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In Light of the FTX Collapse, Team Behind Chainlink (LINK) Offers a Proof of Reserve Solution

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Chainlink Labs offers Proof of Reserve service for embattled exchanges

November 10, 2022 Coin Telegraph

Binance

The company claimed its PoR product can restore trust in crypto exchanges through greater transparency, but not everyone is convinced.

Chainlink Labs offered its Proof of Reserve product as a solution to future trust issues in the crypto exchange market on Nov. 10. In a tweet thread, Chainlink Labs asked “Will crypto continue to repeat the mistakes of the traditional black-box financial industry? Or will a better system emerge?”

#Crypto is at a crossroads.

Will crypto continue to repeat the mistakes of the traditional black-box financial industry? Or will a better system emerge?

A better system is possible, & Proof of Reserve is one way #Chainlink is providing the transparency that users demand.

— Chainlink (@chainlink) November 10, 2022

In answer to this question, it offered its Proof of Reserve (PoR) product, which it said is useful for “for verifying centralized exchange asset reserves, off-chain bank account balances, cross-chain collateral, real-world asset reserves, and much more.”

Over the past few days, the crypto market has been in a freefall thanks to a liquidity crisis at the world’s second-largest crypto exchange, FTX. The exchange has been unable to process withdrawals in a timely manner, and the panic caused by these delays has spread throughout the crypto market.

In the wake of these ongoing issues, the crypto community has started to discuss ways to solve the problem, and one solution that has been offered is for customers to require that every exchange they use offer a Proof of Reserve.

Proof of Reserve is a technique that allows users to audit the reserves of crypto exchanges in real-time. Some exchanges have already implemented Proof of Reserve, and CZ of Binance has argued that all exchanges should now offer this feature.

But some exchanges have said that it will take weeks or longer to create a Proof of Reserves system.

In response, Chainlink Labs argued that its product provides an “out-of-the-box” solution that exchanges can implement immediately.

Here, Chainlink PoR verifies off-chain assets and relays the reserve amounts on-chain. pic.twitter.com/ExmEZWiTLA
— Chainlink (@chainlink) November 10, 2022

The product uses Chainlink nodes connected to both the exchange’s API and its vault addresses, and the nodes are connected to a Proof of Reserve smart contract. The contract can be queried by any other account on the network to determine whether the exchange’s crypto assets are equal to its liabilities. Chainlink Labs sees this as a simple solution to the problem of trust in exchanges.

However, not everyone is convinced. A Twitter user who goes by the name “BLanka” said that Binance chose not to use Chainlink PoR because “the merkel tree algo used by chainlink had its token set as the core piece, after some basic math we realize the token was not even needed.”

Binance Proof-of-Reserve pledge gains support following FTX crisis

November 9, 2022 Coin Telegraph

Acquisition

The call for a more detailed disclosure of liquidity through the use of "Proof-of-Reserves" has been backed by many high-profile industry figures.

Following the liquidity crisis and acquisition of cryptocurrency exchange FTX, Binance CEO Changpeng “CZ” Zhao said his exchange will soon start a Proof-of-Reserves audit system to allow verification of its digital asset holdings.

In a Nov. 8 Twitter post, Zhao pledged to implement a Proof-of-Reserve mechanism at Binance to provide “full transparency” through the use of Merkle Trees — a data structure used to encode blockchain data more efficiently and securely.

All crypto exchanges should do merkle-tree proof-of-reserves.

Banks run on fractional reserves.
Crypto exchanges should not.@Binance will start to do proof-of-reserves soon. Full transparency.
— CZ Binance (@cz_binance) November 8, 2022

A Proof-of-Reserve audit is ordinarily conducted by an independent third party to ensure the custodian’s assets are owned as claimed.

The Binance CEO’s intention to implement Proof-of-Reserves comes after Binance agreed to buy rival cryptocurrency exchange FTX on Nov. 8, who’s been rumored to be on the brink of financial collapse despite CEO Sam Bankman-Fried initially dismissing the claims.

Cointelegraph contacted Binance to confirm if the exchange had begun implementing a Proof-of-Reserve system but did not immediately receive a response.

Chainlink (LINK) CEO Sergey Nazarov expressed his views in a Nov. 8 tweet that a cryptographic-based Proof-of-Reserves mechanism could paint investors with a more clear picture of the solvency situation of a trading venue or financial firm, and “is becoming the new industry standard.”

It is clear that cryptographically proving the solvency of trading venues and financial institutions is becoming the new industry standard. Proof of Reserves is a great example of a cryptographically guaranteed financial world that starts in crypto going on to mainstream finance. https://t.co/eZw1pj5706
— Sergey Nazarov (@SergeyNazarov) November 8, 2022

Meanwhile, crypto exchange Kraken has already implemented its “advanced cryptographic accounting procedure” to allow users to verify their token balances since Feb. 2022.

Crypto exchange OKX also announced its plans to roll out a Merkle tree-based Proof-of-Reserves audit system in a Nov. 8 Twitter post —- something they consider to be an “important step” in establishing a “baseline trust” in the industry.

The idea of more Proof-of-Reserve audits received near-full backing from the Twitter community, with crypto industry figures weighing in on the move by Binance.

Host of The Daily Gwei podcast, Anthony Sassano, and founder of open-source crypto exchange ShapeShift, Erik Voorhees, both suggested Proof-of-Reserves are already integrated into decentralized finance (DeFi) and automated by smart contracts.

Transparent proof-of-reserves:

✅ Wild West Defi
❌ Regulated and Compliant Centralized Exchanges https://t.co/T8QxZ4VOTE
— Erik Voorhees (@ErikVoorhees) November 7, 2022

The founder of crypto market intelligence platform Messari, Ryan Selkis, took things one step further, arguing that regulators should direct their attention to focus on the more centralized players in the industry.

The fact we are debating DeFi protocol regulation before responsible disclosures like proof-of-reserves and liquidity from the mega-funds like a16z and Alameda shows just how far off the ball we are on policy right now.
— Ryan Selkis (@twobitidiot) November 8, 2022

But not all agreed. Antonio Juliano, founder of crypto derivatives trading platform dYdX argued that a Proof-of-Reserves wouldn’t disclose all necessary information needed to verify an exchange's holdings.

The issue is that CEXs *can’t* do proof of reserves

So what if you show a wallet with $20B? How do you know the sum of user balances isn’t $30B?

How do you know if the entity has outstanding loans? How do you know what contracts they’ve entered into? https://t.co/lbL6YGD5Ze
— Antonio | dYdX (@AntonioMJuliano) November 8, 2022

Chainlink

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