Topic: Binance Users Can Now Verify The Bitcoin They Own Via Merkle Tree - page 2. (Read 475 times)

This is it exactly. We've seen multiple examples of large exchanges going down over the last few months (Celsius, Voyager, FTX) in which their customers are treated as unsecured creditors, which essentially means they are the lowest of the low and the absolute last on the list to receive anything back from the pot of funds. We've also seen official filings from the likes of Coinbase saying the exact same thing, that in the event of insolvency proceedings then their customers would also be treated as unsecured creditors.

So proof of reserves, in summary:

• Does not prove they can 100% cover their user deposits.
• Even if it did, does not prove they can 100% cover all outstanding liabilities such as loans and business debts.
• Even if it did, does not provide any reassurance that customers are anything other than unsecured creditors and wouldn't get all their money back anyway

As with pretty much everything CZ says, he will lie through his teeth if it makes him more profit, and you are a fool if you believe him.

oeleo is correct that without also looking at a exchanges liabilities-business debts of other things. then it does not prove an exchange is VIABILITY of being sustainable.

if it has 575k btc that it can show set aside to back user accounts
and it can show total of user accounts also total 575k btc, then that is atleast a relief for customers that the funds are not fractional reserve in some other exchanges holdings being traded behind the scenes. nor treated as the main exchanges own property it can draw on to pay debts

however if they have not set up some process to separate out those coins as "not exchange property but exchange customers property", in a solid unbreakable contract..  then that 575btc = $9,487,500,000 (@$16.5k/btc) could be considered part of an exchanges overall holdings to share between all creditors.

EG if binance had private business debt of say $3.16bill (a 3rd)
then if it had to shut business today.
customers dont get 1:1 they would get 1:0.66 because the business would consolidate its creditors/liabilities and then balance out repayments to all creditors equally.

so although customers can be relieved that the 575k coins are not in some other boiler room exchange being abused in some investment off the binance books.
without liabilities listed to see how much risk of bankruptcy a business is at.. or  that a exchange can honour all customers and creditors guaranteed by legally separating business assets from customer assets. . that number of the "customer collateral" does not mean a guarantee of 100% payout should a exchange have to close down.

it would require that the 575k coins be separated from a businesses ownership/collateral. which is hard to do. to earmark X funds to only go to certain creditors(customers) and not others(business bad deals).  because most liquidations just throw everything into one total then divide it out after equally

Looks like the move has achieved exactly what it was meant to: Convinced people that somehow this shows that Binance are transparent and trustworthy, because they don't understand that it in fact proves absolutely nothing at all.

Proof of reserves without proof of liabilities is meaningless. Let's say I start running an escrow service on the forum, and want to provide "proof of escrow". I sign a message from an address with 1 BTC in it. What does that prove? Absolutely nothing. How many open trades am I dealing with? What is the combined value of all those trades? What if I'm supposed to have 10 BTC in escrow and I only show you 1? How would you even know.

The Merkle tree is trivially manipulated, and there have been no independent third party audits (which could also be manipulated). The bottom line is that Binance will only ever release information that shows you exactly what they want it to show you. If it turns out they are insolvent, then they simply won't release that information until such a time that they can temporarily fix the problem by taking out a loan or something similar. And of course lets not even mention the billions of dollars worth of crypto that left their "proof of reserves" address the day after they published their proof of reserves. Not suspicious at all, I'm sure.

CZ has proven several times that he is not in business just to answer a business man or a CEO. He is always ontop of his game and ahead of his competitors. This is a very good move for transparency, if other exchanges can do this, we rate of bankruptcy and losses would have been limited.
Even though exchanges cannot be trusted, I trust Binance to an extent looking at their security level and even the Insurance fund and lots more. CZ needs to be commended.

This is one good move for Binance to at least restore the trust of people to exchanges after the FTX fiasco.  It is also another step towards adoption and government acknowledgment since fraud and scam of exchanges may be exposed via this method.  This is one way of filtering and kicking out exchanges that have no capability to operate since their reserve fund will be exposed and people will see if they are being robbed or not.

CZ even though many frowns on him always got a good idea in promoting and making his exchange popular by introducing new things that can possibly boost the trust of people to cryptocurrency and of course to his exchange.  No matter what is the intention of CZ in this so-called PoR (Proof of Reserve), I'll take that as another step towards filtering incompetent exchange in the market.




