Love, Money and Proof Of Reserve.

When it comes to spiritual and emotional health, as well as outright self-care, love and money have something in common. Love always starts with you, it begins with self-love, self-respect and trust.
I don’t know who originally said this, but they must have been a Stoic, echoing the idea that you can’t give what you don’t have. If someone promises you love or claims to love you but doesn’t love themselves, that love is empty.
Love is given, love is shown, it's not a rumor to be spoken. Likewise, if a bank or crypto exchange promises you withdrawals but doesn’t actually hold your funds or provide verifiable proof of reserves, that promise is just as hollow, trust them not.
In traditional finance, banks operate on fractional reserve banking, meaning they only keep a fraction of deposits on hand, lending out the rest. If too many customers ask for their money at once, the system collapses.
Crypto introduces Proof of Reserves (PoR) a public, verifiable guarantee that an exchange actually holds the assets it claims. Think of it as a love test for financial institutions they can’t give what they don’t have. They can't show what they don't have.

(By the way, this is just an analogy, I’m not talking about myself! My romantic life is actually amazing, in case you were wondering. Now, back to money… 😂)

What is Proof of Reserves?

Proof of Reserves is an independent audit that confirms whether a crypto exchange or DeFi (Decentralized Finance) platform has enough assets to cover all user deposits. Unlike banks, which obscure their true reserves, PoR provides transparency, letting users verify the exchange’s solvency even from the comfort of your own home or phone.

Key Components of effective PoR:

• Independent Third-Party Audit : A neutral entity verifies the exchange’s reserves.
• On-Chain Transparency : Some PoR solutions use blockchain technology for public verification.
• Reserves vs. Liabilities Check : Ensures the platform has more assets than customer deposits preventing misuse of customer funds for operations.
• Smart Contract Integration : Some DeFi platforms implement automated PoR checks using smart contracts, ensuring funds match reserves on-chain at all times.
• Real-Time and Continuous Audits – Some platforms are moving towards real-time, continuous audits. This approach not only enhances their reputation but also minimizes the risk of manipulation by providing ongoing transparency.

Why is Proof of Reserves Important?

1. Preventing Another FTX-Style Collapse

FTX’s dramatic collapse in 2022 exposed how it had been recklessly gambling with customer deposits. If Proof of Reserves (PoR) had been in place, users could have spotted the warning signs early and withdrawn their funds before disaster struck. Learn more about what actually happened here: FTX Scam Explained.

2. On-Chain Transparency vs. Traditional Finance Secrecy

Banks keep customers in the dark, requiring government bailouts when they fail. This lack of transparency encourages risky behavior, as highlighted in this article. In contrast, Proof of Reserves (PoR) allows crypto platforms to prove their solvency in real-time, eliminating the need for blind trust.

3. Trust in Stablecoins, RWAs, and Tokenized Assets

Stablecoins, Real-World Assets (RWAs), and cross-chain assets must be backed 1:1 with reserves. PoR ensures these assets remain fully collateralized and reduces the risk of a liquidity crisis or bank-runs.

Technologies Used in Proof of Reserves

• Merkle Tree Proofs : A cryptographic method allowing users to verify their balances in an exchange’s total reserves without revealing sensitive information. This video will give you a brief understanding of Merkle Trees and PoR as well.
• Zero-Knowledge Proofs (ZKPs) : Advanced cryptography proving that an exchange has reserves without revealing exact amounts. Here's a quick video on ZKP's.
• Blockchain Oracles : Services like Chainlink Proof of Reserve bring off-chain data (like fiat reserves) on-chain for real-time verification. Proof of Reserve as a service. Other Oracles.

Leading Proof of Reserve Solutions and Validators

• Binance : Self-conducted, uses a Merkle Tree-based PoR system.
• Kraken : Armanino LLP Partners with Armanino LLP for third-party audits.
• Coinbase : Deloitte, Deloitte provides quarterly audit reports.
• OKX : Self-conducted, publishes monthly PoR reports with a BTC reserve ratio of 102%.
• Gate.io : Self-conducted offers Merkle Tree verification of reserves.
• MakerDAO : On-chain verification, reserves are fully transparent and verifiable on-chain (DAI backed by collateral).
• Aave : On-chain verification, uses smart contracts to ensure reserves match deposits; no third-party audits.
• Compound : On-chain verification, reserves are transparent and verifiable on-chain; no third-party audits.
• Uniswap : On-chain verification liquidity pools are fully transparent and verifiable on-chain.
• Curve Finance : On-chain verification, reserves are verifiable on-chain through smart contracts.
• Synthetix: On-chain verification, collateralization ratios are transparent and verifiable on-chain.
• Lido Finance : On-chain verification, staked assets (e.g., ETH) are verifiable on-chain through smart contracts.
• Yearn Finance : On-chain verification, vault reserves are transparent and verifiable on-chain.
• dYdX : On-chain verification, uses StarkWare for scalability; reserves are verifiable on-chain.
• PancakeSwap : On-chain verification, liquidity pools and reserves are fully transparent on-chain.
• Bitget : Self-conducted, utilizes a Merkle Tree-based PoR system. Users can independently verify their assets using the open-source MerkleValidator tool available on GitHub.

