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Cryptocurrency custodians undergo PoR audits to show that users' funds are being held in full. Binance conducts and publishes the results of internal audits, which are further verified by third-party auditors using cryptographic methods, proving that user funds are actually in the company's reserves. Binance users can also independently verify that their account balance was included in the audit.
Introduction
Cryptographic proofs based on blockchain technology ensure transparency of financial transactions on crypto exchanges. PoR records also promote transparency by creating an authorized framework for auditing cryptocurrency custodians.
PoRs are a step forward, but they still need to be further developed to increase transparency and reliability of the ecosystem.
What is PoR information?
A PoR audit verifies that custodians actually hold their clients' funds in full. Cryptocurrency custodial companies undergo PoR audits to show customers and the public that deposited funds match users' balances. These audits are carried out by independent parties, eliminating the possibility of falsification of reserve data.
PoRs are important for several reasons. First, they make sure that user balances on a cryptocurrency exchange are backed by reserve assets. Second, they maintain standards of transparency in companies, making it more difficult to engage in questionable or illegal financial activities.
Ideally, PoRs should benefit both users and businesses. They protect users by reducing security risks and preventing fraudulent activity, while at the same time helping companies retain users and increase their trust.
Conducting an audit of cryptocurrency exchanges guarantees the transparency of the crypto-ecosystem. For example, PoR prevents exchanges from acting as banks by lending deposited assets to third parties.
Likewise, exchanges cannot use deposits to invest in other protocols or companies. In other words, PoRs reduce the risk of companies using customer assets for profit.
With PoR, anyone can verify that a cryptocurrency exchange actually owns the entire amount of its users' deposits. If it turns out that the exchange used these funds for its own interests, trust in it will be undermined.
Why is PoR verification needed?
During PoR verification, the auditor checks the availability of funds from the balance of each account using cryptography. The process is carried out in several steps.
First, the auditor takes a snapshot of all account balances. This data is converted into a Merkle tree, which is used to structure large amounts of information and simplify processing.
User balance data is hashed into a “sheet”. A group of such leaves is then hashed to form a “branch,” and a group of branches is hashed to form a “root.”
The auditor can then use various methods to verify the ownership of each user's address. For example, Binance auditors can do this in three ways. If the process of extracting this information is carried out by the exchange, it is also verified by auditors.
Cryptographic message signing: The auditor provides the exchange with a unique message for cryptographic signing using the corresponding private keys.
Mandated Funds Movement: The exchange must perform a Mandated Funds Movement in which a certain amount from the public key/address will be moved at a certain point in time to obtain the transaction hash and verify the transaction on the corresponding blockchain.
Searching for Addresses in a Blockchain Explorer: An auditor can also search for ETH and BSC addresses (in the case of Binance) on Etherscan and BscScan to ensure they belong to an exchange.
If, as a result of the verification, the balances match, then the exchange will pass the PoR and prove that it owns all deposited assets in full.
PoR Limitations and Opportunities for Improvement
The balance of a cryptocurrency exchange changes as users deposit and withdraw their assets. The problem with PoR is that reserve balances are only verified at certain intervals. As a result, potential problems may be discovered too late, and the custodian may use this opportunity to conceal the use of funds.
It is also important to note that the audit is carried out by third-party organizations, that is, the results of the audit depend on the competence of each auditor and the influence of third-party interests on them.
So what can a crypto exchange do to improve its PoR audit and increase user trust? To begin with, it is necessary to reduce the intervals between audits to exclude any suspicious financial activity during these periods of time. In addition, the exchange must use a reliable third party organization without any financial interest in it or its associated bodies.
Crypto exchanges use PoR to ensure transparency, which is very important during times of financial turmoil. Unlike the traditional banking system, which is based on trust, blockchain technology uses a combination of mathematics and cryptography, offering a more advanced way to audit the financial market.
How to verify that your account has been audited
Users can independently verify that their Binance account was included in the PoR audit. To do this you need to do the following:
Log into your Binance account, open the “Wallet” tab and go to the “Audit” tab.
You will see all the latest PoR audits that checked your account balance.
Additional information can be obtained for each specific audit. In addition, you can also download the Merkle tree here.
Summary
You can study the results of PoR audits and independently verify whether the cryptocurrency custodian holds full reserves of user funds. Audits prevent mismanagement of user funds and increase transparency in the crypto space.
Asset custody information is the first step to restoring and maintaining the trust of cryptocurrency users. In addition, PoR sets high standards for exchanges, places special emphasis on user funds, and makes the industry safer and more transparent for everyone.
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