Binance, the world's largest cryptocurrency exchange, on Friday released its proof-of-reserves system, intended to show evidence for the exchange's ability to cover its users' assets one for one.
By way of explanation, Binance said that when a user buys one bitcoin token, Binance buys one bitcoin token and holds that specific token until the user decides to sell or swap it for another asset.
"What this means in actual terms is that Binance holds all user assets 1:1 (as well as some reserves), we have zero debt in our capital structure and we have made sure that we have an emergency fund (SAFU fund) for extreme cases," the exchange said in its announcement.
Binance also added that this proof of reserves does not include Binance's corporate holdings, which are kept on a completely separate ledger.
For the purpose of users being able to verify their asset holdings, Binance has built and implemented a Merkle tree, which is a cryptographic tool that enables the consolidation of large amounts of data into a single hash. This single hash, called a Merkle Root, acts as a cryptographic seal that “summarizes” all the inputted data. Additionally, Merkle Trees give users the ability to verify specific contents that were included within a particular set of “sealed” data.
