Proof of reserve is a verification practice in which a custodian or exchange demonstrates that it holds assets sufficient to cover its customer liabilities. It typically combines an on-chain attestation of owned assets with a Merkle-tree commitment to the liability set, allowing users to verify inclusion of their balance without revealing others. Robust schemes also prove liabilities to establish solvency, often with auditor or zero-knowledge support.
Overview
- The asset side proves control of on-chain holdings via signatures or address attestations at a snapshot.
- The liability side commits all user balances into a Merkle root, so each user can verify their own inclusion without seeing others.
- Comparing total verified assets against committed liabilities establishes whether reserves cover obligations.
Key aspects
- On-chain asset attestation through controlled-address proofs.
- Merkle commitment to the full liability set.
- Per-user inclusion verification preserving privacy.
- Solvency claims strengthened by auditors or Zero-Knowledge Proof techniques.
Mechanisms
- Address-ownership signatures or message attestations.
- Merkle-tree construction over salted user balances.
- Publication of the Merkle root and per-user inclusion paths.
- Optional zero-knowledge proofs of non-negative liabilities.
Applications
- Solvency assurance for a Centralised Exchange after market stress.
- Custodial transparency for institutional asset holders.
- Regulatory and counterparty due-diligence support.
- Continuous, verifiable alternatives to point-in-time Audit.