Blockstream is working on a more secure version of Bitcoin proof of reserves and is currently open-sourcing the tool to get much-needed feedback, the company announced. Traditionally, a proof of reserves is different for each exchange and requires movements of all funds an exchange possesses, creating a serious security risk.
Blockstream’s Proof of Reserves tool is based on “tried-and-tested methods” that are already in use, while addressing the issues they present. The significant change the tool offers is that the exchange can prove how much in assets it has without actually making any transactions—providing transparency without posing a possible threat to the assets. All it needs to do is to create a transaction spending all of the exchange’s bitcoin UTXO and include an extra invalid input. The invalid input renders the entire transaction invalid; however, it can still be used as a proof.
There is a possible security issue Blockstream is aiming to rectify: the proofs still require exchanges to show their entire lists of UTXOs. However, the company is planning to provide more privacy with the use of Liquid; the exchanges would no longer be required to give the values of all UXTOs, but the sum of all values.