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Declaring proof of reserves is important, but it’s not enough

Declaring proof of reserves is important, but it’s not enough

‘Proof of reserve’ is the new catchphrase and promise by crypto leaders eager to allay investor fears. But loopholes remain and audits might not mean what you think, writes Anndy Lian.

Proof of reserves plays a critical role in the cryptocurrency industry by providing a vital security mechanism for investors. Given the industry’s lack of regulation and transparency, investors may have reservations about putting their money into the market. In response, many leaders in the industry are stepping up to assure users of their reserves.

“The #Binance Proof of Reserve system has now integrated with zk-SNARK, a zero-knowledge verification method. It will also be made open source. We hope this would help the entire industry benefit,” Changpeng “CZ” Zhao, the CEO of Binance, recently tweeted.

Ben Zhou, CEO of Bybit, has also reassured clients that “Bybit has always [been] committed to client fund safety and guarantees 1 to 1 reserves.”

OKX, led by founder, Mingxing “Star” Xu, recently announced their fifth proof-of-reserves report showing over US$8.9 billion in “clean assets” held in the exchange reserves, including over 100% reserves for BTC, ETH and USDT.

This past week, Texas also jumped on the “proof of reserves” bandwagon as its House of Representatives passed a bill that would require it for crypto companies operating in the U.S. state. By requiring adequate reserves, the proposed legislation seeks to prevent situations where a company is unable to meet its obligations to customers due to insufficient funds.

These words and measures may help alleviate some investor concerns that their digital assets held by a crypto exchange are safe and not being used by the exchange for other purposes, such as trading or investment. However, many crypto users still do not understand the concept of “proof of reserves” and how it works.

Here is an overview of what proof of reserves is all about, the potential gaps in how it’s being carried out, and how investors can demand more accurate and timely data for protecting their crypto holdings.

What proof of reserve does

Proof-of-reserve audits are crucial in verifying that exchanges hold the total amount of crypto assets they claim to have on behalf of their customers. This gives investors the confidence to know that their assets are securely stored and not at risk of being lost or stolen. It is especially important given the recent high-profile hacks and security breaches in the industry, which have resulted in the loss of millions of dollars worth of digital assets.

Proof of reserves provides a level of accountability for crypto exchanges. By ensuring that they are holding customers’ assets safely and securely, exchanges are incentivized to maintain high levels of transparency and openness. This can help to prevent suspicious or illegal financial activities from occurring on the exchange, which is vital for the overall credibility and legitimacy of the industry. Thus, it plays a crucial role in maintaining investor confidence and promoting the growth and success of the cryptocurrency industry.

But many people have a mixed understanding of what proof of reserve means and what it entails. There are three methods for proof-of-reserve verification, including “public wallet address,” “third-party audit,” and the most widely used “Merkle tree” proof.

  1. Proving reserves through public wallets

A public wallet is one method for proving reserves, which entails an exchange publicly sharing the addresses of its crypto wallets that contain customer funds. This approach offers a transparent and verifiable mechanism for both customers and regulators to confirm that the exchange is indeed holding the funds it claims to possess.

Through public wallets, customers of a crypto exchange can monitor the wallet addresses and ascertain that the funds contained in those wallets match the amounts they have deposited with the exchange. Such a high level of transparency can bolster trust between customers and the exchange and reassure customers that their funds are safe.

Apart from total transparency and enhancing accountability, a public wallet can also serve as an early warning mechanism for investors to detect any irregularities in a crypto exchange’s financial situation. For instance, if the balance of a wallet suddenly decreases without any explanation, it could signal potential fraudulent activity.

Just a word of caution: A public wallet may not be sufficient in revealing how the reserves are being managed or invested. Hence, it is critical to view a public wallet as just one part of a more extensive transparency and oversight framework, which includes other techniques such as live audits and continuous proof of solvency.

  1. Third-party audits

Third-party audits of proof of reserve are a method of validating an exchange’s reserves through an independent auditor. This approach aims to provide an unbiased evaluation of an exchange’s financial status and can enhance trust between customers, regulators and the exchange.

During a third-party audit, the auditor investigates the exchange’s records and verifies that the funds the exchange holds correspond to the amount owed to its customers. The auditor also confirms that the funds are held in secure and auditable accounts while scrutinizing any potential irregularities or discrepancies that may indicate fraudulent activities.

