The collapse of FTX in 2022 reminded the crypto world that even popular exchanges can fail. One of the ways investors can safeguard their funds is by checking whether an exchange conducts proof of reserves (PoR) audits.
Coinpedia’s guide breaks down proof of reserves in plain terms, explains why it’s essential post-FTX, and shows how you can use it to evaluate exchange safety.
Proof of reserves is a transparency mechanism where a crypto exchange publicly proves it holds enough assets to cover customer deposits. In other words, it’s a verification that your funds actually exist and aren’t being misused. Traditional banks rely on trust and regulation.
Crypto exchanges use proof of reserves to give users visibility without compromising privacy.
Snapshot of Assets: The exchange creates a cryptographic snapshot of all customer balances.
Merkle Tree Creation: These balances are hashed into a structure called a Merkle tree, allowing users to verify their holdings without seeing others’ balances.
Public Audit: The exchange publishes the proof, and independent auditors or users can verify the numbers.
This method allows transparency while maintaining user privacy—a balance that’s crucial in crypto.
The FTX collapse highlighted how a lack of transparency can devastate investors. Many funds were missing or misused, and users had no reliable way to check balances. Since then:
Top exchanges have adopted PoR to reassure users.
Regulators increasingly favor exchanges that provide clear proofs of liquidity.
Investors are now more cautious, using proof of reserves as a key safety metric.
Official Announcements: Exchanges often release PoR reports on their websites or blogs.
Third-Party Audits: Independent audits add credibility.
Regular Updates: The most reliable exchanges publish frequent snapshots, not just one-time proofs.
Popular exchanges offering proof of reserves include Kraken, Bitstamp, and Binance.
Coinpedia Recommendations Use proof of reserves as one factor among others: security, regulatory compliance, and reputation.
Prefer exchanges with ongoing audits, not just past statements.
Always combine PoR checks with safe storage practices, like cold wallets for long-term holdings.
Final Thoughts Proof of reserves is a crucial tool for anyone looking to safeguard crypto assets. By verifying an exchange’s liquidity and transparency, investors can reduce risk and trade with confidence. 👉 Looking for exchanges with strong security and verified reserves? Check out our Coinpedia Best Crypto Exchanges List for safe, trustworthy platforms.