Proof of ReservesPoR
Proof of reserves is an attempt by an exchange or custodian to show it holds the customer assets it claims, often using on-chain addresses and cryptographic proofs. Without proof of liabilities — what is owed to customers — it shows only half the picture.
Proof of reserves is an exchange's way of showing it holds enough coins to cover customer balances. It usually pairs on-chain wallet checks with a Merkle tree of client balances. It helps, but it is a snapshot and it says little about debts. How it is regulated differs by country.
- Category
- Cryptocurrency and Blockchain
- Reading time
- 4 min
- Also called
- PoR attestation, Reserve proof, Merkle tree proof of reserves
- Updated
Proof of reserves in plain words
Proof of reserves is a voluntary way for a platform to show that, in total, it holds enough assets to cover what customers have deposited at a given moment.1
One common method takes an anonymised snapshot of every customer balance and combines them into a Merkle tree.2
Its big limitation: it says nothing complete about the platform's liabilities.1
How a proof of reserves works
Snapshot client balances
All balances are captured at one moment and aggregated into a Merkle tree.2
Prove wallet control
The firm shows it controls the on-chain addresses holding reserves.
Compare totals
An accountant checks that the platform's holdings match or exceed the customer balances in the tree.2
Publish the result
The firm reports a reserve ratio per asset.
Check yourself
Each customer can check for themselves that their balance was included.2
Read the limits
It may only provide a snapshot as of a point-in-time.1
Worked examples
Example 1 — Reserve ratio
105% coveredA hypothetical exchange holds 10,500 coins on-chain against client balances of 10,000 coins.
| Reserve ratio | 10,500 ÷ 10,000 = 105% |
Reserves exceed or match the client balances in the Merkle tree, so the check passes.2
Example 2 — Ignoring debts
About 81% real coverageThe same hypothetical exchange has also borrowed 3,000 coins it owes to lenders.
| Total claims | 10,000 + 3,000 = 13,000 |
| True coverage | 10,500 ÷ 13,000 ≈ 81% |
The assets looked fine, but the proof couldn't show how much the platform owed elsewhere.1
Example 3 — Snapshot timing
85% after the moveA hypothetical venue passes on day 1, then moves 2,000 of its 10,500 coins out on day 2.
| Remaining | 10,500 − 2,000 = 8,500 |
| Ratio | 8,500 ÷ 10,000 = 85% |
Nothing stopped the platform from moving customer assets right after the snapshot.1
Proof of reserves vs financial audit
| Aspect | Proof of reserves | Financial statement audit |
|---|---|---|
| Scope | Selected assets and client balances | Full assets and liabilities |
| Timing | One snapshot | A full period |
| Shows debts | Usually not | Yes |
| Assurance level | Limited or none | Formal audit opinion |
How traders use proof of reserves
Picking a venue
Compare reserve reports before choosing an Exchange.
Sizing balances
Limit Exposure to any one venue.
Risk review
Treat it as one input on Counterparty Risk.
Stablecoin checks
Similar ideas apply to Stablecoin reserves.
Advantages and disadvantages
Advantages
- Lets clients check their balance is included.
- Shows on-chain reserves openly.
- Builds some trust between audits.
- Can be repeated often.
Disadvantages
- Only a snapshot in time.
- Often ignores liabilities.
- Not as rigorous as an audit.
- Rules and standards differ by country.
Going deeper
Read as far as you need. Each level builds on the one before it.
Checking your own balance
Beginner
Customers can verify their own inclusion, usually with a Merkle proof provided by the exchange.2
Not an audit
Intermediate
It is far less thorough than a full audit of the financial statements and may provide little or no assurance.1
Snapshot risk
Advanced
It's only a snapshot of certain wallets at one moment, so how often it's done and whether liabilities are covered matter a lot.1
Common mistakes
Treating PoR as an audit
It is narrower and gives less assurance.
Ignoring liabilities
Reserves can match deposits while debts go unseen.
Trusting old reports
A snapshot can go stale quickly.
Not checking your leaf
Verify your own balance was included.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Proof of reserves compares reserves with client balances.
- A Merkle tree lets clients check inclusion.
- It is a snapshot, not ongoing proof.
- It often ignores liabilities.
- Standards and rules differ by country.
Frequently asked questions
Does proof of reserves mean my funds are safe?
How often should it be done?
Who checks it?
Further learning
- Counterparty Risk
Venue failure risk.
- Exchange
How exchanges hold funds.
- Stablecoin
Reserve reports for stablecoins.
- Diversification
Spreading venue risk.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Exercise Caution with Crypto Asset Securities: Investor Alert (opens in a new tab) Checked .
- Kraken. Proof of Reserves (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.