Proof of Reserve sis Becoming more Effective, but not all its Challenges are Technical

Proof of Reserve (PoR) is benefiting from intense development efforts, but in the end, good behavior necessitates good regulation and a compliance culture.

Proof of reserves (PoR) has gone from buzzword to roar in recent weeks as the cryptocurrency world attempts to recover from the shock and losses of the current crypto winter. After a flurry of discussion and work, adequate PoR criteria and rankings are beginning to emerge, but the fine points of how to conduct proof of reserves, or even who should do it, remain open questions.

The distinction between proof of assets and proof of reserves was quickly identified, as were their respective deficiencies. Attempts by traditional auditors to provide PoR were quickly frustrated, with major firms stepping up and quickly retreating.

Auditors may never provide the assurance users seek from PoR, according to Doug Schwenk, CEO of Digital Asset Research (DAR). While crypto trades around the clock, audits are performed on a regular basis. “Ideally, you’d have a way to measure those liabilities and assets in real time,” he said.

DAR provides information and vetting services to major traditional finance firms and, in collaboration with the London Stock Exchange, produces the FTSE Russell index. “We like to see evidence of reserve. […] It’s not enough for us to say we’re happy, but it’s better than nothing.” “In the world we’re living in right now, better than nothing is sometimes a good starting point,” he added.

To make matters even more complicated, centralized (CeFi) and decentralized (DeFi) platforms present radically different challenges. According to Amit Chaurhary, head of DeFi research for Polygon, a scalable blockchain ecosystem compatible with Ethereum, “proof of reserve is worthy of calling [itself] proof of reserve” in DeFi because of its transparency.