How to read a proof of reserves

After this lesson you can: open an exchange's proof-of-reserves page and say, in one sentence, what it proves and what it does not.

What it is

A proof of reserves (PoR) is an exchange showing that it holds the bitcoin it owes its customers. Two halves: proof of assets, a list of the addresses the company controls, which anyone can check on the public ledger; and proof of liabilities, the total owed to customers, usually published as a Merkle sum tree so that each customer can confirm their own balance is included without everyone's balance being public. Assets divided by liabilities is the reserve ratio. At or above 100% the company is full reserve.

Fractional reserve versus full reserve, compared. — Fractional versus full reserve.Image: River Learn, river.com/learn/what-is-proof-of-reserves

Steps

01Find the page. Search the company's site for "proof of reserves" or "reserves". Examples: River publishes one at river.com/reserves and repeats it monthly; Kraken publishes one at kraken.com/proof-of-reserves. If a company has none, that is itself information.
02Find the assets. Look for the on-chain addresses or the total bitcoin held, and the date of the snapshot. Pick one address and look it up on a block explorer such as mempool.space to see that the balance is real.
03Find the liabilities. Look for the total customer balances and how they were computed (a Merkle sum tree, an auditor's attestation, or both).
04Compute the ratio. Assets divided by liabilities. 100% or more means every customer could withdraw at once.
05If you are a customer, use the "verify my balance" tool if one exists. Your balance being included is what makes the liabilities side honest.
06Note the date. A proof is a snapshot. Ask how often it is repeated.

How a proof of reserves works: assets, liabilities, Merkle tree. — How a proof of reserves fits together.Image: River Learn

What it cannot tell you

Steps to read a proof of reserves: assets, liabilities, ratio, inclusion, date. — The ratio is the headline; the date and your own inclusion are what make it mean something.

It is a snapshot. Coins can be borrowed for the day of the proof and returned after. Monthly repetition makes that expensive; it does not make it impossible.
Liabilities depend on participation. If customers never check their inclusion, the liabilities side rests on trust.
It only covers customer balances. Debts to other parties are outside it. In bankruptcy, customer claims usually rank ahead, but "usually" is not "always".

A proof of reserves makes a custodian more trustworthy. It does not make a custodian your wallet.

Two columns: what a proof of reserves proves and what it does not. — Proves solvency on a date. Does not prove tomorrow, or debts outside customer balances.

MINI CHALLENGEReserve ratio

A published proof shows 12,400 BTC in company-controlled addresses and 12,000 BTC owed to customers. What is the reserve ratio, as a percentage?

percent

CHECK YOURSELF

1/3 What are the two halves of a proof of reserves?A list of the company's employees and a list of its bank accountsA credit rating from an agency and an insurance certificateProof of assets (addresses the company controls) and proof of liabilities (the total owed to customers)

2/3 Why is a proof of reserves called a snapshot?Because it is published as an image rather than as a tableBecause it shows holdings on one date, and coins could be borrowed for that day and returned afterwardsBecause it only covers the company's photograph of its cold-storage vault

3/3 What makes the liabilities side of a proof honest?The company's promise, signed by its chief executive, that the total is correctCustomers checking that their own balances are included in the published totalThe fact that the total is published on the company's website in large type

pick an answer for each question

How to read a proof of reserves

What it is

Steps

What it cannot tell you

SOURCES