Quadriga InitiativeProving Reserves Include Your Balance
In order to do this, a structure called a hashtree is used. A hashtree is a binary tree structure, where the data in the nodes is hashed (one-way encrypted). The hashtree can be used to validate balance information without revealing sensitive customer information.
The full implementation of the hash tree is described in detail by a page put together by Zak Wilcox. The idea was developed by Gregory Maxwell and Peter Todd.
Why Do We Need a HashTree?
As a simple check, you can see that the reserves are greater than what you stored. If every customer did this, it would enforce that the exchange has a balance at least as large as the largest customer. That would mean that there is sufficient balance for any customer to make a withdrawal up to their entire balance.
However, what if multiple customers want to withdraw? In order to know that this would be possible, we would have to know that the total in reserves was equal to the sum of all customer balances, and that this sum included your balance.
One simple solution would be to publish all the customer balances and personal information globally in one list. Then, each customer could check their balance on the list, and check that the sum added up. The obvious problem with this solution is that all the customer balances and personal information are published, and anyone could see the information of anyone else.
Clearly, we need a way to publish this list, without revealing all the private and personal information of customers to other customers. All a customer needs to be able to validate is their own information, and that the balances add up. This is what a hashtree does.