Can proof-of-reserves prevent future crypto exchange collapses?

A number of crypto exchanges are rushing to publish proof-of-reserves in a seeming attempt to reassure investors their funds are safe as fellow exchange FTX melts down.

Proof-of-reserves (PoR) are independent audits by third parties that aim to provide transparency and evidence that a custodian holds the assets it claims to own on behalf of its clients. Auditors then aggregate balances into something called a Merkle tree, which entails all client balances.

FTX exploded this week following a CoinDesk report that showed a June 30 balance sheet of its affiliate trading firm, Alameda Research, was largely made up of FTX’s native token, FTT. This all could have been avoided with PoR, Sergey Nazarov, co-founder of Chainlink, said to TechCrunch.

“There was a balance sheet issue and it became known to many depositors all at once,” Nazarov said. “And because it was a surprise, there was a bank run that led to insolvency.”

But imagine if depositors knew what FTX and Alameda Research’s balance sheets were from the beginning.