On November 10, Chainlink Labs presented its Proof of Reserve product as a remedy to future trust issues in the cryptocurrency exchange sector. In a series of tweets, Chainlink Labs asked, “Will crypto continue to repeat the mistakes of the traditional black-box financial industry? Or will a better system emerge?”
In response, it provided its Proof of Reserve (PoR) product, which it described as suitable for verifying centralised exchange asset reserves, off-chain bank account balances, cross-chain collateral, real-world asset reserves, and much more.
Due to a liquidity problem at FTX, the crypto market has crashed for the past few days. The exchange has been unable to process withdrawals quickly, causing widespread concern throughout the cryptocurrency market.
The crypto community has begun considering potential solutions to these recurring challenges. One is for clients to demand that every exchange they use give Proof of Reserve.
#Chainlink Proof of Reserve isn’t just for #DeFi.
Any digital asset exchange can use Chainlink PoR to verify off-chain and on-chain collateral, helping bring enhanced transparency to the wider #crypto ecosystem. pic.twitter.com/LhirB0dhNp
— Chainlink (@chainlink) November 7, 2022
Proof of Reserve is a protocol for customers to audit the reserves of cryptocurrency exchanges in real-time. Several exchange platforms have already adopted Proof of Reserve, and CZ of Binance argues that all should now provide this functionality.
However, several exchanges have stated that developing a Proof of Reserves mechanism will take weeks or months.
In response, Chainlink Labs asserted that its product is a ready-to-implement “out-of-the-box” solution for exchanges.
The solution employs Chainlink nodes connected to the exchange’s API, vault addresses, and a Proof of Reserve smart contract. Any other account on the network can query the agreement to check if the exchange’s crypto assets are equivalent to its liabilities. Chainlink Labs views this as an answer to the problem of exchange trust.
However, not all individuals concur. A Twitter user identified as “BLanka ” stated that Binance elected not to adopt Chainlink PoR because the Merkle Tree, or “binary hash tree”, also used by Chainlink, had its token set as the main component. After basic math, we realised that the token was not even required.