Cryptocurrency exchange company Binance has released a new site that explains its proof-of-reserves system. The company is starting with BTC reserves. Right now, Binance has a reserve ratio of 101%. It means that the company has enough bitcoins to cover all users’ balances.
This move comes a couple of weeks after the collapse of FTX, another popular crypto exchange. In FTX’s case, the company faced a liquidity crisis. It stopped processing withdrawals because it couldn’t meet demand from investors and end users.
Crypto companies — and crypto exchanges in particular — have been trying to be more transparent about user funds since then. It means sharing more information about hot and cold wallets. But there’s still a lot of work ahead before you can completely trust crypto exchanges and how they handle funds.
A few weeks ago, Binance started by sharing wallet addresses with billions of dollars worth of crypto assets. With this move, the company proved that it does indeed hold a lot of assets and it can process a ton of withdrawals. But the company didn’t state clearly whether those are user assets, Binance’s own balance sheet or a mix of both.
With today’s new proof-of-reserves site, Binance clarified that point by saying that BTC wallets included in the proof-of-reserves system don’t include Binance’s own funds.
“It is important to note that this does not include Binance’s corporate holdings, which are kept on a completely separate ledger,” the company says. You will have to trust Binance’s word as you can’t verify that with a blockchain explorer.
Binance is starting with BTC holdings. Adding up the amounts in each of Binance’s wallet is easy. When it comes to user assets, the company is using a Merkle tree to include 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 around $9.5 billion at today’s exchange rate. And Binance had enough bitcoins in its own wallets to cover 101% of these funds. In other words, if everybody withdraws their BTC at the same time, Binance would have enough BTC to process all withdrawals.
Thanks to the Merkle tree, individual users can use the root hash to check whether their accounts are included in the snapshot of user balances. Binance says it includes user balances across various products — Spot, Funding, Margin, Futures, Earn and Options Wallet. The company also provides a short Python script so that you can check yourself.
“Given recent events, it is understandable that the community will demand more from crypto exchanges, far more than what is currently required of traditional financial institutions. That’s why we’re pleased to provide this latest feature for 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 massive under-taking and will take a few weeks to develop the data for the majority of our assets in custody. We are working to get the next update out as quickly as possible to meet the community’s 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 that they can also cover withdrawals for lesser known cryptocurrencies.
Similarly, the company should work with independent financial and security auditing firms so that you don’t just have to blindly trust the company. There is still a long way to go, but at least today’s new proof-of-reserves system is a step in the right direction.