Cryptocurrency exchange company Binance released one new site that explains the proof-of-reserves system. The company starts with BTC reserves. At the moment, Binance has a reserve ratio of 101%. It means that the company has enough bitcoins to cover all users’ balances.
This move comes a few weeks after the collapse of FTX, another popular crypto exchange. In the case of FTX, the company was facing a liquidity crunch. It stopped processing withdrawals because it could not meet investor and end-user demand.
Crypto companies – and crypto exchanges in particular – have been trying to be more transparent about user funds ever since. It means sharing more information about hot and cold wallets. But there is still a lot of work to be done before you can fully trust crypto exchanges and how they handle money.
A few weeks ago, Binance started sharing wallet addresses with billions of dollars in crypto assets. With this move, the company proved that it indeed owns a lot of assets and can handle a lot of withdrawals. But the company has not clearly stated whether these are user assets, or Binance’s own balance sheet, or a combination of the two.
With today’s new proof-of-reserves site, Binance clarified that point by saying that BTC wallets included in the proof-of-reserves system do not hold Binance’s equity.
“It’s important to note that this does not include Binance’s corporate holdings, which are maintained in a completely segregated ledger,” the company says. You will have to trust Binance’s word as you cannot verify that with a blockchain explorer.
Binance starts with BTC holdings. Adding up the amounts in each Binance wallet is easy. When it comes to user assets, the company uses a Merkle tree to record all individual user accounts and generate a cryptographic seal.
As of November 22 at 23:59 UTC, Binance users collectively held 575742.4228 BTC — that’s about $9.5 billion at the current exchange rate. And Binance had enough bitcoins in its own wallet to cover 101% of these funds. In other words, if everyone withdraws their BTC at the same time, Binance would have enough BTC to process all withdrawals.
The Merkle tree allows individual users to use the root hash to check whether their accounts are included in the snapshot of user balances. Binance says it includes user balances for several products: Spot, Funding, Margin, Futures, Earn, and Options Wallet. The company also provides a short Python script so you can check it yourself.
“Given recent events, it is understandable that the community will demand more from crypto exchanges, far beyond what is currently required from traditional financial institutions. Therefore, we are excited to bring this latest feature to our users to verify their funds,” Binance Founder and CEO Changpeng Zhao “CZ” said in a statement. “As Binance’s user community is exponentially larger than the next largest exchange, this is a huge undertaking and it will take a few weeks to develop the data for most of our assets under custodial. We are working to release the next update as soon as possible to meet community expectations.”
The company already plans to release similar proof-of-reserves information for ETH, USDT, USDC, BUSD, and BNB in the future. Binance offers hundreds of different crypto assets, so let’s hope they can cover withdrawals for lesser-known cryptocurrencies as well.
Likewise, the company should work with independent financial and security audit firms so that you don’t have to blindly trust the company. There is still a long way to go, but today’s new reservation system is certainly a step in the right direction.