Using third-party auditors can yield several benefits, including preventing crypto exchanges from exaggerating their reserves or engaging in fraudulent activities, fostering confidence among customers and regulators, and promoting transparency and accountability within the largely unregulated cryptocurrency industry.

There are some drawbacks to relying on third-party audits for proof of reserves. Finding an impartial auditor with the required expertise and experience to carry out the audit may not always be feasible. In addition, the audit may only reflect a specific snapshot of the exchange’s financial status at a particular moment in time, potentially overlooking other fraudulent activities or ongoing mismanagement.

  1. Merkle tree

A Merkle tree is a cryptographic technique that plays a significant role in securing the blockchain. It employs a complex process that creates a series of hash values representing a block of transactions stored on the exchange. This process is done by combining the hash values of each transaction within the block, thus producing a unique hash value for the entire block.

The creation of this unique hash value is crucial as it provides an extra layer of security for the digital assets held by the exchange. Any attempt to tamper with a single transaction within the block would result in a change to the hash value of the entire block, which the system would detect. As a result, any unauthorized modification of the block can be quickly detected and prevented.

For crypto investors, verifying the hash value of their digital assets is an essential process that enables them to confirm the security of their assets. By doing so, they can be confident that their crypto assets are stored securely on the exchange and not stolen or compromised. Moreover, verifying the hash value of their assets is crucial because it helps to maintain their personal privacy regarding the total amount of assets held on the exchange.

Merkle tree provides this added privacy by only revealing the specific block of transactions that the hash value represents while not revealing any information about the total amount of assets held by the holder. This privacy protection is crucial for holders who want to verify the security of their assets while keeping the total amount of their assets private.

Importance of proving reserves

Proof of reserve plays a vital role in the cryptocurrency industry for three key reasons. Firstly, it allows customers to ensure the accuracy of their holding balances and verify that their assets are safe and secure. As the cryptocurrency market lacks regulation and transparency, It is an essential tool that empowers customers to confirm that their assets are not being used for unauthorized investment purposes, such as trading or lending.

Secondly, it incentivizes exchanges to operate in a more transparent and accountable manner. By verifying the accuracy of their reserve holdings, exchanges are held responsible for their actions, which promotes greater transparency and responsibility in the industry. This creates an environment that discourages suspicious or illegal financial activities, which is crucial for the growth and legitimacy of the market.

Thirdly, it prevents exchanges from acting like traditional banks by lending customer deposits to third parties. In the past, traditional banks have used customer deposits to make loans, putting depositors’ funds at risk. With proof of reserves, customers can verify that their assets are not being lent out, which provides peace of mind and ensures the safety and security of their assets. This important feature sets cryptocurrency exchanges apart from traditional banks and promotes trust and credibility in the industry.

Can public statements be trusted?

Publicly disclosing proof of reserves can have several benefits for cryptocurrency exchanges and crypto holders alike. By verifying the accuracy of reserve holdings, holders can feel confident that their assets are being securely stored and not being utilized for other purposes. This increased trust can attract more users to trade on the exchange, boosting its reputation and market share. Public proof of reserves can also help enhance the stability of an exchange’s operations by preventing the use of customers’ deposits for investment or other business activities. Many mainstream exchanges, including Binance, OKX, Bitget, KuCoin and Bybit, have publicly disclosed their reserves to showcase their commitment to transparency and security. By doing so, these exchanges create a more stable and sustainable operating environment.

While this is a step in the right direction toward greater transparency and accountability, such disclosures are not foolproof and may have some flaws and loopholes. For instance, exchanges can manipulate their reserves data by temporarily moving funds into a hot wallet just for the purpose of verification. Additionally, it only proves that an exchange has enough reserves at a specific point in time, and it does not guarantee that the reserves will remain the same in the future.

One potential solution to the flaws is combining proof of reserve with other transparency methods. Through the use of multiple methods, it is possible to instill greater confidence in both customers and regulators regarding an exchange’s adherence to its claims of reserve holdings. This is particularly critical as an exchange’s failure to maintain adequate reserves can have far-reaching consequences, including reputational damage and financial losses.

By leveraging additional methods, such as live audits and continuous proof of solvency, it is possible to detect fraudulent activities in real time, thereby providing a more detailed and current view of the exchange’s financial position. This proactive approach to monitoring can enable irregularities to be immediately identified and addressed, in contrast to relying on infrequent or less comprehensive audit approaches.

