Binance Users Can Now Verify The Bitcoin They Own Via Merkle Tree

[lionheart78]

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.

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.

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.

1: How true is the volume shown on the wallet to represent the actual funds in exchange possession?

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:

Log in to the Binance Website
-> Click on “Wallet”
-> Click on “Audit”
You will be able to find your Merkle Leaf and Record ID within the page.
Select the audit date you want to verify. You will then find confirmation of the audit type, your Record ID (specific to your account and this particular audit), the assets that were covered, and your asset balances at the time of the audit.
The Record ID enables you to independently verify that your account balance was included by the third-party auditor and would be available shortly.

2: what are the institutions that will audit this balance to assure it accuracy and total control if anything goes wrong with the Exchange.

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

[uchegod-21]

Personally, I think CZ/Binance Is doing all they can to bring transparency and trust to centralized exchanges again, but in all, this still does not change the fact that decentralization is needed at this stage, though the effort is really commendable, but by now, decentralization ought to be on everyones mind.

Let's discuss.

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.

[o_e_l_e_o]

This is one good move for Binance to at least restore the trust of people to exchanges after the FTX fiasco.

This is a very good move for transparency

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.

[franky1]

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

[o_e_l_e_o]

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.

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.

[franky1]

here is the thing though

while people are targetting binance heavily. i find it funny no one is targetting the businesses of DCG which are sisters of FTX

and lost hundreds of millions in the FTC fiacso.. where as from whats reported binance broke even when it escaped via selling FT and then whistle blowing

i would still like to see binances liabilities though. im not a user so no risk for me either way. but just for informative gaze at how crypto businesses are performing/operating

anyway, with DCG:greyscale
in the "everything about greyscale but afraid to ask" topic

myself and others have been looking into things about them

for instance in the TOS user agreement.
grey scale have some nasty terms where it can literally stop access to the entire site at its sole discretion without reason or notice

where as binance terms even in a suspension allows user access to withdraw funds it just deactivates the tabs for doing things like market orders.
..
grey scale says that it does not hold the trust collateral and that coinbase does. and that coinbase cannot tell greyscale the totals, nor tell greyscales customers.

thats a big warning/double red flag

if grey scale cant even see its own books.. they are not going to be able to do good business

[o_e_l_e_o]

while people are targetting binance heavily. i find it funny no one is targtting the businesses of DCG which are sisters of FTX

I don't doubt what you say, but honestly, I don't see the difference between any centralized exchange right now. The events of the past several months have shown us that every single one lies somewhere on the scale of "untrustworthy/shady" to "outright scam". They are all fractional reserve, they all gamble user funds, they all cook the books, they all exist solely to enrich themselves, they all don't give a damn about any of their users, and they are all interconnected in this massive web of lies they have woven, since the collapse of one can cause a domino effect which results in the collapse of several more. Some, such as Binance, know what to say on Twitter (fUnDs ArE sAfU!) to make people believe they are somehow different, but the bottom line is that leaving coins on any exchange is a massive risk. I don't care if it is Binance or Coinbase or Grayscale or some local exchange ran by someone you knew in high school. If your coins are not in your own wallet, then you actually own zero bitcoin and you might as well work on this assumption because before long your centralized exchange of choice will have scammed you for whatever you "thought" you once owned.

[franky1]

that is a good risk adverse way of thinking

it also applies to sidechains and subnets that have a main currency lock plus a currency converion mechanism too
ones that require conversions/rounding of the payment to the lock spend tx. where you dont have access to the underlying raw TX view(not part of wallets GUI) to know what is being signed and only a other network token valuation visible while on the sidechain/subnet. which you only know the conversions are correct when you try to get back to the main net and realise your side/subnet wallet didnt do as promised

be risk adverse and not just trust the social cycle of utopian hype

there is hope for you yet

[buwaytress]

Funny how every CEX is now doing Spiderman pointing.

ok, they hold 0.5M of users BTC, but how do I know that this include mine bitcoins? How do I know if their liability is not 10x bigger (5M bitcoins) and this POR (proof of reserve) is not only a 10% fractional reserve?

