On March 12, 2023, Silicon Valley Bank, the 18th largest bank in the United States, suddenly went bankrupt, with over 95% of customer deposits lacking insurance coverage. However, just a week before the bankruptcy, its financial report still showed that the capital adequacy ratio met standards. This crisis exposed the flaws in the trust system of TradFi—regulatory lag and auditing 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 autonomy in risk monitoring.
This is not just a technological innovation, but a revolutionary paradigm shift in the relationships of financial power—from "institution-defined security" to "code-constrained security," where users transition from "passive risk bearers" to "active security validators."
**1. Asset Control: From "Custodial Trust" to "On-chain Control"
The core of the TradFi system is the belief in institutions. When users deposit money into banks or brokerages, control is handed over to the institutions. This behavior essentially relies on the trust that these institutions will not misappropriate your assets, but this trust is not unfounded; it is supported by a dual guarantee mechanism of national credit endorsement and regulatory frameworks.
When customers deposit currency into a bank account, they are legally considered creditors, and the bank effectively has the right to control these funds. Most of the money in bank accounts is lent out by the bank to other banks or individuals, and the bank retains cash according to the legally mandated reserve ratio to meet immediate withdrawal demands, which is the fractional reserve model. In addition, funds deposited by customers in investment banks or brokerage firms are held in independent accounts of the trust bank - "customer segregation accounts" (segregated accounts).
However, completely handing over asset control to institutions or intermediaries does not mean that users' assets are free from loss risk; in fact, TradFi also has the risk of "crashing"!
In the TradFi system, institutions aim to achieve profitability by investing client funds into long-term, high-risk assets. This model can trigger a chain reaction during market fluctuations: when assets depreciate significantly, institutional balance sheets shrink, market confidence collapses, ultimately leading to a liquidity crisis or even bankruptcy. For example, in 2023, Signature Bank faced a run due to excessive investment in encryption-related assets and long-term bonds amidst severe interest rate fluctuations, and was ultimately taken over by regulators. Although its indicators were "in line with regulatory requirements" before bankruptcy, the liquidity crisis could not be avoided.
It can be seen that TradFi is always faced with the fundamental contradiction between profit pursuit and user security assurance, and users can only choose to fully trust the self-restraint of institutions and the layered regulatory system behind them (banks, insurance, government).
In contrast, crypto institutions are exploring another path: OKX was the first to launch the Proof of Reserves mechanism after the FTX crisis, using on-chain verifiable public records to validate the adequacy, liquidity, and solvency of platform assets to global users.
·Open Positions: The exchange publicly discloses all cold/hot wallet addresses (for example, OKX has opened on-chain asset queries for 22 cryptocurrencies), allowing anyone to verify the 1:1 anchor relationship between Proof of Reserves and user liabilities.
·Transparent Capital Flow: The majority of assets are stored in cold wallets, eliminating opaque operations and maturity mismatch operations, effectively preventing liquidity risk.
Compliant encryption custodians will not misappropriate or re-lend users' encrypted assets, typically maintaining a 1:1 full reserve, unless the user has provided additional authorization to lend or invest user assets. At the same time, OKX has established a series of data protection and account security measures, truly achieving on-chain penetration of asset control rights.
2. Evolution of Financial Transparency Mechanisms: From Report Auditing to On-Chain Consensus
In the traditional system, the security and health of financial institutions completely rely on regulatory requirements (such as periodic financial statements) and external audits for assurance. Banks or brokerages 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 FDIC) assess institutional risk through stress tests, on-site inspections, and liquidity indicators (such as Capital Adequacy Ratio (CAR) and High-Quality Liquid Assets (HQLA)).
However, can financial statements and auditing institutions really guarantee absolute and genuine "safety"? What are the limitations of the traditional system?
·Post-audit and periodic disclosure: Users can only obtain data through lagging 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 TradFi may have unfair valuations, and the auditing system also has flaws.
·Liquidity Risk: Structural issues such as maturity mismatches and excessive leverage can lead to runs or liquidity crises (e.g., bank failures).
