From the onset of the FTX saga, many exchanges have put on a commitment to providing their proof of reserves. We have seen others announce providing their users with a Merkle Tree Proof-of-Reserves solution to promote transparency of crypto assets. One such example is ChainUp, a global blockchain technology solutions provider.
But what exactly is a Merkle Tree Proof-of-Reserve, and how does it help improve crypto asset transparency for exchanges?
What is a Merkle Tree?
Merkle trees, also known as Binary hash trees, are a prevalent data structure in computer technology. On the other hand, in crypto, Merkle trees help encrypt blockchain data more efficiently and securely. Additionally, it enables quick and secure content verifications across big datasets and verifies the consistency and content of the data.
Merkle trees integrate all transactions in a block and generate a digital fingerprint of the entire set of operations. Therefore, it allows the user to verify whether it includes a transaction on the block.
Crypto Exchanges Need Merkle Trees
After FTX, CZ of Binance exchange became increasingly vocal about CEXs adopting Merkle Tree proof of Funds.
The Merkle Tree enables quick, easy verification of a large volume of data, promoting transparency. It consolidates massive data into one hash and efficiently verifies the integrity of the data set. Therefore, Merkle Tree Proof-of-Reserves technology not only provides users with fast asset security verification but also improves the transparency of institutional reserves.
CZ believes that a good name is better than anything and if you lose trust with your investors, it never comes back.
As such one is able to make a decision upon different factors using this technology:
- Prove if the data belongs in the Merkle tree.
- To prove, without doubt, the validity of data being part of a dataset.
- To ensure the validity of a particular set of data being inclusive in a larger data set without revealing the complete data or its subset.
As a commitment to their customers and as an example to the rest of the centralized crypto exchanges in the space, Binance promised to publish a MT Proof-of-Funds soon.
However, the exchange, like many others, released a snapshot of their reserves to prove to their customers and the whole crypto community that they had funds to back their trades on their exchange.
See the full list of the Proof-of-Funds Snapshot Here.
Vincent Munene is a freelance writer and a great blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return, he likes to educate people and keep them up to date on everything blockchain. He is a Biochemist by profession and also loves to play the piano.
