Blockstream’s Proof of Reserves Becomes Open Sourced to Gain Additional Feedback

The exchanges that allow the use of Bitcoin constantly have to proof to their customers that they are managing their funds in an honest way, especially considering the numerous hacks that have occurred through the years.

The holding of crypto reserves is becoming increasingly important, but very few exchanges actually make the effort to prove their balances, according to a recent blog post from Blockstream. To remedy this issue, the company has developed a tool that functions as a

“best-practice standard Reserves for the industry, that offers broad compatibility with the way most Bitcoin exchanges are storing their users’ funds.”

As of today, February 5th, Blockstream has chosen to open-source the work they have put towards this protocol in an effort to gauge the experience for developers and users in the industry. In a post on Twitter, Blockstream wrote,

“Regarding the recent discussion around exchange distrust, we think it's time for the industry to settle on a standard for proving #bitcoin holdings, so we've published a new open source Proof of Reserves tool. Don't trust. Verify.”

The post links to the official blog for Blockstream. As outlined in the blog, Blockstream states that not having some kind of standard method creates both poor accessibility to companies and security risks for anyone involved, users and developers alike.

The new tool with Blockstream makes it possible to pool the methods that already exist within the industry. Blockstream breaks it down, saying,

“Proof of Reserves allows an exchange to prove how many bitcoin they could spend, without needing to generate a “live” transaction or exposing themselves to the risks of moving funds.”

Won a more technical level, when using the tool, Blockstream explains, “[A]n exchange first constructs a single transaction which spends all of an exchange’s Bitcoin UTXOs and adding an extra invalid input. By including one invalid input, the entire transaction is rendered invalid and would be rejected by the network if broadcast. However, the transaction is constructed in such a way that it can still be used as an explicit proof of all the Bitcoin UTXOs spendable by the exchange.”

From that point, the information from the transaction allows anyone to check the reserves by importing the data from their own client. If the user understands how to run a CLI application, the process is relatively easy.

However, there is still one problem – the proofs essentially require all UTXOs to be shared, which is too much information for general users to have on these operations.

Blockstream adds, “However, with Liquid the sum of values can be proven and disclosed without revealing the value of individual UTXOs, due to Liquid’s use of Confidential Transactions.”

The company presently is already working on a few solutions for the tool’s privacy needs.


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