Clarifying 1:1 Backing: Where Does the Extra Money Come From?

A common misconception about Proof of Reserves (PoR) is whether an exchange needs its own funds to cover large deposits like 100,000 BTC, if it only holds customer deposits 1:1. The answer is straightforward:

• If you deposit 100,000 BTC, the exchange must have at least 100,000 BTC in reserves.
• Unlike banks, which lend out customer deposits, PoR compliant exchanges do not use customer funds for operations.
• Instead, a centralized exchange (CEX) covers its expenses using its own money fromprofits, investor funds, or operational reserves.
• The more a CEX earns, the more it can reinvest in growth but it never touches customer deposits.

This is why PoR is the ultimate trust test for exchanges they either have the funds, or they don’t. There’s no faking it.
And just like in love, you can’t pour from an empty cup. If you don’t have love, peace, or healing within yourself, you can’t truly give it to others. Similarly, an exchange must have the reserves it claims in order to fulfill its promises no empty words, just real backing.

The Problems with Proof of Reserves

1. PoR Without Liabilities is Meaningless: Most exchanges only show assets, not liabilities. Without knowing what an exchange owes, users can’t determine if assets are truly available to cover customer deposits. Only a few exchanges (e.g., Kraken, Coinbase, Gate.io) provide liability-inclusive reports. Also, Frances Copolla here, gives a more detailed insight on this. NB. This is all changing for the better though.
2. The "Trust Me Bro" Snapshot Problem: PoR snapshots capture reserves at a single point in time, leaving room for manipulation. Exchanges can temporarily borrow funds to inflate reserves, then return them right after the snapshot, giving a false sense of security. While CEX's have taken significant steps towards transparency, DEFI is pushing the boundaries even further with real-time , on-chain verification. Based on my research, Bitget appears to be leading the way in improving PoR standards. In-fact as of February, this year (2025), their reserve ratio was at 186% almost hitting a ratio of 2:1 but 1.86 : 1.
3. Limited Scope of Audits: Audits often cover only Bitcoin and Ethereum, ignoring alt-coins that make up significant portions of reserves. For example, Crypto.com held 20% of its reserves in SHIB, while Binance held just 15% in BTC/ETH. Volatile or illiquid tokens can quickly undermine solvency. This is however changing though.
4. Auditor Exodus: Major auditors like Armanino (Who had previously audited FTX and giving it a clean bill of health, as reported by forbes), and Mazars, Binance’s main auditing partner, have exited the crypto space. Mazars primarily withdrew due to concerns that public misunderstandings of their PoR reports, especially in the wake of FTX's collapse, could damage their reputation (as highlighted in this article). Meanwhile, the Big Four (Deloitte, PwC, EY, KPMG) remain hesitant to audit private crypto firms. This leaves the industry with fewer credible audit options.
5. Rehypothecation Risk: Exchanges can rehypothecate assets; using the same funds for multiple purposes, creating systemic risk. Without full liability disclosure, PoR audits cannot fully prevent this.

"Not Your Keys, Not Your Wallet; Not Your Wallet, Not Your Funds"

The crypto adage "Not your keys, not your wallet; not your wallet, not your funds" highlights the risks of trusting centralized exchanges. Even with PoR, users lack actual control over their private keys, leaving their assets vulnerable to mismanagement, fraud, or insolvency. True ownership and security come only from self-custody. Take control of your funds, be your own bank, just as Satoshi intended.

Conclusion: Why Crypto Needs Proof of Reserves

In both love and finance, trust and transparency is everything. PoR acts as a trust test for exchanges, proving they truly hold what they promise. While some major crypto platforms have embraced PoR, many still resist full transparency, and concerns about rehypothecation and liabilities remain unresolved.
The collapse of FTX was a wake-up call, but then again Bybit's recent resilience and transparency to the greatest heist in crypto history (so far), shows alot of growth in the space. The industry still lacks universal standards, and major auditors remain hesitant to engage.
Despite its limitations, PoR is a massive step forward compared to traditional banking’s opaque systems.
As the crypto industry matures, it's still very young, widespread PoR adoption could set a new benchmark for accountability one where users no longer rely on empty promises but have verifiable proof that their funds are safe.

What’s Next?

Stay tuned for our follow-up piece on how Bybit leveraged Proof of Reserves to navigate a major hack and why traditional banks wouldn’t survive a similar crisis.
Should all financial institutions adopt Proof of Reserves? Drop your thoughts in the comments! any suggestions will be highly appreciated.