In a year where volatility has been the new normal, traders and exchanges in the crypto industry have felt their fair share of turbulence. From FTX’s unfortunate bankruptcy announcement to Proof taking center stage — trust within this space is at an all-time low.

However, instead of succumbing to despair, many exchanges embrace proactive solutions that could pave the way for sustainable growth.

An example is the Proof of Reserves created to re-establish trust between exchanges and their users by providing transparency in managing funds. By enforcing this system, exchanges can demonstrate their commitment to their customers’ safety.

What exactly is PoR, and why could it be a game changer for the exchange-user dynamic?

What Is Proof of Reserves (PoR)?

Proof of reserves (PoR) is the process that crypto exchanges use to ensure accurate records and secure funds for their users. It allows an exchange to prove that it holds the funds it claims to have. This gives users transparency and assurance that the exchange is solvent and can pay out users’ funds if needed.

Through a comprehensive background check, an independent third-party auditor examines POR via Merkle Tree technology — quickly breaking down data into smaller amounts so transactions can be efficiently processed with minimal errors or delays.

The aim is to guarantee a stable financial environment and balance for the clients with equal or more funds than the total of their accounts. At the end of each day, all exchanges want everyone to walk away feeling secure in their finances.

Why Proof of Reserves Is Important

A crypto exchange needs to be transparent to keep its clients’ assets safe — that means no secretive financial dealings. A lack of disclosure can risk bankruptcy, leaving all those invested vulnerable. By laying everything on the table and being open about their operations, a crypto exchange sends an important message: our customers come first.

Investment security is a significant concern for any crypto trader, but fortunately, solutions like proof-of-reserve audits can help protect them. These unbiased reviews give traders an insight into the amount of financial backing an exchange has and reassures users that real assets back their money. Plus, it benefits both parties — greater investment security yields bigger profits in the long run.

The Trigger: FTX’s Collapse: What Is FTX, and What Happened?

November 2, 2022, will be remembered as a day that exposed the truth behind one of the largest exchanges in the world — FTX. After its balance sheet was leaked to the public, it became apparent that much of what made up its funds and reserves weren’t from successful trading but rather from its native FTT tokens directly printed by FTX and Alameda Research.

This means potentially thousands were misled into believing FTX was doing great.

Just days before, FTX was flying high with a booming business and stable operations. But after some surprising developments came to light, Binance CEO Changpeng Zhao took steps that ultimately ended the venture’s success story: he liquidated his firm’s holdings in FTT as withdrawals were halted on November 8, 2022. As if this wasn’t enough of a blow — Binance made (and quickly withdrew) an offer to purchase all shares of FTX just one day later. Sam Bankman-Fried resigned from his position and announced FTX’s filing for Chapter 11 bankruptcy on November 11.

With its highly publicized connection to Bankman-Fried’s Alameda Research, Solana (SOL) has seen a dramatic plunge in value over the past month. After hovering near $30 on October 14, 2022, SOL is trading at around just $13 — meaning holders of this token have witnessed an eye-watering drop approaching 50%.

So … Why Proof of Reserves?

In the wake of FTX’s bankruptcy and the market frenzy, crypto exchanges have taken steps to ensure investor peace of mind. Leading businesses are all sharing their Merkle trees reserve certificates or announcing plans to do so soon — a move that speaks volumes regarding their commitment to client fund safety.

At Zenith Chain, we’ve always prioritized Clients’ security — with 1:1 reserves guaranteed.” Rest assured, your funds won’t go into safe hands.

A look at the Future

Crypto exchanges are increasingly adopting Proof of reserves, but until it becomes an industry-standard practice, you should keep your digital assets safe with a hardware wallet. Not only is this cold storage more secure than having them sit on the exchange itself, but it is also safer in case unforeseen circumstances arise.

A trustworthy crypto platform is essential to have peace of mind when investing. To ensure you don’t fall victim to malicious actors, you must take the initiative and read up on ways to protect your cryptocurrency.