Definition
Proof of reserves, or PoR, is a transparency mechanism used by some custodial services. Designs differ, but typically aim to show reserve assets and compare them with a defined set of customer liabilities. The term is not automatically equivalent to a full financial-statement audit, and the exact scope of a published report must be read rather than assumed.
How It Works
A provider may demonstrate control of addresses and publish a cryptographic commitment to user balances. A Merkle proof can let a user check that their balance was included without exposing every other customer’s data. Some implementations use additional proofs to constrain accounting claims. These techniques establish only the statements actually covered by the methodology, data and verification process.
Key Considerations
Important limitations include the timing of the snapshot, completeness of liabilities and whether assets are borrowed, pledged or otherwise restricted. Showing a wallet balance does not alone prove that all assets are freely available to customers. Inclusion of one account also does not demonstrate that every liability is included. Review methodology, dates, asset coverage and independent assurance. PoR can improve visibility, but it does not guarantee future withdrawals, prevent misuse after the snapshot or eliminate counterparty risk.