Kraken CEO Calls Binance's Proof of Reserves "Pointless"-Here's Why

Kraken CEO, Jesse Powell shares his displeasure at Binance’s system of disregard for accounts.
Powel stresses that the proof of reserves audit should include cryptographic proof of client balances and wallet control.

In the wake of the FTX fallout, a number of crypto exchanges have promised to share their Proof-of-Reserve (PoR) audits with Merkle proof. This is an effort to increase transparency and prevent future misappropriation of customer funds.

A Merkle proof is a cryptographic technique that can be used to verify the authenticity of a large amount of data. In the context of PoR audits, Merkle proofs can be used to verify that an exchange’s claimed reserves match the actual assets held in its wallets.

The Kraken CEO, Jesse Powell, has been a vocal advocate for full PoR audits with Merkle proof. He has argued that these audits are essential for ensuring that exchanges are solvent and can meet their obligations to their customers.

Powell has criticized Binance for its PoR audit, which he says is incomplete and does not provide cryptographic proof of users’ balances and wallet control. He has also called for media outlets to stop misleading customers about PoR audits.

Powell is correct to point out that Binance’s PoR audit is incomplete. The audit only provides a list of addresses that Binance claims to hold customer funds. However, it does not provide any cryptographic proof that these addresses actually contain the claimed funds.

A full PoR audit would need to include the following steps:

The exchange would need to create a Merkle tree of all of its customer balances.
The exchange would need to publish the Merkle root of the tree.
An independent auditor would need to verify the Merkle tree and confirm that the claimed balances are accurate.

Only by following these steps can an exchange provide a truly transparent and reliable PoR audit.

It is important to note that PoR audits are not a guarantee that an exchange will never run into financial trouble. However, they can help to increase transparency and confidence in the exchange. This is especially important in the wake of the FTX fallout, which has shaken the trust of many investors in the crypto industry.

By sharing their PoR audits with Merkle proof, exchanges can show their customers that they are committed to transparency and accountability. This can help to rebuild trust in the crypto industry and attract new investors.