OKX Security Special Edition | PoR: Breaking the Black Box of Traditional Finance with Code as Constraint

On March 12, 2023, Silicon Valley Bank, the 18th largest bank in the United States, suddenly went bankrupt, with over 95% of customer deposits uninsured. However, just a week before the bankruptcy, its financial report still showed that the capital adequacy ratio met the standards. This crisis exposed the flaws in the traditional financial trust system—regulatory lag and audit opacity. Meanwhile, OKX has paved a new path in the crypto industry: reconstructing the three underlying logics of financial security through Proof of Reserves (PoR), achieving on-chain verifiability of asset control, mathematical confirmation of solvency, and real-time autonomous 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," where users transition from "passive risk bearers" to "active security verifiers."

1. Asset Control: From "Custodial Trust" to "On-Chain Control"

The core of the traditional financial system is trust in institutions. When users deposit money into banks or brokerages, control is handed over to these institutions. This behavior essentially relies on the trust that institutions will not misappropriate your assets, but this trust is not unfounded; it is based on a dual guarantee mechanism of national credit backing and regulatory frameworks.

When customers deposit currency into a bank account, they are legally considered creditors, and the bank actually has the right to control these funds. Most of the money in bank accounts is lent out to other banks or individuals, and banks retain cash according to the legally mandated reserve ratio to meet immediate withdrawal demands, which is known as the fractional reserve model. Additionally, funds deposited with investment banks or brokerages are held in segregated accounts.

However, completely handing over asset control to institutions or intermediaries does not mean that users' assets are free from loss risks; in fact, traditional finance also carries the risk of "failure"!

In the traditional financial system, institutions, in pursuit of profit, often invest customer funds in long-term, high-risk assets. This model can trigger a chain reaction during market volatility: when assets depreciate significantly, institutional balance sheets shrink, market confidence collapses, ultimately leading to liquidity crises or even bankruptcy. For example, Signature Bank faced a bank run in 2023 due to excessive investment in crypto-related assets and long-term bonds, and was ultimately taken over by regulators. Despite meeting all regulatory requirements before its bankruptcy, the liquidity crisis could not be avoided.

It is evident that traditional finance always faces a fundamental contradiction between profit pursuit and user safety assurance, leaving users with no choice but to fully trust the self-restraint of institutions and the layers of regulatory systems behind them (banks, insurance, government).

In contrast, crypto institutions are exploring another path: OKX was the first to introduce the Proof of Reserves mechanism after the FTX crisis, using publicly verifiable on-chain records to validate the sufficiency, liquidity, and solvency of platform assets to global users.

• Public Holdings: The exchange publicly discloses all cold/hot wallet addresses (e.g., OKX has opened on-chain asset queries for 22 cryptocurrencies), allowing anyone to verify the 1:1 anchoring relationship between reserves and user liabilities.
• Transparent Fund Flow: The majority of assets are stored in cold wallets, eliminating opaque operations and maturity mismatches, effectively preventing run risks.

Compliant crypto custodians do not misappropriate or re-lend users' crypto assets, typically maintaining a 1:1 full reserve, and will not lend or invest user assets unless users provide additional authorization. At the same time, OKX has established a series of data protection and account security measures, truly achieving on-chain transparency of asset control.

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 rely entirely on regulatory requirements (such as periodic financial statements) and external audits for assurance. Banks or brokerages must strictly adhere to generally accepted accounting principles (GAAP/IFRS), regularly disclosing financial statements audited by the "Big Four" accounting firms to ensure data authenticity and fairness. Regulatory bodies (such as the Federal Reserve, FDIC) assess institutional risks through stress tests, on-site inspections, and liquidity indicators (such as capital adequacy ratio (CAR), high-quality liquid assets (HQLA)).

However, can financial statements and auditing firms truly guarantee absolute and authentic "safety"? What are the limitations of the traditional system?

