Binance announced that it would introduce zero-knowledge proofs to improve the quality of its Proof of Reserves report.
Zk-SNARKs will allow Binance users to securely and privately confirm nonnegative balances and changes of balances using information from its proof of reserves Merkle tree.
Binance Makes Progress in PoR Roadmap, But Auditors Are Missing
As part of the announcement, Binance said it added SHIB, DOT, CHZ, and SOL to the assets covered by its proof of reserves report. Additionally, the exchange will open-source the zk-SNARKs code to improve transparency and to help other exchanges improve their reporting. Binance has yet to reveal the frequency of forthcoming reports.
Zk-SNARKs, an abbreviation of zero-knowledge succinct on-interactive arguments of knowledge, confirms a statement’s truth without revealing any information about the statement.
The zk-SNARK will verify that each user’s asset balance set is part of a global state of user funds Binance maintains. Additionally, it will anonymously ensure that the user’s net balance is not negative by including collateral posted for margin trading. Customers can use zk-SNARKs to verify that the Merkle root hash in Binance’s Merkle tree reflects asset balance changes. The Merkle root hash is essentially a cryptographic summary of all user balances. Changes to a user’s asset balances will prompt an update of the Merkle root hash, which the zk-SNARK will confirm.
Binance’s addition of zk-SNARKs is the last step in a transparency roadmap outlined at the end of November 2022. Part of its roadmap involved securing the services of a third-party auditor to audit its proof-of-reserves. This initiative has been jeopardized by the exit of accounting firm Mazars from the crypto space. Mazars was the accounting firm that conducted an agreed-upon procedure for the exchange’s first proof-of-reserves report.
Crypto VC Says Zero-Knowledge Proofs Only One Part of the Puzzle
While the technical implementations of PoRs vary, crypto VC Nic Carter expects zero-knowledge methods to supersede the technical limitations of traditional Merkle tree reports.
However, while zk-SNARKs represent an important step in the right direction for the world’s largest exchange, it is still only one part of a broader toolkit that can prevent collapses like FTX. Blockchain expert Anndy Lian agreed, saying that while not perfect, zk-SNARKs provide a “big enhancement.”
According to Carter, exchanges need additional rules to segregate corporate and user assets and protect customer assets from bankruptcy. Additionally, U.S. lawmakers must create a viable market for accounting firms to invest in tools to oversee PoR attestations. Doing so would also encourage offshore exchanges to conduct PoR reports.
Because audits are expensive and done quarterly, Carter suggests that they accompany, rather than replace, more frequent PoR reports, which provide updated customer reassurances.
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