What Is a “Proof-of-Reserves” Audit?

A proof-of-reserves audit is a process where a third-party auditor verifies that a custodial entity, such as a cryptocurrency exchange, holds enough assets to cover all of its customer deposits. This is typically done by comparing a list of all customer balances with the assets held in the exchange's on-chain wallets.

The goal is to provide transparency and prove that the exchange is not operating on a fractional reserve basis. This process helps to build user trust by demonstrating that the platform is solvent and can meet its withdrawal obligations.