Proof-of-reserves (PoR) audits provide cryptographic verifications to ensure that cryptocurrency exchanges possess sufficient assets to cover customer deposits. Techniques such as Merkle trees and zero-knowledge proofs are employed to enhance transparency, paralleling traditional financial requirements for capital reserves. While PoR audits, such as Coinbase's verification of its cbBTC, confirm asset holdings, they do not account for liabilities, which can mislead users about an exchange’s financial stability. The audit process includes asset disclosure via wallet addresses and third-party auditor involvement, ensuring credibility while revealing user balances. Despite their benefits, PoR audits have inherent limitations; they are snapshot assessments lacking real-time oversight and do not prove solvency. Proposed advancements include zero-knowledge proofs, which could provide proof-of-solvency while ensuring user data privacy. Currently, PoR audits represent a step towards greater transparency in the crypto industry, especially vital after the collapse of exchanges like FTX, paving the way for future integration of these practices into both decentralized and traditional finance systems.

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