Novices quickly understand how Merkle Tree verifies whether CEX has 100% reserves

Original title: "Beginners quickly understand how Merkle Tree verifies whether CEX has 100% reserves"

Original source: Ouyi Academy

I believe everyone is aware of the event that the liquidity of a leading trading platform has dried up, which has caused panic in the entire industry.

After the incident was exposed, trading platforms have also announced that they will publicly share the auditable Merkle Tree ( Merkle tree) reserve proof, publicizing the asset status of the platform to users and ensuring the transparency of information. Among them is the Ouyi OKX trading platform, which was the first to express its opinion.

Some professional investors believe that this measure adopted by CEXs at the same time can be On the Internet, it plays the role of the proof-of-reserve system in the blockchain world.

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So, what exactly is a Merkle Tree, and how does it help CEXs prove their innocence. What kind of operation logic does this computer term that sounds obscure and difficult correspond to?

As this topic has been widely discussed, Ouyi OKX Novice Academy will use the most popular language and the most obvious logic to take everyone to find out. Of course, in order to answer this big question for novice users, it is necessary to dismantle a series of small questions layer by layer, let's look at them one by one.

First, the principal of the user on the trading platform is actually a liability of the trading platform

I believe that many users have the habit of storing assets on a centralized trading platform. After all, most of our asset transactions occur on the trading platform, so the cost and time of switching back and forth are also smaller.

But what many users may overlook is that the assets we store on the trading platform, that is, the principal we are going to use for investment, are actually the assets of the trading platform debt.

When we urgently need to withdraw cash, the exchange must pay in full, and the sooner the better, this is also to judge the operating status and credibility of the trading platform, The most intuitive indicator.

So, The essential reason for the thunderstorm incidents that occurred on many trading platforms earlier was that they were unable to pay back the principal of users. To put it bluntly, they did not have enough money and fell into a predicament of insolvency. But users are often unaware of this, because they cannot know how much money CEX has left, and how much money users have deposited on the platform in total. If total reserves > total liabilities, it proves that the platform is safe, otherwise it is risky.

At this time, CEXs need to take the initiative to publicize the above two amounts.

According to the asset verification logic of Mekle Tree, the trading platform needs to announce its total reserves first, and it must be the total assets stored on the chain. Because of the special attributes of the chain, it is guaranteed that the trading platform cannot be faked, and the total reserve amount is completely true. However, how to prove the total debt amount has become a difficult problem.

The total number of users of large-scale trading platforms is tens of millions, and the amount of deposits of each user varies greatly. Every single cent will cause the deviation of the results, affect the accuracy of CEX assets, and cause unsafe factors. For CEX, it is necessary to ensure that each user's assets are accurately included in the total liabilities, and even the process of checking the major account can also reconcile the small account with the user, so as to ensure that all parties are at ease and happy.

So, the most difficult problem is actually how to accurately count the liabilities of the exchange. Only Merkle Tree can play a decisive role at this time. The principal of the user on the trading platform is actually a liability of the trading platform.   

Second, Merkle tree : A data verification process that looks like an upside-down tree

First explain what a Merkle Tree is. It is a tree-structured data processing system designed to verify data integrity and accuracy, and is also considered an important form of blockchain technology. The origin of this name is that its inventor is a scientist named Ralph Merkle (Stanford professor, one of the founders of public key cryptography), and its shape is like an upside-down tree.

We all We know that the blockchain is a network system in which all nodes can participate in data processing. This is the essential difference between it and the traditional Internet. The data calculation, transmission and storage of the latter are all taken care of by centralized nodes, which determines The former is far less efficient than the latter.

So, blockchain The current application of technology is mainly to record transaction information. For example, the original Bitcoin system actually mainly deals with point-to-point electronic transfers. Blockchain, also known as distributed ledger. The particularity of this ledger is that any minor data change will have a harmful impact on the system, because it is collectively maintained by all nodes, and it will affect the whole body.

So, in order not to If you make a mistake, you need an extremely rigorous and precise data processing system, such as Merkle Tree. Merkle Tree's processing idea is to hierarchicalize all data processing processes, that is, all nodes are divided into layers, and in the process of transmitting results layer by layer, the verification of the front and rear nodes is required. If the verification fails, the next step cannot be continued, that is, Explain data falsification.

We see that Merkle The reason why Tree is an inverted tree is because it is a top-down verification process for submitting data. If the data grows explosively, it corresponds to the branches and leaves of the big tree, and there is always only one root, and the longer it is, the thicker it is. Image understanding, the amount of information covered by the root data will become more abundant with the accumulation of system data.

Then, As the level of nodes becomes more complex and the system becomes larger, will data be missed and accuracy compromised? To solve this problem, Merkle Tree uses a hash algorithm.

Under simple science, the hash algorithm is the process of encoding all data files into unique characters. This character is called a hash value and is a mixture of letters and numbers. The data file is what we often call a block. As the data content of each block changes, the hash value will also change accordingly. It can be said that the hash value is the identity proof of the block.

In the blockchain system, the hash algorithm links all the blockchains back and forth to form a chain network. The two blocks, one in front of the other, are connected, and the hash value needs to be verified first. If the hash value is wrong or missing, the calculation will stall and the network will not be able to update. In the Merkle Tree system, if the hash value of any link is abnormal, it is equivalent to a branch misalignment, which will be detected quickly. It should be noted that the hash value of each node will be public for reverse retrieval of the data involved in the corresponding process, similar to bills.

In such an extremely meticulous and interlocking data structure, the data of each user or node directly affects the overall data, that is, Root data changes. However, if the calculation process is started, there will be no errors or errors.

Third, the trading platform has enough money, and the validator for the wrong account

End of introduction After the background and terminology, I believe it will be easier for readers to understand why CEX using Merkle Tree can prove that the total liability data is authentic and credible. In the case of introducing Merkle Tree, each user's account is a node, and the amount of funds in the account is the data of the node. The total assets of all accounts calculated through the Merkle Tree are the real total liabilities of CEX.

In addition, CEX can also provide users with the asset limit of the user account at the time of statistics, as well as the hash values of all nodes from the Merkle tree to the root node. In this way, users can confirm that their own assets are also included in this statistics, and there is no problem of omission, but the process may be relatively cumbersome and complicated for everyone.

Solved After the question of the authenticity of the total liabilities, we only need to compare this result with the total amount of funds on the platform chain to verify the operation of the platform. The amount of the two is 1:1, or total reserves > total liabilities, which proves that the platform is safe and reliable. If Total Reserves < Total Liabilities, beware.

To sum up, using Merkle Tree (Merkle tree) to verify the authenticity of total liabilities is a way to ensure information transparency. His launch is to make everyone sure that CEX has not misappropriated users' assets, or that the operating costs of the platform or even the additional expenses of the founders are completely isolated from the client's principal.

Of course, this method is not perfect, because it may reveal part of the privacy of CEX officials and users to a certain extent, exposing it to deliberate theft Asset Hacking. However, judging from the current status of the CEX industry, sharing an auditable Merkle Tree total reserve has become a standard specification, which is already the best choice to improve user trust. As for how to prevent hacker attacks, I believe that large platforms with strong capital and technical strength have their own good strategies to deal with them.

For Ouyi OKX, a platform with strong anti-risk capabilities and positive corporate values, this system will further enhance users' trust in it and form a virtuous circle. After all, in an open and transparent network, everyone will recognize platforms that actively accept supervision and self-certify their innocence.   

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