All Bitcoin Trading Platforms Are Not Equal – Kraken Stands Out With Its Proof of Reserves
All Bitcoin Trading Platforms Are Not Equal – Kraken Stands Out With Its Proof of Reserves
A transparency initiative that must become the industry standard.
Bitcoin was created by Satoshi Nakamoto to provide a leaderless P2P payment system for everyone. A payment system that belongs to each of its users. Bitcoin belongs to you, just as it belongs to me, and it belongs to every user. That's what makes Bitcoin virtually unstoppable.
To truly take power with Bitcoin, you must take responsibility for securing the fruits of your labor. This means taking ownership of the private keys associated with your Bitcoin because you only own the Bitcoin you have the private keys associated with as I already explained in the past: Not your Keys, Not your Bitcoin.
Unfortunately, some people don't want to fully access the liberating power of Bitcoin. I should say that these people do not feel the need to make the effort involved. For them, Bitcoin as a hedge against monetary inflation is enough. They don't want to find out how to store their Bitcoin's private keys on a hardware wallet by themselves.
This is unfortunate, as I often say, but we are all different, and we all have to accept that we see things differently. I respect the decision of people who tell me that they prefer to store their Bitcoin (or the cryptocurrencies they buy) on exchange platforms. It's their money, and they should do what they think is best for them.
Those who choose to store their Bitcoin on exchanges must understand that not all exchanges are created equal
If you too make this choice, then you need to consider another important parameter: not all exchange platforms are equal. Especially when it comes to security. Some will offer you more guarantees than others in case of a hack of their infrastructure or better customer support. The transaction fees that these platforms will take from you during your transactions are also part of the criteria you should consider.
However, today, there is another criterion that I will highlight. This criterion concerns the transparency of the accounts of the trading platform you will choose. Indeed, when you connect to your exchange platform, you will see numbers on your balance in BTC. However, since you don't have the private keys in your possession, these numbers are just numbers. What is the proof that the platform can send you all your Bitcoin to an address of your choice, while also doing so for all other users?
For the banks of the current monetary and financial system, you know that this is something impossible because of the reserve requirement rate which is not 100%. As a reminder, reserve requirements are the amount of cash that banks must have, in their vaults or at the closest Federal Reserve bank, in line with deposits made by their customers. The rate is set by the Fed's board of governors.
The purpose of the Bitcoin system is to avoid this type of situation where financial institutions abuse your trust. So you should be able to be sure that your trading platform has the number of Bitcoin and other cryptocurrencies it claims to have. Transparency is the key so that you can be sure that the number displayed on your balance is not just a number backed by nothing.
Kraken stands out from the competition with its transparent Proof of Reserves audit process
The reason I'm talking about this today is that the exchange platform Kraken has just published a blog post entitled “Proof of Reserves” in which it describes the auditing process it makes available to its customers to show that it does hold the assets it claims to hold:
“Our regular Proof of Reserves audits make it easy for clients to verify the balances they hold are backed by real assets, all with just a few easy clicks in their account.”
There is no industry standard for this. There is no legal requirement for Kraken to do this. The initiative is voluntary and it is all the more commendable in my eyes. Here is what the Proof of Reserves (PoR) is detailed by Kraken:
“A Proof of Reserves (PoR) is an independent audit conducted by a third party which seeks to ensure that a custodian holds the assets it claims to on behalf of its clients. This auditor takes an anonymized snapshot of all balances held and aggregates them into a Merkle tree — a privacy-friendly data structure that encapsulates all client balances.”
Any Kraken customer can check at any time whether their balance on Kraken has been included in a Proof of Reserves audit previously performed on the platform. This is done by comparing the selected data parts with the obtained Merkle root. If changes have been made in the meantime, then the root would be affected, and the data would differ.
The process will seem tedious to non-technical people. However, the initiative is all the more commendable as Kraken details the whole process to do these checks yourself if you wish:
Based on the record, Kraken then details two methods for verifying your balance. The simple version is to use the third-party auditor's portal with your record ID provided by Kraken. However, this still requires you to trust multiple third parties. A more technically advanced solution is to rebuild a particular Merkle root yourself from sample source code provided by Kraken:
You don't have to do it if you don’t want, but being able to do it is a clear game-changer in my opinion. The auditing and transparency efforts made by Kraken are to be commended, and I hope that this will eventually become an industry standard.
Final Thoughts
When choosing a trading platform, this type of criteria should also be on your list of criteria, and even more, if you choose not to store your assets in cold storage. This may not seem as important as transaction fees to some, but it is something that secures your money and shows the seriousness of the trading platform.
Something essential for the adoption of Bitcoin to continue moving in the right direction in the future.
In Bitcoin We Trust
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When starting out, it feels like there are alot of choices on the exchange front will little difference. That couldn't be further from the truth and I would encourage anyone just joining the space to do some serious research on each exchange and understand how they store your funds, where they store them and how they protect them. It is easy to fall into the trap of thinking that nothing can ever go wrong. Unfortunately, you have to think worst case scenarios and understand how each exchange is prepared to handle those situations. I always keep in mind that a good company should have no reason to hide information. If an exchange will not provide an answer or is vague on something, that is all I need to know. Transparency is key.
It's a good sign that CEXs like Kraken are taking the steps to be more transparent. Either way I prefer to hold my coins myself and just use CEXs as little as possible.