Liquidity Locking is a Part of Proof of Reserves, Here’s Why.

Proof of reserves help ensure that exchanges and other custodial services actually hold the assets they claim to have in their possession.

This concept is going to be growing in importance in the coming months & years as industry participants recover from the loss of confidence, resulting from recent hacks and discoveries of fraudulent behaving companies. Our opinion is that the industry as a whole will begin to demand more transparency and accountability from projects. The demand for tools aiding with Proof of Reserves is growing.

Proof of reserves refers to the process by which an exchange or other custodial service can prove that it holds the assets it claims to have in its possession. This can be done through a variety of methods, such as publishing a public audit of their holdings or allowing customers to verify their holdings on the blockchain.

By implementing proof of reserves, exchanges and other custodial services (also known as VASP, standing for Virtual Assets Services Providers) demonstrate to their customers that they are trustworthy, reliable and to some extent transparent with their user base. We would like to take things a step further and challenge these projects to truly put their money where their mouth is. As of now, Proof of Reserves is done by providing cryptographic proofs of holdings (signed messages from cold wallets, merkle tree of account balances, among other practices).

This is a great starting point.. but it still leaves room for human interference and subterfuge. There is no guarantee that the funds will stay there, there is no protection from hacks and against ourselves… humans. A project’s Proof of Reserves is not complete unless there is a decentralized mechanism ensuring the funds remain. Proof of Reserves is not complete… without Liquidity Locking. This is why, in our upcoming imminent release of Lockers V3, locking smart-contracts will be rebranded to Proof of Reserves as we see this concept a key extension of the latter.

Users are not only going to want a single dated proof of reserves, they are going to want continued access to what is backing a token or project. A vesting schedule coupled with a lock gives investors information as to when funds are to be released and allows for this information to be shown on DeFi tracking platforms (DEXTools, GeckoTerminal and alike) at all times.

We know that exchanges and protocols are not too excited about having to show Proof of Reserves, but this is a necessary step towards truly increasing the confidence in the ecosystem as a whole and towards promoting greater adoption. We invite the community to start requesting that Proof of Reserves become synonymous with the guarantee of a lock and vesting schedule as well.

Have thoughts on this matter? We invite you to join the discussion in one of our social channels below!

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