Proof of reserves: how to read one before you trust it

What is a proof of reserves actually claiming?

A proof of reserves is a platform's statement that the crypto it holds on behalf of customers is at least as large as the crypto it owes them. It is a claim about two totals, and "reserves" is only one of them.

The mechanism, as Merkle Science describes it, has four moves. An independent accountant takes a snapshot of customer balances and builds them into a Merkle tree. Merkle trees condense every balance into one fingerprint, called the root. The accountant then collects signatures showing the platform controls specific wallets. Last, the accountant checks that the wallets hold enough to match the balances in the tree.

Each move produces one of the two totals. The wallets give you reserves. The tree gives you what is owed. If a page publishes only the wallets, you have half of the claim.

Why is reserves without liabilities not enough?

Solvency is a comparison, and a comparison needs two sides. Reserves tell you what is in the room. Liabilities tell you what the room has promised away.

Take an illustrative platform. It shows 12,000 BTC in wallets. Customers are owed 12,500 BTC. Coverage is 12,000 ÷ 12,500 = 0.96, so 96 percent, with a gap of 500 BTC (4 percent).

Now put your own money in that picture. On a ₹5 lakh balance, 96 percent coverage means ₹4.8 lakh is backed and ₹20,000 is not (₹5,00,000 × 0.04). If every customer withdrew at once, someone would be short, and the page that showed only 12,000 BTC would have looked impressive the whole time.

The researchers behind the Nobitex Labs paper on solvency put the same point in two parts. A proof of liabilities asserts the total a business owes its customers. A proof of reserves confirms the total assets it holds. Solvency needs both, and the paper's proof of solvency joins them to show the reserves are at least equal to the liabilities.

Our view: a page that publishes reserves and stays quiet on liabilities has done the easy half. Treat the missing half as the answer.

What are the three numbers to check on any page?

Run the same short test on every platform, ours included. It takes five minutes and needs no technical knowledge.

What the platform holds

Find the total the platform says it holds, by asset. Look for wallet addresses you could look up on a public blockchain, and a statement that the platform controls them. A figure with no addresses behind it is a number you are asked to trust rather than check.

What it owes customers

Find what the platform owes customers in the same assets. This is the number most pages leave out. If it is absent, write "not shown" next to it. Then look for a ratio, reserves divided by liabilities, stated for each asset. A ratio of 1.00 or higher says the platform held at least what it owed on that day.

The day both were counted

A snapshot is a photograph, and the photograph has a day on it. Find that day. A page with no snapshot date proves nothing about today, and a page whose date is a year old proves nothing about the platform you would be joining now. Ask also how often it refreshes, because a monthly snapshot leaves weeks in between.

Can you check your own balance?

Often yes, and it is the most useful check a customer can run. Because every balance sits in the Merkle tree, a platform can give each customer the short path of hashes from their own balance up to the root. Merkle Science describes the user step as hashing your account balance and ID, then searching for it in the tree.

Two details make it work. Balances are salted before hashing, which means a random extra input makes it impossible to tell whose balance is whose from the tree alone. And changing any single balance changes the root, so quiet edits show up.

Be clear about what it proves: your balance was counted, while every other balance, and any liability left out of the tree, stays unchecked. A tree that omits half the customers would still show you your own leaf. That is why an inclusion check is a good test of honesty about you and a weak test of the total.

Who checked it, and to what standard?

Ask who produced the report and what they were engaged to do. Merkle Science notes that a proof of reserves is a process requiring trust in third-party auditors and in the accounting used to value any off-chain assets. In India the report is commonly an accountant's agreed-upon-procedures finding, which is narrower than an audit. The accountant checks the facts the platform asked for and states whether the numbers match.

So read the scope line for which assets are covered. Check whether the accountant, not the platform, collected the wallet signatures, and whether the report names the date and the wallets. Two earlier pieces cover the document: how to read a proof-of-reserves attestation and what a reserves snapshot can and cannot prove.

What can a proof of reserves never show?

Debts that sit off the page are invisible to it. Wallet balances and a customer tree say nothing about money the platform borrowed, pledged or lent against the same coins. Nor will the page show whether the coins were counted twice across two reports, or how the platform behaves between snapshots.

It also says nothing about price. A fully covered balance can lose most of its value in a market fall. Reserves protect against a platform failing to hand your coins back, while the risk of the coins being worth less stays with the investor.

How does Qatobit's Proof of Reserves fit this test?

Qatobit's Proof of Reserves is described as a live, verifiable record of all crypto assets Qatobit holds on behalf of users, available at any time. The home page describes it as audited contracts, public wallet attestations and real-time asset breakdowns, held under institutional custody that keeps user assets apart from company funds.

Run the three numbers on it rather than taking that sentence on trust. Look at the reserves by asset. Look at whether the liabilities side and a ratio are shown. Look at the date, or the refresh the page states. We would rather you apply the test to us before you invest in QSI Growth than after, and a page you can test is the reason to publish one.

What does this mean for your decisions?

Before you move money onto any platform, write the three numbers on a single line: reserves, liabilities, date. If one is blank, you know which question to ask. Size the balance you keep on a platform by what stays uncovered if the blank turns out to matter. Keep the rest where you can see it.

The check also repeats well. Run it when you open the account and again when the market is under stress, because that is when a gap between the two totals would matter. For how a platform is judged on more than this one page, see our guide to the six things to verify before you choose an exchange.

Frequently asked questions

What is a proof of reserves in crypto?

A proof of reserves is a platform's evidence that the crypto it holds for customers matches what it owes them. An independent accountant usually checks it on a stated date. It needs both totals, reserves and liabilities, to say anything about solvency.

Does a proof of reserves mean my money is safe?

No. It shows that on one date the platform held enough crypto to cover what it owed. It does not show off-page debts, behaviour between snapshots or the price of the asset, and market risk stays with you.

What is a Merkle tree in a proof of reserves?

A Merkle tree is a structure that condenses every customer balance into one fingerprint, the root. Any change to a single balance changes the root, which makes quiet edits visible, and each customer can check that their own balance was counted.

How do I check my balance in a proof of reserves?

Hash your account ID and balance as the platform instructs, then look for the result in the published tree or follow the path to the root. A match proves your balance was counted, not that every other balance was.

What should a good proof of reserves page show?

Reserves by asset with public wallet addresses, liabilities in the same assets, a ratio, the snapshot date, how often it refreshes and who produced the report. If liabilities are missing, the page shows only half the claim.

Crypto investments are subject to market risk. Not financial advice.