The Next Generation of
Transparency
Merkle Science’s Proof-of-Reserves is the first step in bringing transparency to the cryptoverse. It’s a method of verifying and proving ownership of balances on exchanges, brokerages and custodians. The need for transparency has never been greater, and Merkle Science is in a unique position to leverage our core competency to help bring this transparency. This is the first step of many in building a truly trustless crypto industry. There is no single solution to transparency as it will require a multifaceted approach including: regulatory guidance, cooperation by key players in the industry, and proof of reserves.
Proof of
Reserves Overview
Proof of Reserves is an advanced cryptographic accounting procedure that can be a self-assessment or an auditor assisted approach for a point in time snapshot of funds held by a financial institution. These snapshots can be performed In real time or at set monthly, quarterly or semi-annually intervals. Proof of Reserves lets you verify that the institutions you trust meet rigorous standards for accountability. Proof of Reserves is the first part of the Proof of Solvency equation outlined by Nic Carter.
Proof of Reserves + Proof of Liability = Proof of Solvency
While Proof of Solvency is the holy grail as it not only proves control of funds on-chain but also exposes liabilities. Proof of Reserves becomes the first step, encouraging third party or self audits and prove ownership of reserves.
Verification Levels
Merkle Science aims to provide a multi-level verification process in an effort to ease the transition into a true Proof-of-Reserve. Entities that wish to begin demonstrating Proof-of-Reserves can begin by self reporting. We assist and provide guidance to our clients at each step of the process.
Self Reported Verification
The Merkle Science platform, with its comprehensive capabilities and focus on compliance, will be a very valuable resource for the Hedera ecosystem. The integration of HBAR and HTS tokens will provide critical infrastructure needed to support an increasing number of Hedera implementations in the regulated financial space.
Proof of Ownership
The next step in verification is proving ownership of the addresses. Entities can verify that they actually own those addresses by signing a message with the appropriate set of keys. Merkle Science verifies the message and confirms ownership of all wallets that have been self reported.
Merkle Root Verification
After successful completion of Level 1 and 2, Merkle Science takes an anonymized snapshot of funds at that point in time. We then generate a Merkle Tree which outputs a Merkle Root. The Merkle Root is published on-chain (i.e. ETH, MATIC) and the Transaction ID is shared. This becomes an immutable record that can be used to look up and verify balances. Entities can leverage the Merkle Science Proof of Reserves API (Available Soon) to begin this process.
Continuous Proof of Reserves
The highest level of verification is a close to real-time proof of reserves. This essentially takes the Level 3 Verification and generates a root on an ongoing basis. This is designed to solve for use cases where funds are borrowed to take a point in time Proof of Reserves snapshot. In addition to a daily, weekly, monthly verification. It also provides on-chain anomaly detection and reporting on suspicious transactions or movement of funds.