Necessary but not sufficient

The dynamic nature of the crypto industry suggests that proof of reserve may not be the ultimate solution but rather a building block to the development of more advanced and robust methods of verifying reserves. Despite its limitations, it is a formidable tool in the crypto industry’s quest for greater transparency and accountability. While it is true that disclosing proof of reserve is not infallible, it represents a significant stride in the right direction, as it bolsters confidence in the sector and cultivates a more mature market.

The widespread adoption of proof of reserve could significantly enhance the credibility and legitimacy of the crypto industry. This would benefit investors and open doors to innovative financial tools and services that could revolutionize the broader economy. Ultimately, as the crypto industry evolves and adapts, its limitations could be addressed and overcome, leading to greater trust and confidence in the sector.

To me, trust can be a really “cheap” word. If you are truly worried, withdraw your crypto and keep it all to yourself and only yourself.

The best way to test proof of reserve is to put on a stress test. If the exchange can withstand withdrawals of any sort in a timely manner, this is the best proof.

 

Source: https://forkast.news/proof-of-reserves-is-important-but-not-enough/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
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How important is whitelisting for the success of NFTs?

How important is whitelisting for the success of NFTs?

Whitelisting typically means that a crypto wallet address has been pre-approved for the minting of NFTs on specific dates and times

In a typical Silicon Valley startup, you look to start with an innovative product or service and then match that to customer demand, testing out your hypothesis with an MVP (minimal viable product) before seeking to scale up the business backed by VC funds.

The VC model seemed in decline during the crypto ICO boom years in 2017/18, when an ambitious whitepaper and an impressive founding team and advisors were enough to gain token investment.

But nowadays, as the world of DeFi, the metaverse and NFTs all usher in the Web3 world, that’s certainly not enough. Projects need to have purpose and be community-led, in a real sense, in terms of both governance and tokenomics.

As Maggie Hsu, partner at top crypto VC Andreessen Horowitz pointed out regarding the nature of Web3 projects earlier this year, “It means having a strong community, not just being “community-led” or “community-first,” but also being community-owned, blurring the distinction between owner, shareholder, and user. What allows for long-term success in Web3 is a clear purpose, having an engaged and high-quality community, and matching the right organisational governance to that purpose and community.”

That being said, how does the current practice of whitelisting, allowing early pre-sale access to NFT and DAOs, square with this Web3 vision? When there is an opportunity from being lucky enough to be whitelisted to make a significant short-term profit, is that right from the longer-term view of the project.

What is whitelisting?

Before we get into the expert discussion, let’s briefly consider the focus of this article. Whitelisting was introduced in the NFT space near the end of 2021 after NFT enthusiasts identified a critical issue during the launch of new projects.

Also Read: NFTs: The good, the bad, and the future

Before the concept of whitelisting became popular, NFT projects with a lot of hype were usually ‘botted’ on the mint day by NFT whales (people who hold large amounts of crypto), leaving little to nothing for retail investors. Using trading bots allows the whales to buy the NFTs before community members have a chance to buy.

As explained in the NFT Examiner, whitelisting is when a specific crypto wallet has been approved for minting a specific NFT.

“As an example, Neo Tokyo is a project where participants have to pass a test to become eligible to mint a Neo Tokyo Identity NFT. If they solve the challenge, they are added to the whitelist, allowing the participant to mint the highly sought after NFT. Without being on the whitelist, buyers could attempt to mint the NFT, but the transaction would fail.”

In the NFT world, whitelisting typically means that a crypto wallet address has been pre-approved for the minting of NFTs on specific dates and times.

Furthermore, due to the high demand for these projects, particularly on the Ethereum blockchain, there were usually ‘gas wars’, with transaction fees reaching thousands of dollars, which was a bad look for the NFT sector and hampered user adoption.

In addition, pre-approved users on the whitelist can spread out their minting so that they are not all transacting simultaneously, avoiding a sudden spike in transaction prices caused by demand. Most new NFT projects layout their whitelisting requirements on their respective

Discord servers, with different tasks and assignments ranging from chatting to a certain level, posting fan art, promoting the project on social media platforms, etc.

