On March 12, 2023, Silicon Valley Bank, the 18th largest bank in the United States, suddenly went bankrupt, with more than 95% of customer deposits not covered by insurance. However, just one week before the bankruptcy, its financial report still showed that its capital adequacy ratio met the standard. This crisis exposed the defects of the traditional financial trust system - regulatory lag and audit black box. At the same time, OKX has opened up a new path in the crypto industry: reconstructing the triple underlying logic of financial security through Proof of Reserves (PoR), realizing the on-chain verifiability of asset control, mathematical confirmation of solvency, and real-time autonomy of risk monitoring.

This is not only a technological innovation, but also a revolutionary paradigm shift in financial power relations - from "institution-defined security" to "code-constrained security", and users are transformed from "passive risk bearers" to "active security verifiers."

1. Asset Control: From “Trust in Custody” to “On-chain Control”

The core of the traditional financial system is trust in institutions. When users deposit money in banks or securities firms, control is handed over to the institutions. Such behavior is essentially trusting that institutions will not misappropriate your assets, but this trust is not a castle in the air. It relies on the dual guarantee mechanism of national credit endorsement and regulatory framework.

When a customer deposits money into a bank account, the customer is legally considered a creditor, and the bank actually has the right to control these funds. Most of the funds in a bank account are loaned by the bank to other banks or individuals. The bank will retain cash to meet immediate withdrawal needs according to the reserve ratio required by law, that is, the partial reserve model. In addition, the funds deposited by customers in investment banks or securities firms are in a separate account of a trusted bank - a "customer segregated account".

However, handing over complete control of assets to an institution or intermediary does not mean that users’ assets are free from risk of loss. In fact, traditional finance also has the risk of "crashing"!

In the traditional financial system, institutions will invest customer funds in long-term, high-risk assets to achieve profit goals. This model may trigger a chain reaction when the market fluctuates: when assets depreciate sharply, institutional balance sheets shrink, market confidence collapses, and eventually evolves into a liquidity crisis or even bankruptcy. For example, in 2023, Signature Bank suffered a run during the sharp fluctuations in interest rates due to excessive investment in crypto-related assets and long-term bonds, and was eventually taken over by regulators. Although its various indicators before bankruptcy "met regulatory requirements", the liquidity crisis was still unavoidable.

It can be seen that traditional finance has always faced the fundamental contradiction between the pursuit of profits and the protection of user security, and users can only choose to fully trust the self-discipline of the institutions and the layers of regulatory systems behind them (banks, insurance, and government).

In contrast, crypto institutions are exploring another path: OKX was the first to launch the Proof of Reserves mechanism after the FTX crisis, verifying the adequacy, liquidity and solvency of the platform's assets to global users through verifiable public records on the chain.

• Public holdings : Exchanges disclose all cold/hot wallet addresses (e.g. OKX has opened up on-chain asset inquiries for 22 currencies), and anyone can verify the 1:1 anchoring relationship between reserves and user liabilities.

• Transparent capital flow : Most assets are stored in cold wallets to eliminate opaque operations and maturity mismatch operations, and effectively prevent bank runs.

Compliant crypto custodians will not misappropriate or re-lend users' crypto assets, usually maintain a 1:1 full reserve , and will not lend or invest user assets unless the user has additional authorization. At the same time, OKX has formulated a series of data protection and account security measures to truly achieve on-chain penetration of asset control rights.

2. Evolution of financial transparency mechanisms: from financial statement audits to on-chain consensus

In the traditional system, the safety and health of financial institutions are completely dependent on regulatory requirements (such as regular financial statements) and external audits. Banks or securities firms must strictly follow generally accepted accounting principles (GAAP/IFRS) and regularly disclose financial statements audited by the "Big Four" accounting firms to ensure that the data is true and fair. Regulatory agencies (such as the Federal Reserve and the FDIC) assess institutional risks through stress testing, on-site inspections, and liquidity indicator monitoring (such as capital adequacy ratio (CAR) and high-quality liquid assets (HQLA)).

However, can financial statements and auditing agencies really guarantee absolute and real "security"? What are the limitations of the traditional system?

• Post-audit and periodic disclosure: Users can only obtain data through delayed reports and cannot monitor asset status in real time. For example, Silicon Valley Bank went bankrupt due to interest rate risk even though its capital adequacy ratio met the standards.

• Data opacity: The book value of traditional finance may be unfairly valued, and the audit system is also flawed.

• Liquidity risk: Structural problems such as maturity mismatch and excessive leverage may lead to a run or liquidity crisis (such as bank failure).

It can be seen that the traditional financial system still has a lot of room for improvement in terms of user rights protection and systemic risk prevention and control. Users need more than just numbers on reports and inaccurate data indicators. Asset health requires a more transparent truth. Future finance requires real-time data monitoring and high asset transparency, and requires technology and consensus to reconstruct financial rights relations.

