Prior to FTX's downfall in November 2022, cryptocurrency exchanges have traditionally been opaque.
Unless explicitly tagged and identified, it was impossible to track what wallets an exchange owns, or might own.
As a result, the idea of Proof of Reserves (PoR) emerged.
It was deemed necessary as a transparent auditing practice that provides an unbiased report of a company's assets in reserve.
Third-party auditors utilise cryptographic signatures representing the total balance of customer assets to ensure that the custodian holds an equal or greater amount of reserve assets.
This safeguardes against potential liquidity crises during mass customer withdrawals.
This best practice allows regulatory bodies to even use PoR as a means to establish standards that protect consumers by ensuring the security of customer funds.
Typically, PoR involves creating a snapshot of a company's balances, providing transparent proof that the crypto company possesses sufficient assets to cover its liabilities at any given moment.
Utilising a secure data structure known as a Merkle tree, PoR aggregates customer balances without exposing private information.
The Merkle root, a tamper-proof cryptographic fingerprint, allows auditors to verify balance information securely.
The Merkle tree's hashing mechanism, foundational to blockchain technology, protects data from tampering or hacking attempts.
But such a method is not without its flaws - PoR offers a singular snapshot in time, not a live accounting of balances over time.
Additionally, it only reveals on-chain assets, not their origin, such as whether the assets were borrowed for the audit.
PoR has evolved quite a bit since its beginnings.
Today, real-time blockchain monitoring platforms such as Dune Analytics and Arkham Intelligence have allowed us to consistently track movements within an exchange's declared assets.
To understand how PoR can help us understand the scope and market share of today's cryptocurrency exchanges, we will compare three different exchanges - HTX, Gate.io, and Bitget, all well-known exchanges in their own right.
As of time of publication, we can see here that HTX's largest holdings are in HT and BTC, both of which are individually valued at approximately $450 million USD.
The total balance that Huobi is managing is approximately $4.2 billion.
Ethereum here is valued at about $100 million, though that is in the form of stETH, a staked version of Ethereum by Lido Finance.
Actual Ethereum only accomodates for a small percentage of the exchange's portfolio.
Dune, however, does not give us insight into the exchange's Tron holdings.
In fact it only covers Bitcoin and a other EVM-compliant chains such as Arbitrum, Binance Smart Chain, Polygon, and Avalanche.
Arkham Intelligence offers us a better picture - Tron accounts for some $1.85 billion (44%) of the company's portfolio
BitGet, also known for its wallet, also manages a substantial portfolio.
Amounting to around $2.7 billion, BitGet holds is exposed subtantially smaller to Tron, amounting to only 5%, or $150 million in its portfolio.
SEE: BitGet asset holdings breakdown
This makes sense - since Justin Sun owns Tron, it's not surprising that his exchange, HTX would allocate of its assets to it.
BitGet's explosive growth mostly started in April this year.
SEE: BitGet's steady growth over the years
The exchange has had steady growth with minor asset outflows.
Within the last week, the exchange saw a net asset increase of close to $300 million.
Lastly we have Gate.io, which manages around $3.6 billion in net assets.
Like BitGet, the exchange is mostly exposed to the Ethereum chain, with an even smaller exposure to Tron at $45 million - about 1% of its portfolio.
SEE: Gate.io's portfolio breakdown
Results on BitGet has been varied.
There have been phases of significant growth in total Assets Under Management, but outflows have been significant as well.
At some point, Gate.io managed close to some $5.1 billion under its portfolio.
SEE: Gate.io's success in December 2021
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