Following claims by some sections of the crypto community that the exchange’s “proof-of-reserve” is worthless, the Binance CEO revealed that the Merkle tree-based system is a user-friendly strategy. Changpeng Zhao made his assertion in a blog post on Saturday while answering questions from the community about transparency in handling customers’ funds.
In a November 26 blog post, the Binance boss responded to the Binance community questions about how the exchange manages capital and wallets. According to the CEO, Binance is committed to ensuring that it complies with legal and regulatory requirements and does not use clients’ funds on its platform.
The exchange holds users’ assets in separate accounts from the one Binance uses to store its funds. Furthermore, the firm uses the wallet facility to secure its crypto assets and safeguard users’ assets.
All users’ deposits are moved to the deposit wallet, and the exchange frequently transfers the tokens to a hot or cold wallet, depending on the number of transactions involved. As a result, this helps reduce the number of transactions and also helps lower the cost of gas.
Ultimately, Binance passed the savings on to customers while maintaining the lowest transaction cost among other exchanges. Furthermore, Binance has some balance in hot wallets to achieve seamless deposits and withdrawals.
However, its cold wallets handle larger deposits and withdrawals. Thus, each user is issued a unique identifier (UID) along with associated login details that help differentiate the customer’s crypto assets from those of Binance.
Binance is reported to have begun working on separate on-chain customer crypto asset wallets in compliance with the new Market in Crypto Assets (MiCA) regulation.
Will the Merkle Tree Proof-of-Reserve Help Authenticate Assets?
According to the CEO of Kraken, Jesse Powell, Binance’s so-called “proof-of-reserve” is “pointless” because the exchange has made no provision for liabilities. In response, Zhao believes that the Merkle Tree strategy is the perfect way to verify users’ crypto assets.
Zhao added, “Binance will involve the services of third-party auditors in its proof-of-reserve plan. “There is a couple of weeks’ wait, but the aim is to accelerate the process.”
Binance developed the proof-of-reserve mechanism in response to the collapse of FTX and its subsequent bankruptcy. As crypto enthusiasts continue to demand that exchanges publish their proof of reserve to show that they hold the assets they claim to hold, Binance has responded to the call.
Customers can now use the mechanism to verify Binance holdings. Nevertheless, users can ascertain only Bitcoin holdings through the Merkle tree-based system.
But the exchange has pledged to add more coins in the coming weeks. The exchange also outlined other updates about its transparency drive.
An example is the zk-SNARKs’ implementation of its proof-of-reserve, involving third-party auditors. Binance is reported to be one of the first exchanges to release its proof of funds after the trends began following the collapse of the FTX ecosystem.
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