In some ways, it’s an evolution of the practice of ‘bounty campaigns’ used in the days of ICOs in 2017/18 to market token offerings by offering giveaways in return for tweets and Facebook likes to help promote the coin offering.

The lure of big profits

Of course, the popularity of getting yourself invited onto an NFT or DAO whitelist isn’t just about being part of an exclusive community, to be part of a long term Web3 project; for too many people simply a chance to make a quick buck.

In his video explainer on the power of whitelisting, YouTuber ‘_DB’ points out that if you get access to a pre-sale token, it usually sells between US$10 to US$20 or even US$30, though how much can vary according to the amount of hype behind a project; with a limit in the amount of pre-sale tokens typically set between US$1,500 to US$2,000.

The new NFT drop from the High Sloth Society (HSS) of 10,000 Elite Sloths recently organised a public sale that was sold out in 29 minutes for US$1.2 Million.

Also Read: 3moji aims to transform the way NFTs are used in metaverse with its composable avatars

The High Sloth Society NFTs started their public sale at noon UTC on the 28th of April. Then on the next day, they sold another 1,000 pieces at 0.08 ETH each at their whitelisting event.

“The High Sloth Society is a group of people that are no longer interested in money but want to focus on what money cannot buy. By owning a high sloth, the users are granted the opportunity to have a direct interest in the ancient artefacts. The Korean National Treasure is just the first one,” Leon Kim, Core Contributor of HSS, said.

What’s the benefit for the community?

The purpose of whitelisting serves two core purposes. The first relates to the fact that if you are going to have any degree of success, you need to build a community around a project. Achieving this involves driving online engagement through social media.

And using a whitelist is an excellent way to do this. For the user, it’s a way of getting preferential access to a project, providing an incentive for a community to rally around a project.

“It can be a really good way to start getting people again, like talking about things on social media, retweeting, commenting, sharing pictures, all that sort of thing, because if you if you make things obvious, then you’ll get like, you’ll get some pretty good organic traction,” confirmed Ben Baldieri, Director of a Web3 tech consultancy Disintermediate Ltd.

The future for whitelisting

The whitelisting method currently dominating the NFT space is relatively new. Therefore, while it’s successfully prevented botted NFT project launches and conserving gas fees, they need to be used with the community in mind.

BigONE Chairman Anndy Lian said, “While the whitelisting practice was founded on good intentions, it has been tainted by some bad actors in the NFT space; this ranges from over-stringent requirements for being considered for a whitelist to some Discord server moderators giving out multiple whitelist spots to their family and friends.”

“I believe that commonly agreed best practices for the NFT space are the logical next step forward to ensure all participants’ safety and security in this exciting marketplace. NFTs have a lot of potential as their utility develops from collectibles to allowing fans to connect directly with artists and creators and their role to prove ownership in the metaverse and GameFi projects. But as things move quickly, we need to ensure we get the balance right in such a fast-changing technology,” Lian added.

 

Original Source: https://e27.co/how-important-is-whitelisting-for-the-success-of-nfts-20220512/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j

KYC: Why is it Important in the Cryptoverse?

KYC: Why is it Important in the Cryptoverse?

As we all know, before beginning an encrypted transaction, you must first verify your identity. When you create an account on a proper centralized crypto exchange, you will usually be asked to complete the “know-your-customer” (KYC) process. This is a standard authentication process required by mainstream cryptocurrency exchanges for those wishing to trade cryptocurrencies. The sooner KYC is completed, the sooner cryptocurrency purchases and withdrawals can be made.

 

For example, for Binance, they have a new hire for the position of Director of KYC Compliance so to ensure the highest standards of regulatory compliance. Binance mentioned that all new users of the company are required to complete Intermediate Verification to access Binance products and service offerings, including cryptocurrency deposits, trades and withdrawals. Their CEO, Zhao Changpeng also emphasized in a tweet that “Mandatory KYC for ALL services @Binance.”

 

This article will explain what KYC is, how the process works, and alternative methods for purchasing cryptocurrency.

 

What is KYC?

KYC is an abbreviation for “know-your-customer,” which verifies the customer’s identity. This is most common among financial institutions and financial service providers, such as banks, stockbrokers, and, more recently, cryptocurrency exchanges. KYC is essential to confirm customers’ identities and prevent illegal activities such as money laundering, terrorism financing, and tax evasion. If a cryptocurrency exchange does not perform KYC, it may be held liable for such illegal activities by industry regulators.

