In light of recent events in the crypto industry, it is becoming increasingly important that Kraken customers and industry participants understand the importance of Proof of Reserves (PoR) on Kraken.
This technique, which is only possible in the new world of cryptocurrency, is a way for Kraken customers to verify whether or not their account balances were included in a third-party audit that showed Kraken had covered customer assets. the day of the audit.
In other words, for every bitcoin, ETH, and various other crypto assets you entrust to us, we want you to be able to personally verify that Kraken has verified that an equivalent amount of that asset is held in our secure wallets. PoR allows this to be done transparently and securely.
What is a reservation?
In financial services, a reserve is traditionally a deposit of assets in treasury. You can think of it as a quantity of money held by an institution, ready for any situation in which it may be needed.
Reserves are generally held to cover customer liabilities, which are outstanding debts that a company owes to its customers based on the holdings in their accounts.
Reserves come into play when you want to withdraw your cryptocurrency from our exchange and keep it in custody yourself. In traditional finance, a bank keeps cash and other valuable items on reserve, but in many cases, it doesn’t hold your actual deposits in full, which means your reserves aren’t always backed up one-to-one.
Why are reserves important?
In traditional finance, a situation where too many customers withdraw their funds at once is called a bank run, and it can be fatal to an economy.
Executions can also occur on centralized cryptocurrency exchanges, leading to major problems if the platform does not have enough assets on reserve to facilitate customer withdrawals.
Often in these unfortunate scenarios, platforms without adequate reserves can suspend withdrawals, leaving clients unable to retrieve their assets from the platform. Depending on the circumstances, these situations can take weeks, months, or sometimes years to resolve, and even then, there is no guarantee that clients will receive the full amount of what they lost.
What is Proof of Reserves?
There is currently no legally approved definition of what a Proof of Reserves audit is.
At Kraken, PoR is an independent audit by a third party that serves to demonstrate that we had assets in reserve on the date of the audit that at least equaled our clients’ covered balances. This is done with user verifiable cryptography to provide 100% transparency and certainty.
At Kraken, PoR is not a case of simply subtracting customer liabilities from customer assets, or providing a list of on-chain wallet addresses for others to inspect. These practices are incomplete and may be misleading to customers seeking to understand the transparency of their exchange.
We believe that the only way to unequivocally demonstrate to clients that we held covered assets at least equal to covered liabilities on the audit date is to use sound mathematics and an independent firm to demonstrate that your account balances in cryptocurrencies such as BTC and ETH (aside from the ones where he opted for extra performance) were actually in the hands of Kraken.
Why are Proof of Reserve audits important?
Proof of reserves helps demonstrate to our clients and the industry that we do not lend the cryptocurrency in your account to others without your knowledge or back your holdings with anything other than the cryptocurrency itself.
In a world of uncertainty, PoR audits exist as one of the few processes where clients can truly know if a platform is creditworthy enough and capable of processing withdrawals.
How are Proof of Reserves audits performed on Kraken?
Our reserves are verified through audits conducted semi-annually (twice a year) by one of the top 25 independent global accounting firms. As an independent third party, the auditor attests to the accuracy of both our clients’ liabilities and the assets Kraken holds to cover those liabilities.
Kraken goes a step further by allowing our clients to independently verify that their holdings were also included in the Proof of Reserves.
At a more granular level, the audit firm takes a snapshot of client balances and organizes them into something called merkle tree — a type of data structure used in cryptography to aggregate and verify the integrity of a set of data.
Using the Merkle tree, account balances are first hashed (converted into unique hexadecimal codes) and then repeatedly processed in pairs, until the final two hash pairs are combined to form a single hash code. known as a merkle rootthis unique code acts as a fingerprint that uniquely represents all the data captured in the auditor snapshot.
The auditor then compares the number of assets held in Kraken’s on-chain crypto wallet addresses to the balances shown in the Merkle tree.
To avoid exposing security vulnerabilities, Kraken provides digital signatures to the audit firm. These signatures prove that we maintain control over the wallets without having to reveal the corresponding private keys. It also shows that the funds do not belong to someone else.
Crypto assets included in the PoR audit include BTC, ETH, USDT, USDC, XRP, ADA, and DOT. In the future, we will look to include additional cryptocurrencies in the Proof of Reserves process with the goal of achieving even greater transparency for our clients.
How do I know my investments are safe?
Kraken’s Proof of Reserves audits are intended to reassure our clients that their funds are transparently and verifiably backed by sufficient assets held in reserve. Proof of reserves audits indicate that assets were held in Kraken reserves that were sufficient to cover customer withdrawals.
In addition to our reservations, we maintain a high level of security in all areas of our ecosystem. This is why Kraken remains one of the few crypto exchanges in the industry that has never experienced a security breach that resulted in the loss of funds. You can learn more about Kraken’s industry-leading security standards here.
Create an account today to benefit from Kraken’s industry-leading security and transparency.
There are no formally accepted rules or procedures that define a proof of reserves audit. For ours, we retain an independent accounting firm to perform work under the standards established by the American Institute of Certified Public Accountants and to issue an Independent Accountant’s Report on Agreed Procedures. This report includes specific procedures performed by that firm, as well as its findings.
These materials are for general information purposes only and are not investment advice or a recommendation or solicitation to buy, sell or hold any digital asset or to engage in any specific trading strategy. Some cryptographic markets and products are not regulated and you may not be protected by government compensation schemes and/or regulatory protection. The unpredictable nature of crypto asset markets can lead to loss of funds. Taxes may be payable on any returns and/or on any increase in the value of your crypto assets and you should seek independent advice on your tax position.
This post What is Proof of Reserves? A Beginner’s Guide
was published first on https://blog.kraken.com/post/16400/what-is-proof-of-reserves-a-beginners-guide/