Binanceâs Proof of Reserves: Two Years of Leading User Funds Transparency
Main Takeaways
Binance introduced its Proof of Reserves (PoR) system two years ago to enhance user-asset transparency and demonstrate that all user assets are backed at least 1:1.
PoR has since become a requirement for responsible centralized exchanges, a tool to build and maintain trust in the digital-asset ecosystem.
Binance has continuously improved its PoR technology, incorporating advanced protocols like zk-SNARKs and capturing user debt liabilities to provide a holistic and transparent representation of user assets and liabilities.
Two years ago, in response to a crisis in confidence in our industry, Binance introduced the first iteration of our Proof of Reserves (PoR) system. We are proud to have been among the first global exchanges to embrace user-asset transparency and make the proof of safekeeping user assets public, demonstrating our commitment to ensuring that all user assets are backed at least 1:1.Â
Maintaining proof of reserves is now a requirement for any responsible centralized exchange. Clearly showing that user assets are safely stored and maintained on a 1:1 basis is essential for building and maintaining trust. As the industry continues to mature, and crypto assets adoption unfolds at an unprecedented pace, we look back at the key developments of our PoR over the last two years and the features that make it unique.
Leading the Industry in PoR Technology
Since day one, we have committed to constantly improving and enhancing our PoR technology. Our initial release used Merkle tree cryptography to consolidate user asset data, creating a Merkle root that summarized the holdings. While this allowed for reliable data verification, the community highlighted potential privacy concerns and manipulation risks associated with this approach. To address these issues, we implemented zk-SNARK protocols in February 2023. This zero-knowledge proof technology, combined with Merkle trees, enables Binance to prove full backing of user funds without revealing individual balances. Users can now verify their funds' inclusion in the total net asset balance calculation while maintaining privacy and security.
More recently, we have incorporated user collateral information and lending business logic into our PoR methodology to ensure that user liabilities are effectively and accurately captured. This protects against any theoretical vulnerabilities in the calculation that could arise without this level of transparency.
Binanceâs PoR is unique in capturing user debt liabilities and collateral information, providing a holistic representation of real liabilities and further demonstrating that assets on Binance are backed at a 1:1 ratio. No other exchange provides as much detail in their PoR and many with lending business do not represent user liabilities at all. Thus, Binance is setting the standard for PoR transparency. Â
Pillars of Trust
The guiding principles that inform our approach to building trust by increasing the transparency of user assets held on Binance are community, education, and an absolute priority of user funds security.Â
Being the largest global exchange and serving almost 240 million users, we have the responsibility to be as transparent as possible when it comes to how we handle user funds. Our PoR embodies this commitment, consistently demonstrating that we have over 100% backing for user holdings in 34 of the largest digital assets tracked by the system.Â
Building with Community
We believe in the fundamental importance of transparency across the industry. Very early on in the development of our PoR, we made the decision to fully open-source the code to aid with wider adoption. Open-sourcing the code has numerous benefits in addition to helping others in the industry improve their PoR mechanisms for the benefit of everyone. We are frequently contacted by researchers and members of the community who have identified potential weaknesses or improvements that can be made. Whether thatâs security audit firms highlighting potential vulnerabilities or researchers from the Ethereum Foundation identifying theoretical issues that can arise from capturing user debt liabilities, we have been able to promptly fix and enhance our PoR methodology to ensure that it remains the best in the business.
Continuous EducationÂ
Improving awareness about proof of reserves is crucial, not just for our platform, but for the entire cryptocurrency community. The original vision for proof of reserves emphasized transparency, accountability, and trust within the ecosystem. By fostering a deeper understanding of PoR principles and technology, the crypto community can contribute to preventing the kinds of collapses that have affected the industry in the past.
Our PoR site and Binance Academy offer a variety of educational resources tailored for all levels of expertise. From comprehensive articles that break down more complex concepts like ZK-snarks to user-friendly glossaries of crypto terms, we aim to demystify the core concepts. By helping our community understand proof of reserves, we can contribute to the overall resilience and credibility of the cryptocurrency ecosystem.
Prioritizing User Funds Security
PoR is an important part of our commitment to the security of our users' funds, clearly showing that user assets are held safely and responsibly. This approach to ensuring the safety of user funds is part of our DNA. In 2018 we established the SAFU fund to assure our users that we will protect their assets in unexpected situations. We always put our users first, there is no higher priority.
Binanceâs Proof of Reserves (PoR) system is in itself a tangible proof of our commitment to the safety and transparency of our users' funds. Over the past two years, even amid market volatility and peak withdrawals, Binance has consistently demonstrated the reliability of our platform, processing massive volumes of withdrawal requests thanks to always maintaining a 1:1 ratio of user asset holdings. By continuously enhancing our PoR technology and incorporating industry-first solutions like zk-SNARKs and representation of liabilities, we ensure that the system works to foster greater trust within and beyond the global crypto community. PoR is not just for show; it is a real representation of Binance's responsible management of user funds.