Crypto audits are coming back in style, but it's still a voluntary practice akin to paint-by-numbers — and without all the numbers. Call it a trust exercise.
Why it matters: This voluntary math goes through cycles of popularity (usually after things go wrong) and have become important again in the wake of a pair of large crypto lenders — Celsius Network and Voyager Digital — filing for bankruptcy reorganization. But they aren't perfect.
Details: Crypto audits ideally show that crypto held on deposit matches customer account balances, but to complete the equation for proof of solvency, one would need to run a proof of liabilities, in addition to custodians attesting to reserves held.
Threat level: Voluntary audits also could mean hidden liabilities and imperfect implementations.
Driving the news: Exchange operator Kraken completed the second of its PoR audits last week. It also expanded the assets covered from just bitcoin and eth to include USDC, USDT, DOT, ADA and XRP.
Details: Other firms that have conducted PoR audits within the last 24 months, according to Nic Carter, a general partner at Castle Island Ventures pushing the industry to do regular checks:
What they're saying: "Our regular Proof of Reserves audits demonstrate Kraken’s ability to pioneer a higher standard for accountability and transparency — not just in crypto, but in the broader banking and financial space, too," Kraken said in a blog post Thursday.
Yes, but: Kraken's expanded voluntary audit still only covers 63% of the total assets held by the firm. A spokesperson tells Axios that the firm will add assets to future audits.
The big picture: "[The] industry does not seem to want it," Prof. Vijayakumaran says. "Eli Ben-Sasson, founder of StarkWare, says exchanges were not interested when StarkWare offered to build proof of solvency tech."
Flashback: Mt. Gox, the legendary exchange that once accounted for 70% of the world's bitcoin transactions, declared bankruptcy in February 2014.
The bottom line: "To those who reject PoR because it’s not perfectly trustless in its current implementation, I would respond that the perfect is the enemy of the good. At present, the industry standard is virtually no transparency," Castle Island Venture's Carter wrote.
