The latest research report indicates that bitcoin exchanges round the world, need to prove that they are secure and proofed-against crypto hackers if they want customers to use their platform. The inference is that the latest spate of robbers, scams, misuse, fraud in the cyber world, apart from exchanges being the main targets for such crimes, has now led to cautious investors, who would rather be fussy and particular about the protection an exchange can offer its trading members over that of financial loss. Hence Bitcoin Reserves are the new consumer metric by which exchanges can make or break their business.
The exchanges which are establishing their credibility by allowing third-party verification of their reserves, and have become very important for businesses to gain customers trust.
However, the processes adopted in proving their balance is once again limited to in-house frameworks thereby leaving a wide gap for widespread speculation. The approaches adopted at every stage have made it difficult for standardization, with respect to technical knowledge as each exchange holding follows a system unique to itself.
Blockstream researchers have provided best-practice for Standard Proof of Reserves for the industry. Broad compatibility for most Bitcoin exchanges for storing customer funds;
Why the research
The effort of the researchers in the initial phase was to offer solutions for liquid functionaries so as to prove Liquid Bitcoin (L-BTC) for third-party auditors. Of the different approaches, the Traditional Approach, there is poor accessibility, security risks. Finally, Proof of Reserves is used as the approach for industry to build generates a ‘live’ transaction for exposing risks of fund movement.
Exchange first constructs a single transaction which is used for exchange with the addition of extra input invalidity the entire transaction is declared invalid and reject the network of the broadcast. A transaction is in a way constructed has to be used for explicit proof with Bitcoin UTXOs for exchange.
Data has to be shared to need to verify reserves. By using Proof of Reserves there is Bitcoin Core Wallet and Trezor with respect to integrations is on the way with Ledger Support. It uses Partially Signed Bitcoin Transactions (PSBT) for technology which is considered as block stream research team.
Proof of Reserves can be used by exchanges for providing auditors for different verification.