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Proof of Reserves (PoR) is the latest buzzword in cryptocurrencies and blockchain technology. It has been gaining traction among traders, investors, and developers to ensure that assets are backed up by real-world collateral. But what exactly is PoR, and how does it work?

What is PoR?

Proof of Reserves is a transparent auditing process crypto firms use to verify their assets. Third-party auditors examine cryptographic signatures and custodian balances to confirm the firm has enough funds to cover potential customer withdrawals. This practice provides customers with visible proof that their money is safe, secure, and accessible anytime.

How is the PoR Audit Handled?

Proof of reserves audit determines if an exchange is solvent or insolvent by evaluating its assets and liabilities. When fractional reserves are in play, part of the deposits are kept in reserve for immediate withdrawal, and the rest is loaned out to borrowers.

The PoR audit process is divided into three parts: proof of liabilities (calculating the exchanges overall liabilities by adding all client account balances to total reserves), proof of reserves (assets that the exchange stores on the blockchain and verifies ownership of public keys with a nonce) and proof of solvency (outputs, attestation that the audit software was run in a trustworthy environment and verifying account balance with Merkle trees root).

PoRs Mission

The need for proof of reserves is growing in importance, especially after the November 2022 collapse of FTX crypto and Binances call for greater transparency. It has also become increasingly relevant as financial regulators create more stringent standards to protect customers, given that Proof of Reserves is a secure and public way to guarantee the safety of customer funds.

Proof-of-Reserves demonstrates that a crypto company has adequate liquidity, offering customers comfort and trust. In todays increasingly regulated landscape, such an audit is becoming increasingly important for exchanges, wallets, and similar entities to provide transparency and trust.

Link:
Proof of Reserves: Understanding PoR and Its Role in Cryptocurrency Transparency - Business News This Week