Blockchains usually aim to be decentralized and independent projects. However, the investors need assurance that can be warranted by employing Proof of Reserves (PoR). This article discusses the importance of PoR and the impact they have made on cryptocurrency space.
What is Proof of Reserves?
Proof of Reserves (PoR) is a type of asset collateralization system that is used by commercial enterprises. This brings more transparency to their clients and depositors. Proof of Reserves usually ensures their authenticity through independent audits and public attestations. Traditional financial systems usually utilize under-collateralization.
At the same time, there is not a lot of accessibility and disclosure for the consumers. Therefore, it can expose the investors to substantial risks such as volatility and sudden crashes. These issues are addressed and resolved by decentralized finance in the form of Proof-of-Reserves.
How Does Proof of Reserves (PoR) Work?
A crypto entity can hold cryptocurrencies as their commercial reserves and create an attestation system that is verifiable for public. It means that analysts and clients can view the certified status of the cryptocurrency holdings that should match with the company claims.
These reports are called proof of reserves. The crypto company in question renders the services of third-party auditing firm to assure their investors that these reports are authentic.
In contrast to the traditional auditing systems, developers are working on creating automated, efficient, unbiased, and verifiable audits. In this manner, exchanges and other crypto platforms can authenticate their commercial reserves by leveraging technologies such as smart contracts and oracles.
This type of verification and transparency system is ideal for projects like stablecoins that brings more legitimacy to them and reduces associated risks.
Types of Proof of Reserves
Here are some of the most important types of PoR available for blockchain entities at present:
On-chain reserve data is generated as a result of direct activity taking place on a blockchain or decentralized protocol. The custodian does not issue guarantees on paper rather they issue the audit reports as on-chain data that warrants underlying collateralized asset reserves using the consensus model on a blockchain network.
Off-chain PoR systems collect their data sources from third-party professional auditors. Oracles that are working to compile the PoR report can collect the data provided by standalone sources such as TUSD stablecoin reserves held in TrustToken.
In case, the fiat reserves backing TUSD in the escrow account deplete it generates an alert to the referenced feed of PoR.
Tokenized and Traditional Markets PoR
Tokenized assets offer acquisition options on a fractional basis and they are hosted on blockchains to keep track of all the trades. To ensure the transparency PoR for tokenized products references property and connected bank accounts that can hold the backing results.
In this instance, decentralized oracles verify the cash flows for various types of RWA or real-world assets.
Cross-chain PoR is used for the crypto products that are supported on various chains. This type of PoR collateralizes data for a litany of assets and brings cross-chain liquidity. This cross-chain data is accessible to various smart contracts that are active on multiple blockchains.
Wrapped Token Bridge PoR
Wrapped tokens bridges enable simple transfers for a given token between two or more blockchain networks. These bridged can contain crypto tokens committed as collateralized assets.
PoR for wrapped tokens ensure the reserves present in these bridges. They can be present in the form of smart contracts.
Liquid Staking Derivatives PoR
Liquid staking derivatives are representation of tokenized staked cryptocurrencies. In this manner, these tokens are used for brining capital efficiency and added growth into the DeFi ecosystem.
At the same time, this PoR also ensured additional liquidity for staking derivatives and thus ensured that these tokens are backed by other.
DeFi Circuit Breaker PoR
At the same time, Circuit breakers in DeFi are a useful tool that is used to mitigate the risks associated with hacks and exploits. PoR in this scenario breaks down smart contract that consist of wrapped assets in real time.
PoR is a modern and brilliant way to ensure transparency and authenticity for cryptocurrencies. They increase the efficiency of the existing auditing method and bring more energy and utility to the financial networks.