Proof-of-Reserves

What is Proof-of-Reserves?

Proof-of-Reserves is a highly specialized process designed to ensure maximum transparency in the custody of digital assets. The method involves executing an on-chain transaction from a “frozen” wallet back to itself, providing verifiable and unequivocal proof that the assets are indeed under the custodian’s control. Each financial institution has a dedicated sub-account where all client assets held on its behalf are securely aggregated. The operational approach to Proof-of-Reserves varies depending on the custody key configuration:

• if the custodian holds exclusive control of the keys, the proof is conducted independently;
• if the keys are shared between the custodian and the institution, the verification is performed jointly;
• if the institution holds exclusive control of the keys, the proof is conducted autonomously, with full access to the necessary information and tools—even by non-technical personnel.

Unlike traditional audits or internal attestations, Proof-of-Reserves relies solely on publicly available data on the blockchain, offering full transparency and allowing anyone to verify the actual existence and availability of assets at any time.

Proof-of-Reserves for Proof-of-Solvency

Proof-of-Reserves represents an essential initial check on the existence and control of assets held by a financial institution. However, on its own, it does not provide a complete picture of financial soundness. To ensure full transparency and verify solvency, it must be integrated with Proof-of-Liabilities. The latter involves reconciling on-chain verified assets with the institution’s internal accounting records, ensuring that all liabilities to clients are properly balanced by equivalent reserves.

This process verifies that every obligation to clients is fully covered by on-chain reserves. The combination of these two elements — Proof-of-Reserves and Proof-of-Liabilities — forms the basis of Proof-of-Solvency. This comprehensive verification confirms not only the existence and control of assets but also their sufficiency to cover all liabilities.

By maintaining a transparent record of these verifications, financial institutions can provide independent, verifiable, and auditable proof of their solvency. This level of accountability strengthens stakeholders’ confidence in the security of client funds and the overall financial integrity of the institution.