What is proof of reserves? How exchanges prove they hold funds

Proof of reserves (PoR) is a way for a crypto exchange, custodian or token issuer to show that it actually holds the assets it owes its customers. Instead of asking users to trust a balance on a screen, the platform publishes evidence that its on-chain wallets contain at least as much bitcoin, ether or stablecoins as the total of customer balances — at a specific point in time.

The idea goes back to the early days of bitcoin exchanges, but it went mainstream after the collapse of FTX in November 2022, when customers discovered that deposits they thought were safe had been used elsewhere. Since then, proof-of-reserves pages have become a standard feature on many large exchanges.

How proof of reserves works

A proof of reserves has two halves. Both are needed; either one alone proves very little.

1. Proof of assets

The platform shows which blockchain addresses it controls and how much they hold. Because blockchains are public, anyone can look up the balances. To prove the addresses really belong to the exchange — rather than to someone else — the firm signs a message with the private keys, or moves a small amount on request, often in front of an independent accountant.

2. Proof of liabilities

This is the harder part: showing how much the platform owes customers without publishing everyone's private account data. Most exchanges use a Merkle tree, a structure that hashes each customer balance into a "leaf", then hashes the leaves together in pairs until a single Merkle root remains. Change any balance, however slightly, and the root changes. The approach was discussed by bitcoin developers Greg Maxwell and Peter Todd as early as 2013.

The exchange publishes the root and the total liabilities. Each customer can then check that their own balance is one of the leaves. If enough users check, it becomes hard to quietly leave accounts out.

3. The comparison

Finally, assets are compared with liabilities, usually per coin. A reserve ratio of 100% or more means the platform held at least one coin on-chain for every coin it owed customers at the snapshot time.

Ways platforms do it

A known flaw of a plain Merkle tree is that a dishonest exchange could add a fake account with a negative balance to make total liabilities look smaller. Binance, which launched its Merkle-tree system in November 2022, later added zk-SNARKs — zero-knowledge proofs — to show that every leaf was counted and no account had a negative net balance. Kraken uses an independent accountant who takes an anonymised snapshot of balances, collects signatures proving control of wallets and compares the two.

Token issuers use related tools. Stablecoin issuers publish regular reserve reports from accounting firms (see what a stablecoin is), and oracle networks such as Chainlink Proof of Reserve publish custody balances on-chain so smart contracts can read them — the mechanism behind Chainlink's new CustodySync lending system.

How to check your own balance

1. Log in to your exchange account and look for a Proof of Reserves or Transparency page.
2. Find your record ID or leaf hash for the latest snapshot; it is generated from your balances at that time.
3. Use the exchange's verification tool, or better, its open-source verifier, to confirm your leaf is part of the published Merkle root.
4. Compare the snapshot date with today. A report that is several months old says little about the present.
5. Check that the coins you actually hold are covered — some reports include only a handful of assets.

What proof of reserves does not prove

Proof of reserves is useful, but it is not an audit and it does not prove an exchange is solvent. Kraken itself lists several limits on its own reports, and accounting firms have raised similar points:

• It is a snapshot. Funds could be borrowed just for the check and returned the next day, or lost after it.
• It ignores other debts. Loans, lawsuits or operating losses are not part of the customer-balance tree. An exchange can hold 100% of customer bitcoin and still owe more than it owns overall.
• Control is not exclusive ownership. Signing with a key proves access, not that nobody else has a copy of the key or a claim on the coins.
• Coverage varies. Some reports cover only major coins, or leave out staked and lent assets.
• No common standard. There is no single professional standard for PoR work. In December 2022 the accounting firm Mazars paused its proof-of-reserves work for crypto clients, a reminder that a report is only as strong as the people behind it.

That is why Ethereum co-founder Vitalik Buterin argued in a November 2022 essay that the goal should be proof of solvency — showing assets exceed all liabilities — and, longer term, designs where users do not have to trust the platform with custody at all.

Proof of reserves vs self-custody

The cleanest way to avoid exchange risk is not to need proof at all: keep long-term holdings in a wallet where you hold the keys. Our guides on custodial vs non-custodial wallets and how to store crypto safely explain the trade-offs, and centralized vs decentralized exchanges shows where each model fits.