Yeah, I think this was brought up many months back too, I could be owing 100 guys BTC and how all of them the same proof of reserve (very common tactic by regular scammers anyway, to show the same proof of bank statement to multiple creditors and the very same way banks borrow money from each other using the same depositors' funds).

Not possible for now unless it's all smart contract tied but at least a third-party has to audit.

[OgNasty]

It’s crazy that it has taken so long for crypto companies leading the industry to actually start using the properties of crypto for the benefit of their customers instead of just to fleece them. I really like this development and hope it forces other crypto companies to be completely transparent about their activities. Customers/users shouldn’t be willing to accept anything less than full transparency in provable fashion. We deserve it.

[franky1]

apparently these are the wallets that total the binances 575k btc customer funds

34xp4vRoCGJym3xR7yCVPFHoCNxv4Twseo           252,597 BTC
3M219KR5vEneNb47ewrPfWyb5jQ2DjxRP6            127,351 BTC
bc1qm34lsc65zpw79lxes69zkqmk6ee3ewf0j77s3h 102,610 BTC
bc1qazcm763858nkj2dj986etajv6wquslv8uxwczt   94,643 BTC
                                                                 total  577201 BTC

quick google search shown 3 or the 4 are tagged on bitcoinrichlist as being binances too. but could be wrong

[o_e_l_e_o]

Customers/users shouldn’t be willing to accept anything less than full transparency in provable fashion.

It cannot be done. You will always be left trusting the exchange, and as I said above, an exchange will never release information or data which shows they are insolvent or shows you anything other than exactly what they want you to see.

They can sign messages from addresses holding coins to prove they own these coins. Great. How do we know those coins aren't a loan? How do we know those coins aren't some outstanding investment they've pulled back in just for the sake of proof of reserves and will immediately be moved out again? How do we know that those coins aren't going to be moved tomorrow to some other address? (Binance have already done this.) You can't even be sure Binance didn't just bribe someone to sign a message saying their coins belong to Binance. CZ could be doing this with his own personal stash. Impossible to verify.

Even putting all that aside, and assuming you trust this unverifiable proof of reserves, once again, it means nothing without a proof of liabilities, which cannot be provided in a trustless manner. How do you verify the data they used to create the Merkle tree? How do you know they haven't created a fake account with a balance of negative ten thousand bitcoin in order to balance the books? If they ever actually involve a third party auditor, how do you know Binance aren't hiding some information from them. How do you verify the work of this auditor?

Trust upon trust upon trust. You cannot verify anything, with or without this "proof of reserves" illusion.

You want full transparency? Run a full node and keep your coins in your own wallet. That's the only solution.

[franky1]

Customers/users shouldn’t be willing to accept anything less than full transparency in provable fashion.

It cannot be done. You will always be left trusting the exchange, and as I said above, an exchange will never release information or data which shows they are insolvent or shows you anything other than exactly what they want you to see.

They can sign messages from addresses holding coins to prove they own these coins. Great. How do we know those coins aren't a loan? How do we know those coins aren't some outstanding investment they've pulled back in just for the sake of proof of reserves and will immediately be moved out again? How do we know that those coins aren't going to be moved tomorrow to some other address? (Binance have already done this.)

because you watch the reserves. you see when their main hoard entered the address.. if it was in the last month.. then its suspect.
if its a progressive gathering slowly over years, less suspect(normal behaviour)

if it all moves out tomorrow.. then you really keep an eye on its movements

You can't even be sure Binance didn't just bribe someone to sign a message saying their coins belong to Binance. CZ could be doing this with his own personal stash. Impossible to verify.

if someone has a personal stash of 100k+ coins. bribery wont do it. .. maybe favours or blackmail would. just saying

as for assuming its exchange owners personal stash.. yes assume all exchanges treat coins as their own. stay risk aware. but dont go into ignorance with "but we just dont know"

Even putting all that aside, and assuming you trust this unverifiable proof of reserves, once again, it means nothing without a proof of liabilities, which cannot be provided in a trustless manner. How do you verify the data they used to create the Merkle tree?

its more about if there is a total amount.
and within that amount all account holders can see that  they are accounted for within that total. then they know they are accounted for.