Whether it is new or old, it is a good thing that Binance emphasize on implementing Proof of Reserve, which may possibly make other exchanges to follow. Or CZ made it known to public that it is essential for an exchange to prove their fund reserves to the public.

I think volume or trading volume in the market is different with funds of client in an exchange.  AS I read it, the platform client can verify if their holdings have an equivalent reserve on the exchange via this method:


It was stated that the audit will be done by third-party auditors, and of course, the auditing team must be acknowledged by the authority, possibly the team behind the BUSD audit.  Or any legit auditing company.

The explanation is further detailed on the link given by @OP

I don't think it's media manipulation, today's information is not only concentrated on twitter, twitter is not the only or most popular social network. Nowadays market issues are discussed everywhere and as soon as there is a question people quickly find out and spread it on all social media channels. I don't know what the exact reason is but I think it's not media manipulation. I don't follow CZ and Elon on twitter but I've been using reddit a lot lately and their tweets are often discussed on reddit and I haven't seen any hypothetical as you say.

I don't think this new feature is any thing new and should not be celebrated in any form, however, we still have some exchange balance tracking sites so this is nothing new and the automate questions should be.
1: How true is the volume shown on the wallet to represent the actual funds in exchange possession?
2: what are the institutions that will audit this balance to assure it accuracy and total control if anything goes wrong with the Exchange.
I made a post about this development some couple of days back you may take a look.

And even if they did show their liability’s it is still like they own the keys to your house, that you yourself don’t have the keys to. They can come at any time and steal or loose your coins. Because not your keys not your coins.

This proves nothing. We all know Binance own some bitcoin. What we don't know is if Binance own enough bitcoin to complete cover all their liabilities. And without proof of liabilities (which is not being provided nor will be forthcoming), then this whole thing is smoke and mirrors designed to trick newbies who don't understand any better. Just like most of what Binance do (such as their centralized scamcoins masquerading as bitcoin).

Oh look. Binance owned CMC rates Binance as the best. There's a surprise!

So they release one Merkle tree which includes 50% of customers, and a second Merkle tree which includes the other 50% of customers. Every customer can check they are included and see that their balances are "fully backed up", even though they are actually running at a 50% deficit. Or even more trivially than that, they simply create a fake account on Binance and credit it with negative 500,000 BTC. Include that in the Merkle tree and oh look! Everything checks out just fine. Not only is it completely trivial for them to do this, but it is also impossible to prove they are not doing this and impossible for anyone to verify anything at all.

This proves nothing. If you leave coins on any centralized exchange after the events of the past few months, then you absolutely have no one to blame but yourself when you lose everything.

If a kidnapper sent out a ransom note and included proof of life, would you applaud them on their efforts and say it made them more trustworthy?

Of course not.  The kidnapper could still act against your wishes because they hold hostage what you hold dear.  You are powerless.

Use that mentality when it comes to your BTC.

Could this become a standard for all exchanges to implement?

It would kill the exchanges that have nothing in thier balance but thier own token. It's not really an issue of whether exchanges have tons of coins but just the trust to open it for the public to see. This is a game for CZ to look thru the balances of every competitor he has and I think he is really up to see who is losing the game.

As far as I’m aware, Besides Binance, OKX and Phemex are using the same Merkle Tree method; it may become somewhat widespread. We’ll see.

They don’t currently allow people to trace all their assets though: Binance has implemented it only for bitcoin so far, OKX has it for bitcoin, ethereum and usdt, and Phemex does it for bitcoin, ethereum, usd, usdt and usdc.

They do differ is the actual verification process, some requiring downloading CSV with the whole snapshot of , others requiring executing some python code, some list a set of addresses that hold the coins, others additionally provide a files with a signed message to prove those addresses are theirs. Formal audits-to-be mentioned here and there too.

The overall idea is that the sum of all balances for a given asset, of all customer account hashed ids, is to be less than or equal to the balance for that asset in the published list of addresses for that asset in control of the given Exchange.

Of course we have to believe that all customers (probably with a non-cero balance, I’m not sure here) are actually included within the data structure that ties the CustomerId hash to its balance for the asset, and that none are left out. But since each customer can verify his inclusion in the data structure, any left out customers could call the whole thing a bluff were it to happen.

Note: Proof of reserves is not proof of unhackable reserves.

