Binance has emerged as one of the largest exchanges globally. It has dethroned much older cryptocurrency firms with its growth and development since its inception. CZ’s exchange was also one of the sturdiest exchanges during the slumping bear market.
CZ is an ardent Twitter user and uses the platform to share developments and other ideas. In one of his recent tweets, CZ mentions Merkle-tree proof-of-reserves. He also advises all cryptocurrency exchanges to do the same type of audit. CZ stressed that cryptocurrency exchanges should not follow banks and their fractional reserve method.
The CEO of Binance addressed everyone, saying that Binance will start to do proof-of-reserves soon. He stated that this will also pave the way for full financial transparency. CZ’s tweet follows the recent announcement of Binance fully acquiring FTX.
What is a Merkle tree?
A Merkle tree is one of the techniques or structures used to improve transparency regarding how transactions are verified. Cryptocurrency exchanges are required to provide transparency on the user funds they hold. The method helps users analyze and verify that the funds are held by the exchange.
In computer science, the Merkle tree is a unique kind of data structure. Bitcoin and other cryptocurrencies use Merkle trees to more securely and efficiently encrypt blockchain data.
Basically, how this works is that the exchange provides the data to the auditor. The auditor then uses the data from the user balances to generate the Merkle tree. Additionally, the Merkle tree and root hashes are verified and published by the auditor after the calculation.
The Merkle tree leaves will be saved and shared publicly on GitHub as a plain text file. This will allow customers to personally verify their individual balances. Gate.io, one of the leading cryptocurrency exchanges with over 12 million users, follows the Merkle tree data structure. The exchange has also recently gone through a proof-of-reserves audit for complete transparency. CZ stressed that the exchanges should follow this data auditing process, as it can provide full transparency to its customers.