You want full transparency? Run a full node and keep your coins in your own wallet. That's the only solution.

agreed

[o_e_l_e_o]

because you watch the reserves. you see when their main hoard entered the address.. if it was in the last month.. then its suspect.

Except people don't do this. Case in point: Binance flooded the mempool last week moving a ton of funds in to their proof of reserve addresses, and also moved $2.7 billion worth of crypto out of their proof of reserves addresses the day after publishing them. And yet we see this forum/Reddit/Twitter flooded with people thinking that Binance are somehow now safe.

but dont go into ignorance with "but we just dont know"

That's exactly the point I'm making. You don't know, not can you verify. By using any centralized exchange, you are trusting.

and within that amount all account holders can see that  they are accounted for within that total. then they know they are accounted for.

But they can't see who else is or is not accounted for within that total. If an exchange publishes proof of reserves of 10,000 BTC, and no customer has more than 10 BTC, then they will all be falsely reassured. But turns out the exchange is hiding the fact they have 100,000 customers all with 1 BTC and are massively fractional reserve.

[franky1]

But they can't see who else is or is not accounted for within that total. If an exchange publishes proof of reserves of 10,000 BTC, and no customer has more than 10 BTC, then they will all be falsely reassured. But turns out the exchange is hiding the fact they have 100,000 customers all with 1 BTC and are massively fractional reserve.

ok lets delve into this more

ok binance has ~26m customers and a publicly viewable address list of reserve totalling ~575k btc

lets call it an average of 0.02211538 a user

what you are trying to say is that "what we dont know" is that they might have PoR of only 57k reserves. and only 1000 customers listed in the merkle with ~57btc average, which doesnt tally to the true customer holdings..

sorry but no.. just no

each person can see they are part of the merkle. and the merkle totals up to the same amount as the reserves

the merkel hash of a users leaf is their account details and balance hashed.. and outside the hash is a clear text of the balance aswell

users can check the balance(clear) matches their balance thats hashed to confirm nothing shoddy happening with their leaf(no miscount of their balance)

then for the clear text balance they can see all balances add up to the total. and that total matches the known bitcoin reserve addresses total

knowing they are included in the total. meaning knowing the reserve owner has enough coins to meet all of those clear text balances, no matter who they are. it shows they are included and not forgotten

there is no "negative " balance as that will be easy to spot

.
if you want to go opposite and say "imagine if CZ made an account and put 10k coin and added that to the merkle

then the clear text balances would total 585k coins instead of 575k coins.
which as long as the new 585k coins match the public bitcoin address reserves of 585k coins. then it simply means there are enough coins in binance control at that time to not only pay all users that can be seen and self verify they are part of the merkle total. but cz too
.
problems only arise when the merkle total does not tally with the reserves total. .. and thats the point. showing they do tally shows .. wait for it.. proof of reserves

if people have a hash. but cant find their hash in the merkle.. that too is a problem because then CZ is not tallying all users meaning there are more users balances not accounted for compared to the reserves addresses.
but if every user is found in the merkle. then it tallies

...
now with all that said
even with things tallying up

there is not much to stop a business from just one day moving funds out. disabling account access running off to an island and shouting "i been hacked" while sipping a cocktail on a beach holding all reserves to himself, while pressing a bankruptcy announcement button on his phone with an evil laugh

[o_e_l_e_o]

then for the clear text balance they can see all balances add up to the total. and that total matches the known bitcoin reserve addresses total

Except they can't see all the balances which add up to the total. They can see the hashes in the Merkle tree, and the balance on their own individual leaf. That's it. They don't know if the 100 other hashes they are looking at represent 1 BTC each, or if 99 of the hashes represent 2 BTC each and 1 represents negative 98 BTC. In one case the exchange is solvent; in the other they aren't.

