Why Proof of Reserves says nothing

"Proof of reserves" in the context of a centralized exchange refers to the process by which the exchange demonstrates, typically through cryptographic methods, that it holds the assets it claims to possess on behalf of its users.

Especially after FTX insolvency and the events that followed (loss of funds), many other exchanges tried to mitigate the trust issue that arise. Some exchanges implement proof of reserves mechanisms. This involves providing cryptographic evidence that verifies the exchange holds the stated amount of assets. This evidence can take various forms:

1. Merkle Trees

2. Multi-signature Wallets

3. Audits

4. Transparency Reports

Most of the times, that's nothing more than a "nice to know" information. The reason is that CEXs hold the majority of their assets in the form of centralised issued stablecoins. Sometimes the CEX itself is the issuer of the stablecoin. Can you connect the dots? We come again to the point that users must rely on trust in the exchange's integrity rather than cryptographic proofs to ensure the stability and value of the stablecoin.

One example is Binance USD (BUSD). Binance, one of the largest cryptocurrency exchanges globally, issues BUSD, a stablecoin pegged 1:1 to the US dollar. Binance manages the issuance, redemption, and reserve backing of BUSD within its platform.

It's important to note that while Tether has significant connections to certain exchanges, it is also widely used beyond those platforms. Tether's role as a stablecoin (USDT) and its influence on cryptocurrency markets extend beyond its specific connections to individual exchanges. An example is Bitfinex, a major cryptocurrency exchange that has a significant historical and operational connection to Tether. Both Bitfinex and Tether share common corporate entities and management. In fact, the same individuals are believed (rumours-not confirmed) to be behind both Bitfinex and Tether.