Tuesday 31 January 2023
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Cake DeFi publishes Merkle tree-based proof of reserves

Singapore-based decentralized finance (DeFi) services firm Cake DeFi has announced the release of its proof of reserves using the cryptographically audited Merkle tree method.

Developed by Ralph Merkle in 1979, the Merkle tree method is a way of proving that a certain piece of data is included in a set of data, without revealing the entire set of data. Under the proof-of-reserves method, a Merkle tree is used to prove that a cryptocurrency exchange has the reserves it claims to have, without revealing the exact amounts of each cryptocurrency that it holds, in order to protect the privacy of the platform and its users.

According to the DeFi services firm, users can now verify their assets, as well as the company’s liabilities, in a newly rolled-out feature that grants public access to its Merkle tree proof of reserves, available on its website. The tool intends to enable users to perform a self-audit of their own funds under the Merkle tree data structure.

In the spirit of transparency, Cake DeFi said it will also enable users to see how yields are generated, with real-time on-chain data about customer funds.

Related: Cake DeFi launches $100M venture arm for Web3, gaming, and fintech initiatives

Although many exchanges such as Binance, Crypto.com, Bybit, and OKX, have all rolled out Merkle tree-based proofs of reserves to promote transparency following the collapse of FTX, some officials remain skeptical about their efficacy.

In a Dec. 22 interview with The Wall Street Journal, the Securities and Exchange Commission’s acting chief accountant, Paul Munter, shared that the results of these audits aren’t necessarily an indicator that the company is in a good financial position. According to him, proof-of-reserves reports by exchanges “lack” sufficient information for stakeholders to determine whether the company has enough assets to meet its liabilities.

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