What is Proof Of Reserve?

| November 17, 2023

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Proof of Reserve

Following the FTX collapse, proof of reserves has become a prominent topic of discussion as investors increasingly demand exchanges to provide evidence of their cryptocurrency holdings. But what is proof of reserve, and why is it significant? 

Proof of reserves (PoR) is a method used to verify that a trading platform or cryptocurrency firm possesses one-to-one backing for the digital assets held in custody on behalf of their customers. To carry out this verification, firms often enlist the services of a third-party organization. The attestation results are then published, albeit with certain considerations, to provide investors with insights into the financial state of centralized exchanges and ascertain whether they possess sufficient funds to match customer deposits. 

Since this trend emerged, a wide array of attestations have been conducted, with some inspiring greater confidence in the firm’s financial standing compared to others. This ongoing practice of proof of reserves seeks to enhance transparency and instil trust within the cryptocurrency ecosystem.

Key Takeaways 

  • Proof of reserves serves as a mechanism to determine the safety of customer funds by ensuring that all deposits have adequate backing in the form of sufficient funds.  
  • Crypto companies can release periodic audit results showcasing their proof of reserves or provide real-time visibility of their available reserves on their website.   
  • Utilizing blockchain technology, proof of reserves employs a public verification process to validate a crypto company’s on-chain assets. This ensures transparency and reinforces trust within the cryptocurrency industry. 

What Is Proof of Reserve? 

Proof of Reserve involves businesses holding cryptocurrency generating public attestations to demonstrate their solvency to depositors through independent audits. However, these audits rely on centralized third parties, leading to lengthy, time-consuming, and manual processes.  

With developers advancing the creation of sophisticated financial products within the digital asset ecosystem, there is a need for a dependable, transparent, and decentralized standard to facilitate automated audits of reserves. This is where services like Chainlink PoR come into play, leveraging the transparency offered by blockchains, smart contracts, and oracles. Such PoR services provide a solution enabling efficient and reliable auditing of reserves through an automated process, offering enhanced transparency and trust in the ecosystem. 

Working of Proof of Reserve  

The working of “Proof of Reserve” is a crucial aspect that deserves attention. When custodial assets control users’ private keys, they can utilize them as they please. While you can access transaction details through the hot and cold wallets used by centralized custodians, it provides only an aggregated view of the total assets held by the platform. To thoroughly verify account balances, the Proof of Reserves auditing process delves into various aspects.  

The first step involves the auditor taking a snapshot of the institution’s balances. Subsequently, the auditor organizes these balances using the Merkle tree system. The custodial data is arranged within a single data tree, with partitions forming branches. Next, the data pieces are identified using hash codes. By deriving the Merkle root, which serves as the single connection point among the data pieces in the tree, auditors establish a foundation for verification.  

With unique digital signatures, individual accounts responsible for depositing assets can be identified. Verifying individual contributors entails matching the digital signatures with the records within the Merkle tree. The subsequent step involves verifying whether the individual balances align with the balances visible in the Merkle tree. Utilizing the Merkle tree’s data structure can detect any substantial changes in individual balances. This ensures that the institution cannot modify user balances without being detected. 

Through this comprehensive verification process, the Proof of Reserves mechanism confirms the accuracy and integrity of account balances within a custodial system. 

Merkle Tree-based Proof of Reserves   

An effective method to conduct an attestation is through a Proof of Reserve (PoR) protocol that utilizes a Merkle Tree proof, enabling the consolidation of large data sets into a single hash while ensuring data integrity.  

The PoR protocol validates the authenticity of user balances and transactions through cryptographic proofs, providing a robust verification mechanism.  

Crypto exchanges can publish PoR attestations based on Merkle Trees at regular intervals, such as weekly, monthly, or quarterly, in the form of snapshots. Alternatively, they may offer real-time attestations accessible on their websites.  

While snapshots can demonstrate a crypto firm’s solvency at a specific point in time, real-time attestations are considered superior when verifying an exchange’s reserves. At any given moment, they enable anyone to confirm that the funds are genuinely backed by the exchange, enhancing transparency and trust in the system.  

How are proof-of-reserve audits conducted? 

A third-party auditor typically conducts the proof-of-reserves auditing process to ensure the adequacy of a crypto custodian’s balance sheet in balancing its customers’ holdings. The following steps outline this process: 

1. The external auditor or auditing firm begins by taking an anonymized snapshot of the institution’s balances. These balances are then organized into a Merkle tree containing custodial data and branches authenticated using hash codes. 

2. The auditor collects the individual user contributions by leveraging the unique signatures of each account holder.  

3. The next step involves authenticating whether customers’ assets are held on a full-reserve basis. This is done by comparing the digital signatures to the Merkle tree records, ensuring that the reported balances from individual contributors are at least equal to those obtained from the Merkle tree. 

4. After the Proof of Reserves (PoR) audit, users can verify their own transactions. For example, suppose someone has held their crypto assets on an exchange. In that case, they can access their Merkle leaf and Record ID by logging in to the respective website, navigating to the “Wallet” section, and selecting “Audit.” 

5. The subsequent step is to choose the audit date to confirm the type of audit, the covered assets, the user’s Record ID, and the asset balances included in the auditor’s attestation report regarding the exchange’s proof of reserves audit. 

By following this rigorous auditing process, crypto custodians can provide their customers with transparency and assurance regarding the sufficiency of their asset holdings. 

Example: Chainlink Proof of Reserve (PoR) 

Chainlink Proof of Reserve (PoR) revolutionizes how smart contracts verify the collateralization of on-chain assets backed by off-chain or cross-chain reserves. Leveraging a decentralized network of oracles, Chainlink PoR enables real-time, autonomous auditing of collateral, safeguarding user funds against fractional reserve practices and fraudulent behaviour by off-chain custodians. Instead of relying on trust in custodians’ paper guarantees, Chainlink PoR enables automated on-chain audits that provide users with a superior level of assurance regarding the underlying collateralization of assets, fostering transparency in the crypto asset ecosystem. 

Moreover, Chainlink proof-of-reserve is increasingly utilized to enhance the security of wrapped assets’ minting, redeeming, and burning processes. When Chainlink proof-of-reserve detects under-collateralization of wrapped tokens, Chainlink Automation can be employed to halt the minting, redeeming, and burning operations, preserving the integrity of the ecosystem. 

Chainlink proof-of-reserve empowers smart contracts with unparalleled data accuracy, enabling robust audits and safeguarding the interests of users in the ever-evolving crypto landscape. 


Implementing Proof of Reserves (PoR) is a crucial measure for crypto companies to prioritize the safety of customer funds and establish their liquidity through cryptographic validation. With increasing regulations in the crypto industry, it becomes advantageous for crypto exchanges and custodial companies to undergo proof-of-reserves audits. While the process may have limitations, such as not addressing company liabilities, it is significant in reassuring customers and enhancing their confidence in the platform.

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More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 


Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture