Proof of Reserve is a type of cryptographic proof used in cryptocurrency systems to prove that the system has sufficient funds available for transactions. This proof is necessary in order to ensure trust and confidence among users, as well as provide assurance that their funds are protected.
In simple terms, Proof of Reserve allows users to verify whether or not a given cryptocurrency exchange platform holds enough cryptocurrency reserves to cover all user deposits. In other words, it provides an audit trail which can be tracked and verified by anyone who wants to check the amount of crypto held by a particular exchange platform.
When using Proof of Reserve, an auditor will generate a list (or “report”) showing the total number of coins held at any given moment in time on behalf of customers. The auditor must also prove that no new coins have been created since the last report was generated and confirm whether or not withdrawals were handled correctly during this period.
The benefit offered by Proof-of-Reserve is twofold: firstly it increases security for users; secondly it offers transparency into how much money is being stored on behalf of clients at any one time with complete accuracy – something which traditional banking systems lack due to their reliance on paper records rather than digital ones.
Additionally, this type of cryptographic system encourages exchanges platforms themselves because they are able to demonstrate their commitment towards providing secure services through having efficient financial reporting processes in place from within their own organizations; thus giving them more credibility amongst its users and potential investors alike .
Finally , given its decentralised nature , using Proof-of-Reserve helps prevent single points of failure whereby even if one node fails then data can still be retrieved from others nodes connected across wider networks . As such , overall resilience against malicious attacks remains significantly higher when compared with other forms cryptography like SHA256 which rely solely upon individualized hashes .
