Grant and Review Process
Coinbase announced a developer grant program late last year to advance the state of the art in on-chain accounting, privacy-preserving techniques related to proof of assets or liabilities (including the application of zero-knowledge techniques), and closely related technologies.
We received over 50 proposals for the grant. We put together a cross-functional and diverse team to review them. The proposals went through a very thorough review process which consisted of four phases. In the first two phases, we filtered out five proposals from all the submissions. Next, we engaged with the five teams to better understand their ideas, capabilities, resources, etc.
We were impressed with one team in particular, Silver Sixpence. They have strong technical background, deep experience in the blockchain space, and ambitious plans for the future.
We are excited to select Silver Sixpence for the grant, supporting their development of an open source ZK software library for Proof-of-Reserves (PoR) that is optimized for exchange integrations. This library will empower custodians globally to perform their own solvency proofs following a methodology based on best practices. (The term PoR in this context includes both sides of the balance sheet: Assets and Liabilities.)
Silver Sixpence will also build a Dashboard & Web Application which will serve as the central hub for everything related to PoR. Exchange solvency can be monitored and reported, while users, auditors and regulators will gain access to crucial insights, visual representations of reserves, liabilities, and a wealth of resources related to solvency verification.
Understanding Proof of Reserves (PoR)
Generally speaking, PoR refers to a procedure with which custodians of cryptoassets can show that they control enough onchain assets to cover their total corresponding client account balances. However, a PoR can take many different forms that require varying degrees of trust. Some methods require publishing all the exchange data so that independent verification can be done, while others make use of trusted third parties to gain degrees of privacy.
Maxwell & Todd pioneered a cryptographic, transparent PoR methodology in 2013, which has seen significant refinements over the past decade. At a high level, Maxwell & Todd leverage the remarkable accounting abilities of blockchains with their transparency features to show that a custodian owns their claimed assets, while incorporating a data structure called a Merkle Tree to report the total sum of all client balances on the exchange (liabilities).
As we look to take the current state of PoR forward, we strive for the following attributes:
Low entry barrier for performing PoR so all exchanges can publish reports on a regular basis
Self-reported PoR attestations should be simple and technically sound
Enables users to independently verify the existence of all assets and liabilities
Makes it much more difficult for industry players to commit fraud
Preserves the privacy of both users and exchanges
Zero-knowledge cryptography can bring us closer to these ideals.
The bigger picture
A recurring theme in the setbacks of the recent past has been the insufficiency of custodians' reserve assets to meet their outstanding obligations. It is debatable whether PoR could have prevented such failures, but a proper application of the process could definitely give early warning signs for custodian insolvency.
As PoR tools and methods mature, they may be included into traditional audit processes. Unlike some anti-fraud measures, PoR can be an inexpensive exercise which can be conducted at high frequency without impacting the overall user experience. We support a future where trustless PoR can be achieved by industry teams of all sizes and provide more transparency and protection to cryptocurrency exchanges' customers.
Through Coinbase’s grant, Silver Sixpence will contribute to developer tools, deployment frameworks, and thought leadership in this domain.
As the financial and regulatory landscape undergoes rapid transformation, with cryptocurrency at its forefront, PoR adoption is a testament to the industry's innovative culture in providing transparency to users and regulators.
Coinbase is very excited to partner with Silver Sixpence to take the design and practice of PoR to the next level. We will keep you updated with the technical details and the progress of this project in a subsequent blog post.