Proof of reserves emerged as a direct response to the need for greater transparency among companies holding digital assets on behalf of investors. Now, the mechanism is expected to be revamped as institutions seek tools for tracking and auditing onchain assets in real time.
Web3 companies are hoping to capitalize on this demand. Financial data lake TRES, for instance, is launching a proof of funds mechanism that reportedly offers automated snapshots delivered in real-time for crypto exchanges and custodians.
“Exchanges only track wallets that exist on their co-mingled omnibus account. This is purely a balance snapshot of these specific wallets, meaning they can be potentially manipulated,” Tal Zackon, co-founder of TRES, told Cointelegraph.
Proof of reserves is a concept developed for exchanges to prove that they hold sufficient assets to back their customers’ deposits, reducing concerns about insolvency and misuse of funds. FTX’s collapse may be the latest example of the need for effective asset monitoring. The exchange's collapse in November 2022 sparked calls for transparency and prompted exchanges to disclose how they manage user funds.
However, the lack of standardization among companies is still one of the industry’s pain points. “We didn’t think it did the job of keeping a proper audit trail and providing real, validated trust to customers,” explained Zackon.
Binance’s proof of reserve page notes that although its users’ assets are fully backed, the majority of its corporate holdings are stored in wallets that are not included in its reserve calculations. Kraken, on the other hand, considers snapshots of spot balances only for selected assets, such as Bitcoin (BTC), Ether (ETH), Cardano (ADA), Polkadot (DOT), XRP (XRP) and some stablecoins.
“Real-time understanding of balances can be tracked manually, but seeing your full audit trail and financial history is the bigger issue,” said Zackon.
Solutions focused on onchain monitoring have been in the industry for a while. Chainlink, for example, uses oracles to conduct decentralized audits of assets and liabilities for exchanges. Glassnode also allows the tracking of exchange balances and analyzes onchain data to assess reserves.
However, the growing adoption of digital assets among traditional companies is likely to increase the demand for standardized reports using clear methodologies. Coinbase’s 2023 Institutional Investor survey revealed that 64% of current crypto investors expect their allocations to increase over the next three years.
“We believe that, in order for crypto to move forward, it must stay within the regulatory framework of existing traditional financial systems,” noted Zackon.