 

Under normal circumstances, investors can open a trading account without completing the KYC process; however, the investor’s account will be restricted until the identity verification is completed. The most likely limitation is that the exchange does not allow investors to withdraw or buy cryptocurrency at all or that the amount you can deposit is limited.

 

How KYC works

 

KYC is handled differently by each cryptocurrency exchange. Typically requires the following information during the KYC process: name, date of birth, certificate type, number and photo, biometric verification, and so on. In most cases, valid government-issued ID documents, such as ID cards, passports, or driving licenses, are also required.

 

The exchange will use biometric verification to verify the investor’s identity after the investor provides the information and photos required by the exchange and completes the biometric verification. Therefore, reviews may take some time. In addition, each exchange has a different review time, depending on the company and how popular it is.

 

In some cases, the exchange will require additional investor verification. In this case, the investor may be required to show proof of his or her physical address or take a selfie.

 

“The additional verification protects all parties. It is a standard requirement globally within the investment industry. It’s a process from industry regulatory bodies to protect all stakeholders and this should be implemented in the crypto industry. This is a way to keep our crypto industry clean and accountable.” Anndy Lian, Chairman, BigONE Exchange in Asia and Chief Digital Advisor to Mongolia commented too.

 

Can I buy cryptocurrency without KYC?

 

You can buy cryptocurrency without KYC, but it is more complicated and risky than using a KYC-compliant exchange. Decentralized exchanges and Bitcoin ATMs are the most common ways to purchase cryptocurrency without needing to provide proof of identity.

 

A decentralized exchange does not have a centralized organization and management. Peer-to-peer (P2P) trading and automatic market maker (AMM) trading are the two main types of decentralized crypto transactions.

 

Peer-to-peer trading (P2P) offers buyers and sellers a platform for issuing cryptocurrency price quotes, which function similarly to a list of cryptocurrencies classified ads. However, even though these platforms have security measures to prevent fraud, buyers and sellers may still be duped and lose money. As a result, peer-to-peer transactions are generally riskier than centralized cryptocurrency exchanges.

 

You can also trade paired cryptocurrencies using automated market makers (AMM). They set transaction prices using smart contracts and provide transactions using a liquidity pool, a collection of encrypted funds contributed by users. Although AMM does not require identity verification, you must prepare in advance an encrypted wallet with funds ahead of time to conduct transactions. On these platforms, you cannot buy cryptocurrencies with cash. Many users will choose to buy cryptocurrency on a centralized exchange first, then transfer it to a crypto wallet and connect it to AMM to gain access to a broader selection of cryptocurrencies. Clearly, your goal of investing in cryptocurrency is to make money. However, when the cryptocurrency is transferred between accounts, you risk paying a significant portion of the cryptocurrency as a handling fee.

In addition to the two methods mentioned above, Bitcoin ATMs can be found all over the world.

 

Despite their name, these ATMs do not always accept Bitcoin. Other types of cryptocurrencies are also available at some ATMs. Although ATMs are frequently expensive than crypto exchanges, these ATMs allow you to purchase cryptocurrency in cash at a convenient location. Bear in mind that crypto ATM providers such as are still subject to regulations. For example, Bitcoin of America based in the US is registered as a money services business with the United States Department of Treasury, and it operates in compliance with all AML-regulations and relevant laws.

 

The crucial part of crypto trading

 

KYC is a requirement that almost all centralized cryptocurrency exchanges impose. However, buyers who prefer to remain anonymous can use decentralized exchanges or Bitcoin ATMs.

However, these options are frequently less convenient and faster than purchasing on high-quality centralized exchanges and decentralized exchanges and Bitcoin ATMs may also charge you higher transaction fees. Therefore, the best option remains to select a centralized exchange and complete their KYC process. Fortunately, these procedures are straightforward with help from customer support every step in the process. Following completion of KYC, you will be able to buy and trade cryptocurrencies freely.

 

We need to do our part to ensure the industry is proper. On our end, we have crypto exchanges coming to us for public relations and marketing-related services. As long as they are grey, we do not accept them. We do not want to be marketing for the wrong companies.

 

 

Original Source: https://hackernoon.com/kyc-why-is-it-important-in-the-cryptoverse

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author- “NFT: From Zero to Hero” and “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

www.anndy.com
j j j