Why Do Crypto Trading Platforms Use Merkle Trees to Prove Reserves?
Original Source: Jason, Founder of BuilderDao
< b>BlockBeats Note: On November 9thCZ, the founder of Binance, suggested that all major trading platforms use Merkle trees to prove their capital reserves. Affected by this incident, although some trading platforms have proved their capital reserves before, they will once again adopt the Merkel tree method to improve the transparency of platform funds. For most users, it may not be clear what the Merkle tree method is and why it is proved in this way. In this regard, the founder of BuidlerDAO Jason Chen conducted a simple science popularization on Twitter, and BlockBeats organized it as follows:
CZ posted that all trading platforms should be Merkle trees Proof of reserves, and Binance will also start, followed by OKX and Huobi. In fact, two trading platforms, Gate and Kraken, have already adopted Merkle tree proof of reserves, and users can verify whether the reserves are Sufficient, but it has not become an industry consensus before. I believe that the rhythm of Binance will make the industry more self-disciplined and more stable.
Many friends do not understand what is the Merkle tree reserve proof, why to prove the reserve, and why to use the Merkle tree to prove ? Kraken, a trading platform, explains proof of reserve. Click here to view.
The technical reasons for adopting proof of reserves
First of all, we actually I don’t even know whether the money I have stored in the trading platform has been embezzled. This problem is not only in the banks of the exchange (Zhengzhou, Nanjing and other banks), but also includes USDT’s claim that it will strictly abide by the 1:1 US dollar reserve, but who knows? , this time FTX was exposed to misappropriation of depositor funds, resulting in insolvency.
In fact, all centralization is a black box, after all, it is off-chain, and the decentralized exchanges on the chain are open and transparent. The probability of thunderstorms is naturally much smaller, so for exchanges, 100% proof of reserve means the existence of users. If you have 100 yuan here, you must ensure that you really have 100 yuan in your hand. The most direct operation is to disclose all book assets, but this brings problems including privacy disclosure. After all, all depositors must be disclosed.
And the magnitude of the data is too large and may be an Excel with several million rows. The main function of the Merkle tree is to use a small cost It can verify data integrity. It is widely used in all aspects of the blockchain, such as the Merkle tree used by NFT to verify the whitelist when mint. After all, if thousands of wallet addresses are traversed one by one, they will be exhausted. So the Merkle tree can be used to quickly verify whether an address exists in the whitelist set.
Principle of Merkle Tree Reserve Proof
Including how the blockchain itself verifies that the data has not been tampered with, and also stores the Merkle tree in the block header of each block. What is its specific principle? As shown in the figure below, each account is the bottom Acct node, which can perform a SHA256 encryption calculation on the balance and account name of each account, and then calculate the hash value obtained next to each other, layer by layer. Finally got a tree root.
So as an ordinary user, to verify whether the current reserve inventory has changed at this time, I only need to perform a hash calculation on my own account according to the rules, find my position in the tree, and adjacent nodes, and then Then calculate the hash layer by layer, and finally get a tree root calculated by myself. If it is consistent with the official announcement, it means that the reserve is correct.
The battle between centralization and decentralization is the battle between trust and consensus. More and more exchanges have begun to actively use technical means to copy The shackles are transparent. This major change in the industry is also an opportunity for industry rectification.
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