People, don't be naive and don't believe the fairy tales presented to you by various CEOs who have never done anything for Bitcoin, nor will they ever do it. In the fear that people will start massively withdrawing their funds from CEX, they invented that POR and now they are competing to show the bigger numbers as if that means that those who have the most BTC in their possession deserve people to trust them more than some others.

Well, Binance is very poor compared to what Coinbase supposedly has - and when everything is added up, let them make sure that the total amount does not exceed 19 million BTC

Trust when lost is generally difficult to get back, even between nations, marriages and mere friendship. The POR initiative is commendable for sure but it's actually not enough to savage the situation. Binance had a clear chance to remedy the whole outburst initially by going on to acquire FTX but backing out of the deal and letting them down suggests they actually cared more about their prominence in the domain than whatever.

This is cool. Other exchanges I think will like to also open thier balances to all so that people will see thru which one is insolvent and we be aware of what might happen and prevent another SBF in this industry.

CZ is quick to have this transparency. Because he was already criticized for taking the step for the POR by the guys who promoted FTX particularly MeetKevin and his friends such as Stephan Graham.

That is actually a very good idea. An exchange where your coins are sent directly to the wallet of the buyer. Maybe there could be a model where there is a refund issued by the exchange if the coins are not recived within an hour. Still there is the problem with fees and also that people may not send the coins at all if they see the price went up in the timeframe they have.

Well, we need somebody to store their coins on exchanges to provide liquidity for the markets. Bitcoin network has less than a million transactions per day, while a single exchange has more trades than that for BTC/USD, not even considering other pairs. If no one held their coins on exchanges, trade volumes would shrink and BTC would be more volatile in short term. And the overall price could be lower as the result.

Maybe in the future, when LN is well integrated by exchanges, traders would move BTC instantly between their wallets and exchange with negligible fee, but right now it's not happening, sadly.

This is somehow good and somehow bad, since it makes everything more secure but at the other hand it will make people trust exchanges to store coins which is fundamentally wrong. There will definitely an exchange in the future that will anyway steal the coins. Since even if I can see that the exchange holds my BTC no Indy stops them from stealing them and run away with them. (See MT Gox, BTC-E or FTX) It gives a proof of something that is basically pointless.

because your balance is part of the account which totals the same as the blockchain holding

EG - i  really simplifying it down to most basics to show how merkles can be used

imagine 2 pages of excel
page one is all the coins on blockchain held by a service. which totals 575k btc

and page 2 is customer balances which total 575m
where your name (hashed for privacy) is on page 2.
where other users are not revealed due to hashes to others knowing real names .. but they too can find their own reference hash in that page 2 list

EG
page 1                             page 2
deposits                          user accounts(not in order)
1legacyuserA 10btc          da42dab49777512b8f425b43a493816c -4btc
1legacyuserB 4btc            01880749a3a55a34659994ef23dcf0c3  -10btc
1legacyuserC 15btc          9db3b3f7b608880d0a7d19a5cc611fb8 -11btc
1legacyuserD 11btc          e8836d7e6bcf77e6e9454b5c1f6ebbdf -15btc

                                       then take the first 2 da42+0188. hash them
                                       =95f309a30aac743c459b24afe8c9e51f -14btc
                                       then take the second 2 9db3+e88. hash them
                                       =d0569e38584ec9ff272270ebf9b37d7d  -26btc

                                        then take those two 95f3+d056 hash them
                                        39cc18deff1270d8436687dc5a458e54 -40btc
total 40btc in custody        

imagine you are first depositor userA of page1
and are the 0188 prefix hash of page 2

for demo i MD5 "Tytanowy Janusz - 10btc"
and for instance MD5 "userC - 15btc" is the 9db3 prefix hash

you can see your allotment hash is part of a accounting process which totals the same as page 1 total

as long as a users allotment is in that total the user is seen as being counted/included. thus "safe"

ofcourse its not 100% proof because a exchange can simply one day shout "we been hacked" and take all coins. but atleast being seen and counted is a better standing than having no count not included in any count

Well, if you go through their announcement article which I believe I also shared in the OP,  if you read it all through, you will discover that they have plans for third party audit in the works, and also some other implementations which they believe will give users the assurance that POR data is authentic, you can see the part in the screenshot below.
Like I said in the OP, I personally believe in decentralization and it will take something much more than POR for me to ever fully trust a centralized system the same way I trust a decentralized system, but then, the POR thing I think is a good implementation, atleast better than nothing, soon, investors and traders will start avoiding exchanges that does not show their POR..