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What is 100% Proof of Reserves?

A centralized trading platform manages a ledger for recording user assets in a database. As such, platforms face the challenge of proving that they have full custody of all users' assets in good condition.
Gate.io implemented the Merkle tree to resolve this issue, by storing the hash value of each user's account assets in the leaf nodes of the Merkle tree. Every user can audit the total amount of users' assets stored in the leaf nodes of the Merkle tree and verify whether his funds are included through a qualified third-party audit agency.
If the assets stored in the Merkle tree are verified to be greater than or equal to 100%, it means the users' assets are kept in full on the platform, i.e. the platform provides 100% Proof of Reserves for the users' assets.
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Why is the 100% Proof of Reserves so important?

The platform provides 100% Proof of Reserves

The platform is financially solid
Enhance users' trust
Guarantee the security of users' assets
100% cash out in a crowded withdrawal

Without the 100% proof-of-reserves commitment

Users' assets are at risk of being misappropriated
Delay or inability to cash out assets
The platform may suffer a run if users crowd to request a withdrawal
The platform is more likely to go bankrupt or suffer assets loss

Proof of Reserves

10/19/2022 00:00AM UTC | BTC Block Height 759290

BTC Reserve Ratio

Gate.io held BTC-denominated assets in excess of 100% of client BTC liabilities

Merkle Root Hash

Merkle tree generated from all balances with 22 levels & 2,097,152 records for secure and efficient verification

ETH Reserve Ratio

Gate.io held ETH-denominated assets in excess of 100% of client ETH liabilities

Process overview

If the total amount of hot and cold wallets is greater than or equal to all users' assets in the snapshot, it means that the platform can provide 100% Proof of Reserves for this currency.
Ownership over the wallet - Gate.io

Ownership over the wallet

When you use hot or cold wallets, you transfer a randomly designated amount to the addresses designated by the audit company to prove your ownership over the wallet.
The audit company will add up the balance of the relevant addresses to calculate the total amount involved in the transaction (including users' assets and self-owned assets of the platform).

Technical Details

In cryptography and computer science, a hash tree or Merkle tree is a tree in which every leaf node is labeled with the cryptographic hash of a data block. Every non-leaf node is labeled with the hash of the labels of its child nodes. Hash trees allow efficient and secure verification of the contents of large data structures.

The hashed user id (UID) and user balances are first exported from Gate's database. Each pair of hashed UID and user balances will be hashed respectively and then concatenated to form the underlying data block . For each data block, the same hash function will be applied to generate the leaf nodes of the Merkle tree. The resulting hashed data are subsequently hashed together in pairs to create the parent nodes of the leaf nodes. This process continues until it results in a single hash known as the merkle root. Please refer to the diagram below for illustration. After the merkle tree is successfully built, the leaf nodes will be exported into a plain text file, which will be published together with the merkle root hash by the auditor.

Merkle tree - Gate.io

K' when hashed with the hash of the unknown dataset A, yields A'K', which is H(A' + K')

A'K' hashed with C'D' leads to the root, H(A'K' + C'D')

Compare the value of H(A'K' + C'D') with the published merkle root hash

Hence, we can prove whether the user input data (hashed UID, user balance) is present or not in our merkle tree, without having to reveal any other customer's user id or balance.

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