The Proof of Reserves (PoR) introduced by crypto exchanges is a way to break through traditional limitations and build a security system that users can verify independently:

(1) Asset chain

• Open and transparent : The exchange discloses the cold/hot wallet addresses, and all reserve funds are traceable on the chain (OKX covers 22 currencies).

• Rigid redemption capability : Ensure that the total exchange reserves ≥ total user assets to cope with extreme runs.

• Self-verification : Anyone can verify whether the reserve is sufficient without relying on delayed audit reports, preventing exchanges from misappropriating user assets or manipulating data.

(2) Liability Verification (Based on Zero-Knowledge Proof Technology)

• zk-STARKs :

  • Aggregate user assets into a global balance sheet to ensure that data cannot be tampered with.

  • Users can anonymously verify whether their assets are included in the balance sheet.

  • Prevent exchanges from inflating or hiding debts (such as falsifying the number of users or asset size).

• Negative balance constraints :

  • Mathematical constraints are used to ensure that the user's net asset value is not negative, avoiding the risk of liquidation.

  • Prevent systemic crises caused by high-leverage margin calls (similar to the Archegos high-leverage trading incident that resulted in a loss of approximately US$36 billion).

(3) Transparent pricing of digital assets

• Digital assets are priced according to real-time market conditions to avoid divergence between book value and real value.

• Proof is status, which prevents the estimation model from being vague and having room for maneuver.

When the reserves of each token become a mathematically verifiable fact, financial security shifts from passive trust to active consensus.

3. Trust Reconstruction: From “Centralized Trust Intermediary” to “User Active Verification”

With the application of Proof of Reserve (PoR), the focus of trust has shifted from reliance on institutions to emphasis on technology and mathematical proof. Users no longer need to blindly trust the security of a certain institution, but can use verifiable data to gain risk awareness.

In the past, it was almost impossible for ordinary users to personally verify the assets and liabilities of exchanges or banks. Traditional financial transaction records are only kept in the internal ledgers of institutions and regulated clearing systems, and are not open to the public. The data disclosed to the market is often processed and aggregated. Only authorized regulators and auditors can fully view the bank's transaction details and ledger data.

This semi-closed and semi-transparent financial data essentially weakens the user's right to know about risks. Although it protects commercial secrets, it limits the ability to monitor systemic risks to a few institutions, and users cannot penetrate and verify the real risk exposure of institutions. When a crisis breaks out, users are often the last to know and become the risk bearers.

Trust in traditional finance is built on audit reports and regulatory documents, while the crypto industry is reconstructing the security paradigm through cryptographic proofs and on-chain verifiability. The Proof of Reserve (PoR) mechanism has established a complete trust structure - verifiable assets on the chain, public wallet addresses, and user-controlled verification, which constitutes a new paradigm for asset security in the crypto era. The industry standard has been upgraded from "trust mode" to "verification mode".

PoR is a real-time dashboard of OKX's asset security and a proof report of the exchange's solvency. Users do not need to rely on third-party audits and can verify asset security through the self-verification tools provided by OKX. In addition, the complete OKX PoR code has passed third-party audits and is fully open source. Users' confidence in the security of their funds is based on verifiable facts, which not only provides users with a sense of participation and trust, but also forms a continuous supervision of the OKX platform.

Conclusion:

What the traditional financial system exposes is not simply a technical flaw, but rather the systemic limitations of the centralized trust model - when asset security relies on institutional self-discipline and post-regulatory intervention, users are essentially at the end of the risk transmission chain.

Crypto exchanges are using technology to establish structural security guarantees: the fundamental unity of asset control, payment transparency, and risk controllability. On a trading platform with transparent on-chain ledgers and user-verifiable transactions, trust no longer comes from institutional credit endorsement and supervision, but from technology and consensus. Users are not only participants, but also co-builders of the risk control system.

At OKX, security is not a percentage in an audit report, but a verification right that every user can exercise. We believe that true financial security is something that can be seen with your own eyes and verified with your own hands!

Disclaimer

The information provided in this article is for reference only and does not constitute and should not be considered as (i) investment advice, trading advice or investment recommendation; (ii) an offer or solicitation to buy or sell digital assets; or (iii) financial, accounting, legal or tax advice. We do not guarantee the accuracy, completeness or usefulness of such information. Digital assets (including stablecoins and NFTs) involve high risks and may depreciate or become worthless. Digital assets are not insured. Past performance does not guarantee future results. You should carefully consider whether trading or holding digital assets is suitable for you based on your financial situation, investment objectives, level of experience and risk tolerance. Please consult your legal, tax and investment professionals for your specific situation. Please be responsible for understanding and complying with local applicable laws and regulations.