GLOSSARY · BLOCKCHAIN & WEB3
Proof of Reserves
What proof of reserves is: how a custodian or issuer cryptographically demonstrates that it backs its clients' balances, and the limits of the method.
WHAT IS IT? · FOR DUMMIES
Proof of reserves is how an exchange, custodian or stablecoin issuer demonstrates that it really holds the assets it claims to hold: it publishes cryptographic proofs of its balances so that anyone can verify them. It was born from an expensive lesson: promises of solvency without proof are worth nothing.
WHAT IS IT? · PRO
A serious proof of reserves combines proof of assets (verifiable addresses or a third-party attestation) with proof of liabilities — typically a Merkle tree of client balances that lets each user check that their balance is included without exposing the rest. Without the liabilities leg, the proof is decorative: showing funds says nothing about how much is owed.
Its limits matter: it is a snapshot, it does not watch off-chain liabilities or hidden loans, and it does not replace the audit and regulated segregation that MiCA requires of custodians and issuers — the standard we describe in crypto-asset custody and in the euro stablecoin.
01 / Key points
- Cryptographic proof that a custodian/issuer backs client balances
- Complete: verifiable assets + liabilities in a Merkle tree
- A snapshot: it does not detect hidden off-chain debts
- Complements — does not replace — regulated audit and segregation
02 / Advantages
- Verifiable by anyone, including each client
- Market discipline: whoever does not publish it says something
- Cheap to verify compared with a full audit
03 / Disadvantages
- A snapshot, manipulable with funds borrowed that day
- Does not cover hidden off-chain liabilities
- False sense of security if read as an audit