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Binance Proof-of-Reserve Pledge Receives Support in the Wake of FTX Predicament

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Binance CEO Changpeng “CZ” Zhao declared that his exchange will soon begin a Proof-of-Reserves audit process to provide verification of its digital asset holdings in the wake of the liquidity crisis and the takeover of cryptocurrency exchange FTX.

In a tweet on November 8, Zhao committed to developing a Proof-of-Reserve system at Binance in order to give “full transparency” via Merkle Trees, a data structure used to efficiently and safely to encrypt blockchain data better.

An independent third party usually performs a Proof-of-Reserve audit to make sure the assets belonging to the custodian are actually owned as stated.

The CEO of Binance announced his plan to launch Proof-of-Reserves, following Binance’s Nov. 8 agreement to acquire rival cryptocurrency exchange FTX — which had been thought to be on the verge of financial meltdown despite CEO Sam Bankman-Fried originally denouncing the claims.

Chainlink CEO Sergey Nazarov opined that a cryptographic-based Proof-of-Reserves system is becoming the new industry norm and might give investors a full perspective of the solvency situation of a trading venue or financial institution.

Crypto exchange Kraken has already started using its “advanced cryptographic accounting procedure” in February 2022 to let consumers verify the token balances.

The cryptocurrency exchange OKX also revealed its plans to introduce a Merkle tree-based Proof-of-Reserves audit mechanism, which it regards as an “essential step” toward creating “baseline trust” in the industry.

Nearly everyone on Twitter supported the concept of increased Proof-of-Reserve audits, and prominent members of the crypto industry commented on Binance’s decision.

Specifically, Anthony Sassano (host of The Daily Gwei podcast) and Erik Voorhees (founder of open-source crypto exchange ShapeShift) both asserted that Proof-of-Reserves is already a part of decentralized finance (DeFi) and is handled through smart contracts.

As for Messari founder Ryan Selkis, he argued that regulators should concentrate on the more centralized actors in the industry.

Antonio Juliano, the founder of the cryptocurrency derivatives trading platform dYdX, was among the people who disagreed with the notion. He stated the Proof-of-Reserves would not provide all the data required to confirm an exchange’s holdings.

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