• Post-Audit and Periodic Disclosure: Users can only obtain data through delayed reports, unable to monitor asset status in real time. For instance, Silicon Valley Bank went bankrupt despite meeting capital adequacy ratios due to interest rate risks.
• Data Opacity: The book value in traditional finance may involve non-fair valuations, and the auditing system has its flaws.
• Liquidity Risks: Structural issues such as maturity mismatches and excessive leverage can lead to runs or liquidity crises (e.g., bank failures).

It is clear that there is still significant room for improvement in protecting user rights and preventing systemic risks within the traditional financial system. Users need more than just numbers on reports and inaccurate data indicators; asset health requires a more transparent truth. The future of finance needs real-time data monitoring and high asset transparency, requiring technology and consensus to reconstruct financial power relations.

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

(1) On-Chain Asset Verification

• Public Transparency: Exchanges publicly disclose cold/hot wallet addresses, and all reserves can be checked on-chain (OKX covers 22 cryptocurrencies).
• Rigid Repayment Capability: Ensures total reserves of the exchange ≥ total user assets, capable of handling extreme runs.
• Self-Verification: Anyone can verify whether reserves are sufficient, independent of 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 liability statement, ensuring data is immutable.
• Users can anonymously verify whether their assets are included in the liability statement.
• Prevent exchanges from inflating or hiding debts (e.g., falsifying user numbers or asset sizes).
• Negative Balance Constraints:
• Use mathematical constraints to ensure user asset net worth is not negative, avoiding liquidation risks.
• Prevent systemic crises triggered by high-leverage liquidations (similar to the Archegos high-leverage trading incident that resulted in approximately $36 billion in losses).

(3) Transparent Pricing of Digital Assets

• Digital assets are priced according to real-time market rates, avoiding discrepancies between book value and actual value.
• Proof is the state, preventing issues related to vague estimation models and operational space.

Click the image to view the complete spreadsheet

When every token's reserves become mathematically verifiable facts, financial security shifts from passive trust to active consensus.

3. Trust Reconstruction: From "Centralized Trust Intermediaries" to "User Active Verification"

With the application of Proof of Reserves (PoR), the focus of trust shifts from reliance on institutions to an emphasis on technology and mathematical proof. Users no longer need to blindly trust the security of a particular institution; instead, they can rely on verifiable data to gain informed risk awareness.

In the past, ordinary users could hardly verify the asset-liability situation of exchanges or banks personally. Traditional financial transaction records are only stored in the internal ledgers of institutions and regulated clearing systems, not made public. The data disclosed to the market is often processed and aggregated. Only authorized regulators and auditors can comprehensively view the transaction details and ledger data of banks.

This semi-closed and semi-transparent financial data effectively undermines users' right to informed risk awareness. While it protects commercial secrets, it limits the ability to monitor systemic risks to a few institutions, preventing users from penetrating and verifying the true risk exposures of institutions. When crises erupt, users are often the last to know and become the bearers of risk.

Click the image to view the complete spreadsheet

The 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 Reserves mechanism (PoR) establishes a complete trust structure—on-chain verifiable assets, publicly available wallet addresses, and user self-verification, forming a new paradigm of asset security in the crypto era. The industry standard has shifted from a "trust model" to a "verification model."

PoR serves as a real-time dashboard for OKX asset security and a proof report of the exchange's solvency. Users do not need to rely on third-party audits; they can penetrate and verify asset security through the self-verification tools provided by OKX. Additionally, the complete code of OKX PoR has undergone third-party audits and is fully open-sourced. Users' confidence in fund security is built on verifiable factual foundations, which not only provides a sense of participation and trust for users but also forms continuous supervision over the OKX platform.

Conclusion:

The issues exposed by the traditional financial system are not merely technical flaws but systemic limitations of the centralized trust model—when asset security relies on institutional self-restraint and post-event regulatory interventions, users are essentially at the end of the risk transmission chain.

Crypto exchanges are establishing structural security guarantees through technology: a fundamental unity of asset control, repayment transparency, and controllable risks. On a transparent on-chain ledger and a user-verifiable trading platform, trust no longer comes from institutional credit backing and regulation 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 figure in an audit report but a verification right that every user can exercise. We believe that true financial security is "visible to the eye and verifiable by hand"!