Bitcoin is a movement founded on individual monetary sovereignty, transparency and peer-to-peer auditability enabled by a breakthrough in technology. It launched at a time when trust in the world’s financial institutions was at an all-time low and struck a chord. Bitcoin’s success has led to profits, which has, in turn, led to complacency. Today, people are once again placing their trust in new crypto institutions, some of which have done very little to earn that privilege. Over $4.4 billion[1] was lost as a result of crypto exit scams and thefts in 2019 alone and billions more are likely at risk right now.
The technology to provide auditability and transparency for bitcoin held in custody has been inherent to the protocol from its inception. However, the industry has been slow to incorporate these features for end customers. As once-siloed companies bid to broaden their offerings[2] (exchanges adding custody, lending, etc.), complexity will increase and transparency on proof of reserves (allowing customers to confirm that the service they are using does in fact hold their bitcoin, on-chain) will become even more important. The ability to offer proof of reserves will become a tool to earn and retain customer trust.
Some Challenges in the Path to Proof of Reserves
While the idea of proving that bitcoin sent to a particular service or company is still held by such company might seem trivial to some, there are about as many ways to structure custody and interaction with customers as there are altcoins in the crypto universe.
Some services like cold-storage vaulting allow for relatively straightforward implementations while others, like trading on exchanges, can be more complex. Beyond the technical challenges, it is important to highlight some of the business reasons.
