Blockstream, Proof of Reserves Tool. How to prove possession of crypto
Bitcoin

Blockstream, Proof of Reserves Tool. How to prove possession of crypto

By Marco Cavicchioli - 5 Feb 2019

Chevron down

Blockstream released a new solution: a so-called Proof of Reserves Tool. It is a standard for providing concrete proof of ownership of declared reserves, compatible with most exchanges. The tool has been proposed to the community of developers on GitHub.

Blockstream had been working on a solution to demonstrate the existence and ownership of bitcoin reserves for a long time, but the existing approaches had ample room for improvement.

After all the cases of loss of funds by exchanges, it has become increasingly important for cryptocurrency holders to prove that third parties actually own the funds they claim to hold.

The lack of a standard caused several problems, including poor accessibility, as each exchange used its own solutions that made it too difficult for users to actually verify the existence of funds.

In addition, there were security risks, because proving the existence of reserves required the exchanges to demonstrate the possession of the private keys of the wallets in which the bitcoins were stored by sending all the funds to new addresses.

The Blockstream solution, called Proof of Reserves Tool, uses tested methods used in the industry instead of creating a solution from scratch.

Using Proof of Reserves Tool, exchanges can then demonstrate how many bitcoins they can use (i.e. send), but without having to generate any transactions. Thanks to this too they can easily verify ownership.

Technically it is a real single transaction that spends all the bitcoins in possession, but with an additional invalid input that prevents the transaction from being successful. However, the transaction is made in such a way that it can be used as real, concrete and explicit proof of the possession of the bitcoins: these will not be transferred, but in this way the possession  (i.e. the actual usability) will be demonstrated.

Obviously, the data of the transaction are public and can be shared with anyone who wants to verify the existence and possession of funds.

According to Blockstream, the solution would be easy to use and accessible to anyone who knows how to run a CLI application.

Proof of Reserves is written in Rust, and is currently supported by the Bitcoin Core wallet and Trezor, although other integrations are coming soon (e.g. for the Ledger wallets).

This solution is not only available for exchanges, and could be an important step also and especially to make these technologies more acceptable to regulators.

Marco Cavicchioli
Marco Cavicchioli

Class 1975, Marco teaches web-technologies and is an online writer specializing in cryptocurrencies. He founded ilBitcoin.news, and his YouTube channel has more than 11 thousand subscribers.

We use cookies to make sure you can have the best experience on our site. If you continue to use this site we will assume that you are happy with it.