With the collapse of the FTX cryptocurrency exchange, unable to pay despite its status as the third largest exchange in the world, the issue of proof of reserves for all platforms is back on the table. The explanations.
The fall of the American FTX empire registered in November is only the copy of the examples of Mount Gox, the exchange founded by the French Mark Karpelès and the Canadian platform QuadrigaCX, which respectively fell in 2014 and 2019, due to mismanagement and use. of fractional reserves. A method that consists of operating without keeping all customer deposits in reserve and oh so dangerous in the context of the undeniable crypto market.
What is proof of reserves?
Proof of Reserves is an initiative that aims to increase the transparency of digital asset providers and guarantee the exact presence of assets at a given address. From 2014 and the bankruptcy of Mount Gox, American columnist and tax expert Jason Tyra publishes about the concept of “Proof-of-Reserves”, the need to require cryptocurrency platforms to comply with this transparency standard. In 2019, Blockstream offers bitcoin start-ups a technical methodology to popularize the practice. But it is above all analyst Nic Carter who returns at regular intervals in social networks and us press on this topic to spread the concept to the main stakeholders: the users.
It is necessary to differentiate the verification of reserves from the audit. An audit is a procedure carried out by an economic entity to assess the compliance of a company’s accounts. But if a cryptocurrency exchange platform can be solvent or have a stable balance, this does not prevent it from using an individual’s deposit for a purpose to which the latter has not consented. Therefore, both procedures are compatible: audit to check the solvency of a company, verification of reserves, proper use of user deposits.
How to perform a confirmation of reserves?
Therefore, proof of reserves is supposed to allow each user of the platform to verify the presence of his assets at the deposit address himself, as if a bank customer came to verify the presence of a commodity in his luggage.
For this, it is necessary to compare the data produced by the platforms with the information contained in the blockchain, the only reliable source. There are several methods: cryptography with the Merkle tree (a hash structure containing encrypted data), the fingerprint of which must be compared with the readings of the platform; building a (unfinalized) transaction containing all unspent bitcoins (UTXO) of a platform; simple production of a list of reserves associated with public keys and to be compared with customer balances and addresses.
Which platforms produce proof of bookings?
The American platform Gate.io is one of the first to implement a backup validation tool, using Merkle tree techniquefollowed by its counterpart the kraken. Since the FTX scandal, Binance, OKEX, Kucoin promised to use the same process.
Bitmex has a used time the same process but today it releases a simple downloadable file for the client to compare on-chain assets with data published by the platform. As for the Blockstream process of invalid UTXO transaction, it is used by Bitcoin Core and Trezor wallets.
And in France, then?
In France, the StackinSat platform did not wait for the FTX disaster: from last June, announced the launch of the reserve test system. For this, he uses the services of a service provider, Israeli Fireblocks. On the part of the Coinhouse and Paymium platforms, the procedures have not yet been decided, but according to our information, they are each in the working phase on this topic.
Remember that in order to operate on our land, the PSAN status, issued by the AMF, is mandatory and requires an annual audit, even if this does not constitute, as we have seen, proof of reservation.