Proof of Reserves Explained: What It Proves and What It Doesn't

When FTX collapsed in November 2022, customers learned that the balances on their screens were not backed by the coins the exchange actually held. Within weeks, many large exchanges began publishing proof of reserves, a report meant to show that they hold at least as much of each asset as customers have deposited. Four years on, it has become a standard, but it is often misunderstood. It answers one narrow question well and leaves others open.

How it works

• The exchange takes a snapshot of every customer balance and turns it into a Merkle tree, a cryptographic structure whose single root summarizes all the balances.
• Each customer can check that their own balance was included without seeing anyone else's.
• The exchange then shows wallets it controls on the blockchain, so the public can compare assets with the total owed, asset by asset, as a reserve ratio.
• Some add zero-knowledge proofs, zk-SNARKs at Binance and zk-STARKs at OKX, to show no account was given a negative balance to shrink the total. Binance, OKX, Bybit and Bitget publish monthly; Kraken has used a quarterly schedule.

Proof of reserves tells you the vault was full on the day it was photographed. It does not tell you what the owner borrowed.

What it does not prove

The biggest gap is liabilities. A proof of reserves covers customer balances, but not loans, unpaid bills, legal claims or other debts, so an exchange could hold every customer coin and still be insolvent. It is also a snapshot: assets could be borrowed for the day of the count, or pledged elsewhere, and the report would not show it. Verification varies too. Some exchanges hire outside firms; others publish open-source tools and verify themselves. The limits became clear in December 2022, when accounting firm Mazars paused its proof-of-reserves work for crypto clients. Coinbase, a listed company, does not publish a cryptographic proof; it relies instead on audited financial statements that include liabilities.

How to read a report

• Check the date and frequency. An old snapshot says little about today.
• Look at the ratio for each asset you hold, not just the total. Bitget, for example, reported a total ratio of 127% for June 2026; a high total can hide a shortfall in one coin.
• Find out who verified it, and whether that firm checked liabilities or only balances.
• Verify your own inclusion with the exchange's tool, and compare the report with any audited accounts.

Risk note: this is general information, not investment advice or a recommendation of any platform. Proof of reserves reduces one kind of uncertainty; it does not guarantee that an exchange will survive or that withdrawals will always be honored. Assets held on an exchange are generally not covered by deposit insurance.