Can proof of reserves prevent future crypto exchange meltdowns?

A number of crypto exchanges are rushing to release proof of reserves in an apparent attempt to reassure investors of the safety of funds as other FTX exchanges slump.

Proof of Reserves (PoR) are independent third-party audits that aim to provide transparency and evidence that a custodian holds the assets it claims to hold on behalf of its clients. Auditors then aggregate the balances into what is called a Merkle tree, which includes all customer balances.

FTX exploded this week following a CoinDesk report that showed a June 30 balance sheet from its affiliate trading firm, Alameda Research, was largely comprised of FTX's native token, FTT. All of this could have been avoided with PoR, Chainlink co-founder Sergey Nazarov told TechCrunch.

“There was a problem with the balance sheet and it became known to many depositors at the same time,” Nazarov said. "And because it was a surprise, there was a bank run that led to insolvency."

But imagine if filers knew about the balance sheets of FTX and Alameda Research all along.