Chainlink’s proof-of-reserves tech isn’t the only way to prove reserves. MakerDAO, for example, uses a system called collateralized debt positions (CDPs) to prove that its Dai stablecoin is backed by Ethereum. The system is complex, but it’s also transparent and verifiable by anyone.
Chainlink’s PoR tech is a step up from the paper attestations that many exchanges and custodians rely on, but it’s not a panacea. It’s a tool that can be used to prove reserves, but it’s only as good as the data that’s fed into it.
Chainlink Proof of Reserve is one of the only ways for crypto custodians to track real-world assets directly on blockchains, a service that unlocks a host of safety and transparency benefits for the end-users of decentralized finance (DeFi) products, said Chainlink. Rather than forcing users to trust paper guarantees made by custodians, Chainlink PoR can be deployed for automated on-chain audits that give users a superior guarantee of an asset’s underlying collateralization.
However, Chainlink’s proof-of-reserves tech may add more confusion than transparency in some cases. Its decentralized oracle network helps ensure the safe delivery of off-chain reserve data, but it doesn’t make that data any more credible than it would be otherwise.
Different companies use the proof-of-reserves moniker to describe different accounting systems, each of varying quality. Accordingly, Chainlink’s PoR partners all use their methods to back up their reserve claims.
Chainlink will do all kinds of different stuff and just call it ‘proof-of-reserve,’ explained Niklas Kunkel, formerly head of Oracles at MakerDAO. One decentralized app’s proof-of-reserves program doesn’t have the same trust or security guarantees as proof of reserve on another app.
Using an extreme analogy – a stablecoin issuer self-attesting to its reserves via Chainlink would be like FTX emailing its financials to 16 people and asking them to disseminate the numbers on its behalf. Even if numbers are audited (as they often were, in the case of FTX), they would ultimately only be as trustworthy as that original email from FTX.
Chainlink’s proof-of-reserves tech is a step up from the paper attestations that many exchanges and custodians rely on, but it’s not a panacea. It’s a tool that can be used to prove reserves, but it’s only as good as the data that’s fed into it.