Cryptocurrency exchange company Binance has released a new site that explains its proof-of-reserves system. The company starts with BTC reserves. Currently, Binance has a reserve rate of 101%. This means that the company has enough bitcoins to cover the balances of all users.
The move comes weeks after the collapse of FTX, another popular crypto exchange. In the case of FTX, the company was facing a liquidity crisis. It stopped processing withdrawals as it could not keep up with demand from investors and end users.
Crypto companies – and crypto exchanges in particular – have been trying to be more transparent about user funds ever since. This means sharing more information about hot and cold wallets. But there is still a lot of work to be done before we can fully trust crypto exchanges and the way they handle funds.
A few weeks ago, Binance began sharing wallet addresses with billions of dollars in crypto assets. With this move, the company has proven that it does indeed hold a lot of assets and can process a ton of withdrawals. But the company hasn’t made it clear whether these are user assets, or Binance’s own balance sheet, or a mix of the two.
With today’s new Proof of Reserves site, Binance clarified this point by saying that the BTC wallets included in the Proof of Reserves system do not include Binance’s own funds.
“It’s important to note that this does not include Binance’s company holdings, which are kept in a completely separate ledger,” the company says. You will have to trust the word of Binance as you cannot verify this with a blockchain explorer.
Binance starts with BTC holdings. Adding up the amounts in each of Binance’s wallets is easy. When it comes to user assets, the company uses a Merkle tree to include all individual user accounts and generate a cryptographic seal.
As of 23:59 UTC on November 22, Binance users collectively held 575,742.4228 BTC, or approximately $9.5 billion at today’s exchange rate. And Binance had enough bitcoins in its own wallets to cover 101% of those funds. In other words, if everyone withdraws their BTC at the same time, Binance would have enough BTC to process all withdrawals.
Using the Merkle tree, individual users can use the root hash to check if their accounts are included in the user balances snapshot. 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 you can check it yourself.
“Given recent events, it is understandable that the community is demanding more from crypto exchanges, far more than what is currently demanded from traditional financial institutions. That’s why we’re excited 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 undertaking and it will take a few weeks to develop data for the majority of our escrow assets. We are working to release the next update as soon as possible to meet community expectations.
The company already plans to release similar Proofs of Reserve information for ETH, USDT, USDC, BUSD, and BNB in the future. Binance offers hundreds of different crypto assets, so hopefully they can cover withdrawals for lesser-known cryptocurrencies as well.
Likewise, the company should work with independent financial and security audit firms so that you don’t have to blindly trust the company. There’s still a long way to go, but at least today’s new proof of reserve system is a step in the right direction.