What does proof of reserves really prove?
Sure everyone can verify how much they have on-chain but it's impossible to verify how much bitcoin users claim and if they are running a fractional reserve or not.
It's all smokes and mirrors to make normies and gambling addicts feel safe.
you put everyone's account balances in a merkle tree. publish the merkle root somewhere public. you can give each user a merkle proof that they can use to verify that they account balances are included in the merkle root that's been published.
check out kraken's docs: https://www.kraken.com/proof-of-reserves or this blog post from peter todd for a slightly more general mechanism: https://petertodd.org/2016/commitments-and-single-use-seals
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TIL. I have to admit that is an ingenious solution and much better than nothing.
Still, it only works if everyone verifies which is unlikely. In the end, it's the same principle as a bank run, everything is fine as long as no one verifies they can withdraw their money at the same time.
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