{"id":15058,"date":"2022-12-02T05:16:05","date_gmt":"2022-12-02T05:16:05","guid":{"rendered":"https:\/\/crowdfundjunction.com\/blog\/proof-of-reserves-are-at-best-incomplete-at-worst-misleading-and-deceptive-says-crypto-analyst-martin-hiesboeck-interview-bitcoin-news\/"},"modified":"2022-12-02T05:16:05","modified_gmt":"2022-12-02T05:16:05","slug":"proof-of-reserves-are-at-best-incomplete-at-worst-misleading-and-deceptive-says-crypto-analyst-martin-hiesboeck-interview-bitcoin-news","status":"publish","type":"post","link":"https:\/\/crowdfundjunction.com\/blog\/proof-of-reserves-are-at-best-incomplete-at-worst-misleading-and-deceptive-says-crypto-analyst-martin-hiesboeck-interview-bitcoin-news\/","title":{"rendered":"Proof-of-Reserves Are at ‘Best Incomplete, at Worst Misleading and Deceptive’ Says Crypto Analyst Martin Hiesboeck \u2013 Interview Bitcoin News"},"content":{"rendered":"

(Originally posted on : Bitcoin News )<\/b>
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While many crypto exchanges have seemingly embraced the use of proof-of-reserves (PoR) to showcase their transparency and reassure nervous users, crypto analyst Martin Hiesboeck insists such so-called proofs are susceptible to manipulation or misrepresentation. He added that PoRs alone are not a suitable method of verifying an exchange\u2019s reserves because they do not \u201caccount for liabilities and off-chain assets at all.\u201d<\/strong><\/p>\n

PoR May Be \u2018Misleading and Deceptive\u2019<\/h2>\n

Following the collapse of FTX in November, trust in centralized exchanges ebbed, with many users rushing to move their assets off of such platforms. This, in turn, sparked a rush by crypto exchanges to present or publish their proof-of-reserves (PoR).<\/p>\n

Seen as an emergency response to the confidence crisis created by FTX\u2019s fall, PoR Merkle trees have seemingly become the de-facto standard measure used to project a crypto exchange\u2019s transparency. Proponents of PoR assert that using this audit method reassures users that a crypto exchange is not misusing their funds.<\/p>\n

However, despite their apparent embrace by many in the crypto industry, presenting PoR audits alone may not prove that an exchange is not misusing client funds. It is also alleged that some crypto exchanges are lending each other funds just prior to an audit and returning these immediately after a PoR has been presented.<\/p>\n

To critics like Martin Hiesboeck, a crypto analyst and head of blockchain and crypto research at the multi-asset digital trading platform Uphold<\/a>, PoRs are not suitable tools for proving the status of an exchange\u2019s reserves because they do not \u201caccount for liabilities and off-chain assets at all.\u201d This according to Hiesboeck<\/a> makes PoRs \u201cat best incomplete, at worst misleading and deceptive.\u201d<\/p>\n

Commenting on why some in the crypto space have seemingly endorsed PoRs, Hiesboeck told Bitcoin.com News:<\/p>\n

\u201cThe Merkle Tree PoR has seen increased adoption and interest in the past few weeks due to shaken trust in centralized exchanges. CEXs [centralized exchanges] needed a fast and public \u2019emergency response\u2019 to restore public and user trust, and this is why the so-called Proof of Reserves method became so popular and is currently touted as the best way to prove an exchange\u2019s transparency \u2014 at least on paper.\u201d<\/p>\n

Nevertheless, Hiesboeck notes that PoRs have two issues that make them susceptible to manipulation or misrepresentation. One is what Hiesboeck describes as the inherent opaqueness of a Merkle Tree model. This model by design \u201callows for the verification of certain data without divulging its contents.\u201d<\/p>\n

For centralized exchanges using this model, it means their respective auditors can publish a \u201clegitimate snapshot\u201d of a crypto exchange platform\u2019s reserves. Explaining why he finds this problematic, Hiesboeck said:<\/p>\n

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Regular onlookers have no means to verify the results of PoRs nor assurance that funds weren\u2019t moved from these addresses immediately after the audit. To solve this issue, at least partially, there needs to be some kind of a real-time independent reserve monitoring system to provide up-to-date information over time.<\/p>\n<\/blockquote>\n

The exclusion of an exchange\u2019s outstanding liabilities in PoRs is another issue making them a less reliable way of verifying or ascertaining a crypto exchange platform\u2019s financial well-being. Therefore presenting or publishing a crypto exchange\u2019s assets without also revealing its liabilities does not provide an accurate picture of the platform\u2019s financial health, Hiesboeck argued.<\/p>\n

\u201cMany exchanges that have published PoRs don\u2019t include such information, meaning they are non-transparent. Nor do they reflect any custodians\u2019 off-chain assets and where these funds originated from,\u201d he added.<\/p>\n

Still, despite Hiesboeck and other critics\u2019 arguments against the use of this model, PoRs appear to have gained traction. As reported<\/a> by Bitcoin.com News, several large crypto exchanges have presented audits based on the Merkle tree model. Binance, one of the world\u2019s largest crypto exchange platforms, recently published<\/a> its PoR for bitcoin. The snapshot suggested that Binance\u2019s BTC<\/a> reserves were slightly more than net user balances.<\/p>\n

Meanwhile, when asked if there is a better alternative verification method, Hiesboeck replied:<\/p>\n

\u201cThe only alternative to a Merkle Tree PoR is a system that provides a combination of reserves and liabilities. It should include proof that the operating entities are domiciled in the right jurisdictions and that any attestation has been subject to review by an external auditing firm.\u201d<\/p>\n

What are your thoughts on this story? Let us know what you think in the comments section below. <\/strong><\/em><\/p>\n

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\nTerence Zimwara <\/h6>\n

\nTerence Zimwara is a Zimbabwe award-winning journalist, author and writer. He has written extensively about the economic troubles of some African countries as well as how digital currencies can provide Africans with an escape route.

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Image Credits<\/b>: Shutterstock, Pixabay, Wiki Commons, Dr. Martin Hiesboeck, Twitter<\/em><\/p>\n

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Disclaimer<\/strong>: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com<\/a> does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.<\/p>\n<\/div>\n

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