Chainlink Labs offered its proof-of-reserve product as a solution to future trust issues in the crypto exchange market on Nov. 10. In a tweet thread, Chainlink Labs asked, “Will crypto continue to repeat the mistakes of the traditional black-box financial industry? Or will a better system emerge?”
#Crypto is at a crossroads.— Chainlink (@chainlink) November 10, 2022
Will crypto continue to repeat the mistakes of the traditional black-box financial industry? Or will a better system emerge?
A better system is possible, & Proof of Reserve is one way #Chainlink is providing the transparency that users demand.
In answer to this question, it offered its proof-of-reserve (PoR) product, which it said is useful “for verifying centralized exchange asset reserves, off-chain bank account balances, cross-chain collateral, real-world asset reserves, and much more.”
Over the past few days, the crypto market has been in a freefall thanks to a liquidity crisis at the world’s second-largest crypto exchange, FTX. The exchange has been unable to process withdrawals in a timely manner, and the panic caused by these delays has spread throughout the crypto market.
In the wake of these ongoing issues, the crypto community has started to discuss ways to solve the problem, and one solution that has been offered is for customers to require that every exchange they use offer a proof-of-reserve.
Proof of reserve is a technique that allows users to audit the reserves of crypto exchanges in real time. Some exchanges have already implemented proof of reserve, and Binance CEO Changpeng Zhao has argued that all exchanges should now offer this feature.
But some exchanges have said that it will take weeks or longer to create a proof-of-reserves system.
In response, Chainlink Labs argued that its product provides an “out-of-the-box” solution that exchanges can implement immediately.
Here, Chainlink PoR verifies off-chain assets and relays the reserve amounts on-chain. pic.twitter.com/ExmEZWiTLA— Chainlink (@chainlink) November 10, 2022
The product uses Chainlink nodes connected to both the exchange’s API and its vault addresses, and the nodes are connected to a proof-of-reserve smart contract. The contract can be queried by any other account on the network to determine whether the exchange’s crypto assets are equal to its liabilities. Chainlink Labs sees this as a simple solution to the problem of trust in exchanges.
Updated Nov. 14 at 9:50pm: This article has been updated to remove an erroneous comment.