Jesse Powell of Kraken at least understands this: https://nitter.it/jespow/status/1596227031637045248#m

if you want to go opposite and say "imagine if CZ made an account and put 10k coin and added that to the merkle

Except CZ could just leave that account out of the Merkle tree entirely and no one would know. He's not exactly about to expose himself, and you as a user have absolutely no way to verify that all accounts are included in the Merkle tree.

problems only arise when the merkle total does not tally with the reserves total. .. and thats the point. showing they do tally shows .. wait for it.. proof of reserves

And no exchange will ever release data which shows the Merkle tree does not tally with their claimed liabilities. They will just fudge the numbers until it shows you what they want it to show you (which as we've just discussed is trivially done), rendering the entire thing meaningless.

[franky1]

then for the clear text balance they can see all balances add up to the total. and that total matches the known bitcoin reserve addresses total

Except they can't see all the balances which add up to the total. They can see the hashes in the Merkle tree, and the balance on their own individual leaf. That's it.

but the balances are not just inside the hash..
but also outside the hash. and its the outside cleartext balance thats totalled up

people can see they are part of the merkle and all outside balances mach the hashed balance and their balance is totalled up

here is an example

merkle_hash = "46dc2ebaa7cf3d253dedd10084399efce7b1ac8db9b6b5edf55f0c1ae7dec483 BTC:1.0,D.BTC:0.0,N.BTC:1.0"
red =hash   blue= balance in clear text
that user has 1btc

each person has their own leaf that looks like that.
cleartext balance matches the balance inside their account.
so they can verify they are part of the tree that totals to the total.

as long as they are included. and the totals tally they know there is enough coins

lets say there were user accounts of average 0.02 per leaf for 26m users
(520k merkle tally) and reserves addresses total was 575k then great more coins than needed to make all them 26m leafs whole

however
lets say there were user accounts of average 0.03 per leaf for 26m users
(780k merkle tally) and reserves addresses total was 575k then problem

also if users cant find themselves in the merkle.. problem

simple example... if you stil not sure about things
how do you convince yourself that your bitcoin network transaction is indeed confirmed..
because you see your transaction hash is included in the merkle tree which totals up and matches the merkle root of the blockheader

[pawanjain]

As long as the exchange is centralized there won't be a sure short way to find out if the exchange does hold the coins we have in our wallets.
They can always tweak the numbers since they are the central authority of the exchange.
So their Proof of Reserve system is just another way of convincing people to hold their money on the exchanges.

[Yatsan]

As long as the exchange is centralized there won't be a sure short way to find out if the exchange does hold the coins we have in our wallets.
They can always tweak the numbers since they are the central authority of the exchange.
So their Proof of Reserve system is just another way of convincing people to hold their money on the exchanges.

Also, verification would only matter if you are planning to hold a token for years. Wherein most of the people in Binance are not even storing their assets in it for a long period of time 'coz most of the people in that exchanger are also traders. Holding tokens in the first place should be done on wallets so I guess there's no need for verification especially if you are not planning to keep your assets in a 'box'. All of these are because of what happened right? People are asking for adjustments from exchanges because their assets might be lost. This technology is decentralized so what's with this 'ID'. People should just practice self-discipline. If assets were lost then check for transaction history.

[BIT-BENDER]

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.

In my own opinion Exchanges such as Binance understand that they are on a backlash for being centralized, yes they have patronage but are mostly vendors who are business minded and don’t really care about centralization or decentralization.

I think what binance is trying to do it so win people over although I don’t think Binance are completely transparent, some people has lost their funds on Binance for some privacy issue of low implications. I don’t know the future of Binance yet but I am really not moved with story by this.