BIT's Solution to Proof of Solvency
The Lehman-Brothers-like crisis triggered by FTX has generated a chain reaction in the industry, not to mention increased scrutiny. For exchanges, open and transparent cryptocurrency reserves are now an essential element of securing market confidence.
Cryptocurrency exchanges have been operating for more than a decade, and the business model has been evolving non-stop. Besides taking trading fees as revenue, exchanges also support lending, staking, venture, incubation businesses, and more. This has meant that proof of solvency has become increasingly complicated.
At BIT, we are determined to contribute to the industry’s self-regulation. In line with other CEXs, we will also publish Merkle Tree proof-of-reserves for our assets and Merkle Tree proof-of-liabilities for validation.
We will secure the market’s confidence by measuring leverage via the combination of Proof of Reserves and Proof of Liabilities (Proof of Reserves + Proof of Liabilities = Proof of Solvency).
Proof of Reserves (PoR)
Merkle-tree proof of reserves is a welcomed innovation. Aside from the intention to acquire different licenses in various jurisdictions, BIT has consulted with multiple parties regarding the audit. Through our use of Cactus, Cobo, Copperas custodians, BIT’s proof of reserves is much more transparent.
Proof of Liabilities (PoL)
Proof of liabilities is more complex than proof of assets. Like with the verification of assets, an exchange might publish a list of all liabilities, including account balances and creditor names.
How do we achieve this?
- Technically, BIT is gearing up to bring several models to record liabilities correctly and, at the same time, to improve privacy and security:
- Add “liability proof” attributions in the user system to support the validation afterward
- To develop snapshot tools for reserves and liabilities
- To create a suite of tools for the generation and validation of PoR and PoL
It is never prudent for any exchange to sit back and rest on its laurels, especially when we have a multitude of stakeholders for whom we, as an exchange, are responsible. With that ethos in mind, BIT is making strides towards adopting a combination of PoR and PoL. We believe privacy, security, and transparency are the cornerstones of building an exchange with a strong foundation for our users. Our goal is to establish the necessary protocols and systems in place and to have a suite of tools designed to generate and validate PoR and PoL.