Top CEXes Promise Transparency with Merkle Tree Proof of Reserves

• Binance has pledged to release its Proof of Reserves (PoR).
• Major cryptocurrency exchanges are reportedly willing to release their Merkle Tree records.
• Providing evidence of reserves can serve to increase trust among investors.

Even by the standards of the crypto industry, the events of the past seven days have proven exceptionally chaotic. With the crypto industry still feeling the effects of the collapses of Luna, Celsius, and Three Arrows Capital (3AC), news around the potential collapse of leading crypto exchange FTX due to liquidity issues and rumors of insolvency has hit the headlines, and indeed the crypto markets, in spectacular fashion.

Amid the roar of the FTX-Binance drama, Binance CEO Changpeng “CZ” Zhao announced that the crypto exchange would use a Merkle Tree Proof of Reserve system to ensure full transparency, and has urged other cryptocurrency exchanges to follow suit in order to foster trust between exchanges and investors at this critical juncture. Following Zhao’s pledge, cryptocurrency entrepreneur and Founder of Tron Justin Sun stated that the Huobi exchange, of which Sun is an adviser and shareholder, will carry out “a third” Merkle tree reserve test.

Since the announcement, a range of marketplaces, including Binance, Gate.io, KuCoin, Poloniex, MEXC Global, Bitget, Huobi, OKX, Deribit, and Bybit, have all assented to publicly providing their Merkle Tree reserve certificates in an effort to encourage further transparency.

What Is the Merkle Tree Certificate?

A Merkle Tree, also known as a binary hash tree, is a form of computer science data structure. In the case of cryptocurrencies such as Bitcoin, Merkle Trees are used to more efficiently and securely encrypt blockchain data (BTC).

Centralized cryptocurrency exchanges (CEX) store information on the assets of each user using a central database ledger. Exchanges can therefore utilize Merkle Trees to store the hash value of assets in each user’s account in the Merkle Tree’s “leaf nodes”. In the second stage of this validation process, a third party audits the assets in the Merkle Tree’s leaf nodes to verify and authenticate user holdings.

On the Flipside

• With Sequoia pulling out of its FTX shareholdings, Binance considered a full acquisition of FTX before passing up the opportunity. While crypto has a reputation for its volatility, recent events, and indeed 2022 in general, has been particularly egregious.

Why You Should Care

Transparency is crucial for cryptocurrency exchanges to maintain, as, without it, users and investors would quickly lose faith in the system, often leading to cases such as that of FTX. With proof that user’s assets are safe and secure, they would have little reason to withdraw their funds, let alone in an en masse panic. Recognizing this, major cryptocurrency exchanges have decided to publicly disclose their Proof of Reserves to maintain that trust with investors.

Find out more about the recent FTX debacle: 

U.S. Justice Department and SEC are Investigating the FTX Crisis

Bankman-Fried Apologizes for FTX (FTT) Crisis, Says Alameda Research Is “Winding Down Trading”