A primary concern surrounding exchanges is the potential misuse of user deposits, which can spiral into a loss of user funds, insolvency, or a bank run-type scenario. Even after high-profile collapses due to misappropriation of user funds, many exchanges still do not provide an asset reserve guarantee to their users. So, other than taking their word for it, there’s no way for users to verify that those exchanges hold their cryptocurrency 1:1.
One of the earliest exchanges to provide reserve guarantees is Gate.io which, in 2020, became the first to produce third-party audited Proof of Reserves (PoR) using the Merkle tree method. This method enabled users to independently verify that their account balance was included and assessed by a licensed external accounting firm.
This method was again repeated in 2022, showing Gate.io’s reserves exceeded user deposits, with 108% of BTC and 104% of ETH deposits stored in the exchange’s reserves. Then, in response to major incidents that shook the crypto world, Gate.io released its PoR method as open source later that year, welcoming other digital asset platforms to participate and produce user-verifiable PoR data.
The next evolution of PoR
After several successful implementations, Gate.io plans to modify its reserves guarantees to include more blockchain-related technologies. Currently, Gate.io uses Merkle tree data structures in its PoR method, which is also a core component of blockchain, like Bitcoin. Now, Gate.io will adopt zero-knowledge (ZK) proof tech for users’ asset verification, which provides additional security and privacy when conducting PoR.
As a pioneering exchange regarding Proof of Reserves, Gate.io is taking steps to enhance privacy and security within its asset reserves process. By implementing zero-knowledge tech, which enables data verification without revealing specific information, users are afforded a more central role in verifying their assets are held in reserve. In addition, this shows Gate.io’s larger commitment to increasing confidence in the digital asset space, alongside other efforts such as sharing PoR methods publicly and supporting peers through the industry support fund.