doing statements about implementing the Merkle tree proof-of-reserves ASAP.

What is a Merkle Tree?

The Merkle tree from Ralph C Merkles’ publication in 1974. See the link below.

A Merkle tree allows two parties to agree on a shared secret by exchanging messages, even if they have no secrets in common beforehand.

The first-ever mention of such a tree was published in Protocols for Public Key Cryptosystems 1978 by  Ralph C Merkle. 

What is Proof of reserves?

No formally accepted rules or procedures define crypto proof of reserves audit.

Still, in general, a Proof of Reserves (PoR) is an independent audit conducted by a third party.

The primary mission of the 3rd party in this contest is to ensure that a custodian holds the assets it claims on behalf of its clients.

This auditor takes an anonymized snapshot of all balances held and aggregates them into a Merkle tree — a privacy-friendly data structure that encapsulates all client balances.

From there, the auditor obtains a Merkle root: a cryptographic fingerprint that uniquely identifies the combination of these balances when the snapshot was created.

NEXO - First Crypto Exchange with Proof of Reserves

NEXO and Armanino proof of reserves image

Nexo Passes Real-Time Armanino Audit in September 2021, Becomes the First Crypto Lender to Shed Light on Reserves

  • Fully-Backed: Your holdings on Nexo’s platform are backed by assets by more than 100%.
  • Properly Managed: Third-party assurance (Aramino LLP) that your funds on the Nexo platform are appropriately managed and accounted for.
  • Always Available: 24/7 proof of Nexo’s ability to meet all liabilities owed to you at any time.

See the latest result from the proof of reserves audit performed by Aramino for the Nexo crypto lending and exchange platform.

Kraken - Crypto Exchange with Proof of Reserves

Kraken was among the first significant crypto exchanges to implement proof-of-reserves in August 2022.

This happened before the crypto community screamed about it after the FTX crash in early November 2022. It’s essential with such inventors like Kraken in the crypto space working proactively to avoid such significant drops in trustworthiness that the FTX crashed caused.

How to verify that your account was audited on Kraken?

Step-by-step guide on how to verify your funds on Kraken.

  1. Login to your Kraken account
  2. Click on your name in the upper right corner and choose “Audits.” Here, you will find the historical proof of reserves conducted by Kraken.
  3. Select the audit date you want to verify. The Record ID enables you to confirm that your account balance was included via the third-party auditor.

How to verify your record with the auditor?

By following this step-by-step guide, you can easily verify your account balance against the 3rd party auditor with your Record ID.

1. Copy the Record ID from your account (see the previous section).

2. Visit the Aramino website (or any third-party auditor responsible for the audit)

3. Enter your Record ID in the third-party auditor’s portal to verify your account balances.

Gate.io - Crypto Exchange with Proof of Reserves

Gate.io uses Armanino to observe and audit their custody holdings in bitcoin and ether assets.

In cooperation with leading U.S. firm Armanino LLP, Gate.io was the first to conduct Proof of Reserves audits in this manner back in 2020.

Read more about the exchange in our Gate.io review.

Crypto Proof of Reserves Roadmap from Exchanges

Many of the top Bitcoin and altcoin trading exchanges are now making statements about implementing proof-of-reserves and even standardizing this in the crypto industry. 

Binance - Proof of Reserves

Binance has already started working on going fully transparent with its holdings.

Binance is planning to introduce a Merkle tree proof of reserves and expects to take at least a month.

In the meantime, CZ is publishing all the public addresses held by Binance.

What is Binance SAFU fund?

Binance Secure Asset Fund for Users (SAFU) is an emergency insurance fund established by Binance in July 2018 to protect users’ funds.

Binance committed a percentage of trading fees to grow it to a sizable level of US$1 billion based on January 29, 2022. Binance further topped the SAFU with $ 1 billion on the 9th of November 2022.

The fund’s value will fluctuate based on the market since it consists of BNB, BUSD, and BTC

Kucoin - Proof of Reserves

At the moment (November 2022), Prof-of-reserves is at the top of all Crypto exchange CEO priorities. They are tweeting about this topic, publishing publishes addresses, and communicating plans to introduce Merkle tree proof-of-reserves.

Bybit - Proof of Reserves

Bybit realized the need for proof of reserves after the FTX collapse. As stated in the tweet above, they will start working on a Merkle tree proof of funds.