Quadriga InitiativeWhy Proof of Reserves Matters
In 2019, we saw 3 large scale exchange events in Canada alone:
- QuadrigaCX
- EZ-BTC
- Einstein
Each one represents massive losses for those involved - hundreds and thousands of affected lives. These are real people and families at the other ends, with hopes and dreams, who worked hard for their money.
In the case of QuadrigaCX, it took the freezing of the bank accounts, the death/disappearance of the CEO, and concerted legal action to even realize it was insolvent.
Unchecked exchanges can continue to operate for years with whatever level of reserves they like, while standard traditional audits have multitudes of limitations.
Hacks may continue for weeks (Bitgrail) or months (Mt. Gox), either not noticed or not disclosed. Funds are lost forever due to the irreversible nature of cryptocurrency.
Overview of Proof of Reserves
Proof of Reserves enables a real-time public audit of an entity holding cryptocurrency such as an exchange. The algorithm uses the blockchain and a special structure called a hashtree to show without doubt that:
- Reserves exist on the blockchain.
- The exchange or entity has authority to spend those reserves.
- Those reserves include the balance of any customer which checks.
This is done without revealing the private/personal information of customers or who owns what on the exchange.
This tutorial will explain the algorithm in full detail. Let's get started!