After FTX collapsed in November 2022, concerns over the safety of centralized exchanges intensified across the crypto market. In response, Binance founder CZ called on exchanges to publish Proof of Reserves (PoR) and Merkle Tree data to improve transparency and reassure users about solvency.
What Proof of Reserves Shows
The source article uses a simple analogy: a mother keeping children’s Lunar New Year red-packet money. If she can show a bank account balance that exceeds the amount entrusted to her, that suggests she can repay everyone when asked. In the same way, an exchange’s Proof of Reserves is meant to show that it holds enough on-chain assets to meet withdrawal demands.
According to the article, users can check CoinMarketCap’s exchange listings for a “reserve” icon. If available, they can view the exchange’s reserve composition by asset type. The piece uses Binance as an example, noting reserves held in assets such as BUSD, BNB, BTC, and USDT. CoinMarketCap relies on public blockchain data and references platforms such as Nansen and DeFi Llama to monitor these balances.
Why Merkle Trees Matter
However, reserve balances alone do not answer the full question. An exchange may hold large assets, but users still need to know how much the platform owes customers in total. Exchange safety therefore depends on comparing two sides: visible reserves and customer liabilities.
That is where the Merkle Tree becomes useful. As described in the article, exchanges can hash user balance data and combine it pair by pair through multiple layers until they reach a final aggregate result. This top-level output represents the total of customer balances in a verifiable structure, which can then be compared with the exchange’s reserves. If reserves exceed customer liabilities, the platform can claim it has sufficient backing.
Verification Efficiency and Privacy
The article also explains why exchanges do not simply publish one grand total. A Merkle Tree makes verification more efficient: if there is an error in the final result, investigators can trace the issue through a specific branch instead of recalculating every account from scratch. This structure helps improve auditability while avoiding the need to expose every user’s detailed balance publicly.
Building such a system is not simple. Exchanges process registrations, deposits, and withdrawals every day, meaning balances constantly change. For that reason, some platforms also submit their Merkle Tree-related disclosures to auditing firms for review. The article says that by the end of 2022, exchanges that had published related Merkle Tree or audit information included Coinbase, Kraken, Pionex, Gate, and Bitfinex.
Transparency Does Not Remove All Risk
Still, the article stresses that Proof of Reserves and Merkle Trees improve transparency, but they do not eliminate risk entirely. Crypto remains a high-risk market with fast-moving information and sharp volatility. Users are therefore advised to conduct their own research and manage risk carefully before choosing an exchange or committing capital.