Rather than trusting a custodian's word, Proof of Reserves gives depositors a mathematical way to check that their coins are actually backed. Most implementations rely on a Merkle tree: every customer balance becomes a hashed "leaf," pairs of leaves are hashed together repeatedly, and the process climbs upward until a single fingerprint, the Merkle root, is published. A customer can hash their own account ID and balance, trace the path up the tree, and confirm it lands on that published root, proving their funds were counted without exposing anyone else's balance.

That process only proves liabilities: what the platform says it owes users. To show solvency, an exchange or custodian must also demonstrate it controls matching on-chain assets, typically by signing a message from wallet addresses holding sufficient bitcoin, ether, or stablecoin reserves. Some platforms, including Binance, add zero-knowledge cryptography so the total can be verified without publishing every wallet address or balance in the clear.

PoR gained widespread adoption after FTX collapsed in November 2022, revealing it had secretly used customer deposits to cover its own losses. Kraken, Binance, and other major exchanges now publish reserve ratios on a recurring basis, generally quarterly or monthly.

The method has real limits. It captures a single snapshot, so assets could theoretically be borrowed just before the audit and returned afterward. It also says nothing about a platform's debts, loans, or off-balance-sheet obligations, meaning a company could hold reserves that exceed customer balances while still being effectively insolvent. Regulators and accountants have described PoR attestations as far less rigorous than a full financial statement audit, treating them as a useful transparency signal rather than a substitute for independent auditing or proof of liabilities.