Proof-of-Reserves

Proof-of-reserves is a way for a custodial exchange to demonstrate that it actually holds the customer assets it claims to hold, rather than only owing customers an IOU. In practice this usually combines a cryptographic snapshot of customer balances (often via a Merkle tree, so individual users can verify their own balance was included) with an independent audit or attestation confirming the exchange's on-chain holdings match or exceed those liabilities. It is one of the most important safety signals for evaluating an exchange, because it addresses the core risk of custodial platforms: trusting that the coins in your account balance are actually backed one-to-one. Proof-of-reserves is not a complete guarantee — it's a point-in-time snapshot and doesn't verify liabilities like outstanding loans — but its absence is a meaningful red flag.