In an effort to instill public confidence in crypto, Binance has rolled out a new Proof of Reserve (PoR) verification system, adding new tokens and advanced technology that further enhances privacy, security and reliability. Binance is the world’s largest crypto exchange.
“Because of the fallout of several well-known players in the space in 2022, centralized financial intermediaries need a way to provide assurance to external parties of their balance sheet strength and the existence of user funds on an account level,” Max Tang, director of finance at Edge & Node, told Austin Journal. Edge & Node is a software development company founded by the core protocol team behind the blockchain indexing and querying protocol known as The Graph. "PoR is one of the ways to do that," Tang added.
The upgrade uses an advanced zk-SNARK technology that "further enhances privacy, security and reliability,” a spokesperson for Binance said in a release announcing the new system. That should add to the peace of mind for users and account holders as this "major improvement" enables users to verify that Binance has enough to cover all of its user assets and that Binance has additional reserves on hand.
Max Tang
| Edgeandnode.com
“Although PoR is not perfect, it is a significant step forward in terms of providing transparency to users, particularly with regard to the existence of user funds,” said Tang, who earned an MBA from the Tuck School of Business at Dartmouth.
Binance has added this new private, secure verification system in response to calls for greater security and transparency to protect users and investors across the crypto industry. Those demands have been made in the aftermath of the FTX collapse that send shock waves across the industry.
Binance said it has made its PoR code open-source, thus providing full transparency and to allow others in the industry to benefit while providing feedback on the technology.
Industry watchers welcomed the change.
“We are encouraged by the steps taken by Binance US to increase transparency and elevate the conversation around proof of reserves,” Lee Bratcher, president of the Texas Blockchain Council, told Austin Journal. “In Texas, we have been working closely with the Texas Legislature and specifically Rep. Capriglione and Spencer Schumacher of the Innovation and Technology Caucus, to draft a bill (HB 1666) that would require exchanges doing business in Texas to have a plan for implementing industry best practices around proof of reserves.”
The upgraded security also gives Tang more of a reason to recommend using Binance, he said.
Asked if he’s more likely to recommend using the Binance exchange now, Tang said, “Everything else being equal, yes. Every exchange should provide PoR. A privacy-enhanced PoR system is strictly better than one that exposes more user information.”
Binance's zk-SNARK zero-knowledge verification technology is private, secure and "would require an unfeasible amount of computational power to break its security,” the company said in its release. Polyhedra Network, a Web3 infrastructure builder, has said that modern zero-knowledge proof systems are so secure that they are essentially unbreakable.
While the zk-SNARK protocol might not be perfect, it is being called one of the best systems in existence.
“I am not aware of other PoR systems using zero-knowledge proofs,” Tang said. “In this context, it (Binance’s system) is likely industry-leading.”
He discussed the merits of the zk-SNARK technology.
“My understanding is that this system uses zk-SNARKs for the Merkle proof, which provides more insulation for account information versus the traditional Merkle tree,” Tang said, referencing the cryptographic technique that was in use.
In a blog post announcing the improvement, Binance explained that after the November 2022 collapse of FTX, the crypto industry experienced a "crisis of trust.” The company said its development team has since been "hard at work building advanced proof-of-solvency solutions.” Demonstrating that all user funds stored on Binance are fully covered at a 1:1 ratio, and that reserves are on hand, is "critical" to "restore industry trust,” the Binance post said.
Asked whether it will restore that trust, Tang said, “Trust needs definition here and can mean different things for different people. What this tool enables is that users can run the verification themselves with an executable file provided by Binance.”
Against that backdrop, Tang said it will have implications for the crypto industry in general.
“Binance is the largest centralized intermediary globally,” he said. “This step provides industry leadership in terms of the direction where the industry is heading.”
With it in place, regulators now can feel better that centralized intermediaries are providing more information to users, Tang said, calling it a step toward “rebuilding the confidence that was lost in 2022.”