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Proof of Liabilities
A cryptographic method letting an exchange prove the total customer balances it owes, without revealing any individual customer's specific balance.
Proof of liabilities is a cryptographic method, commonly implemented using a Merkle sum tree, that lets an exchange prove the total customer balances it owes across its entire user base, without revealing any individual customer's specific balance to anyone else.
Combined with proof of reserves (see Kaavon's "Proof of Reserves" glossary definition), proof of liabilities lets an exchange demonstrate that its total held assets meet or exceed its total owed liabilities — a more complete solvency picture than proof of reserves alone, which doesn't show the liabilities side at all.
Examples
- Proof of liabilities addresses a specific gap in basic proof of reserves: showing what an exchange actually owes, not just what assets it holds.
- A Merkle sum tree is the common cryptographic structure used to implement proof of liabilities without revealing individual customer balances.