It is evident that there is still significant room for improvement in the traditional financial system regarding user rights protection and systemic risk prevention. Users require more than just numbers on reports and inaccurate data indicators; they need a more transparent truth about asset health. Future finance will require real-time data monitoring and high asset transparency, necessitating technology and consensus to reconstruct financial rights relationships.
The Proof of Reserves (PoR) introduced by cryptocurrency exchanges is precisely the way to break the limitations of TradFi, thereby building a security system that users can independently verify.
(1) Asset On-Chainization
·Public Transparency: The exchange publicly discloses cold/hot wallet addresses, and all reserves are verifiable on-chain (OKX covers 22 cryptocurrencies).
·Rigid redemption capability: Ensure that the total reserves of the exchange ≥ total assets of users, capable of responding to extreme runs.
·Self-verification: Anyone can verify whether the Proof of Reserves is sufficient, without relying on outdated audit reports, avoiding the misappropriation of user assets or data manipulation by exchanges.
(2) Liability Verification (Based on Zero-Knowledge Proof Technology)
·zk-STARKs：
￮Summarize user assets into a global balance sheet, ensuring that the data is tamper-proof.
￮Users can verify anonymously whether their assets are included in the balance sheet.
￮Prevent exchanges from inflating or hiding debts (such as falsifying user numbers or asset sizes).
·Negative Balance Constraint：
￮Ensure that the user asset net value is not negative through mathematical constraints to avoid liquidation risk.
￮Prevent systemic crises caused by high leverage liquidations (similar to the Archegos high-leverage trading incident that resulted in losses of approximately $36 billion).
(3) Transparent Pricing of Digital Assets
·Digital assets are priced according to real-time market rates to avoid discrepancies between book value and actual value.
·Proof is status, preventing issues of vague estimation models and operational space.
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 Intermediaries" to "User-initiated 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 proofs. Users no longer need to blindly trust the security of a certain institution, but can instead leverage verifiable data to gain informed consent regarding risks.
In the past, it was almost impossible for ordinary users to personally verify the asset-liability situation of exchanges or banks. TradFi transaction records were only kept in the internal ledgers of institutions and regulated clearing systems, and were not made public. The data publicly available to the market was often processed and aggregated. Only authorized regulators and auditors could comprehensively view the transaction details and ledger data of banks.
This semi-closed and semi-transparent financial data essentially undermines users' right to be informed about risks. While it protects trade secrets, it limits the ability to monitor systemic risks to a few institutions, leaving users unable to penetrate and verify the true risk exposures of these institutions. When a crisis erupts, users are often the last to know and become the bearers of the risk.
Trust in TradFi is built on audit reports and regulatory documents, while the encryption industry is reconstructing the security paradigm through cryptographic proof and on-chain verifiability. The Proof of Reserves (PoR) mechanism establishes a complete trust structure—on-chain verifiable assets, public wallet addresses, and user self-verification, forming a new paradigm of asset security in the encryption era. The industry standard has upgraded from a "trust model" to a "verification model."
PoR is OKX's real-time dashboard for asset security, serving as 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. Additionally, the complete code for OKX PoR has been audited by a third party and is fully open source. Users' confidence in the security of their funds is built on verifiable facts, which not only provides a sense of participation and trust for users but also establishes continuous oversight for the OKX platform.
Conclusion
The traditional financial system exposes not merely technical flaws, but the systemic limitations of a centralized trust model—when asset security relies on the self-restraint of institutions and the ex-post intervention of regulation, users are effectively at the end of the risk transmission chain.
Cryptocurrency exchanges are establishing structural security guarantees through technology: the fundamental unity of asset control, payment transparency, and manageable risk. On an on-chain transparent ledger and a user-verified trading platform, trust no longer comes from institutional credit endorsements 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 number in an audit report, but a verification right that every user can exercise. We believe that true financial security is "visible to the eyes and verifiable by hand!"
Disclaimer
The information provided in this article is for reference only and does not constitute, nor should it be considered as (i) investment advice, trading advice or investment recommendations; (ii) any offer or invitation 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 regarding your specific circumstances. You are responsible for understanding and complying with the applicable laws and regulations in your locality.
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
OKX PoR: Breaking the Black Box of TradFi with Code Constraints
On March 12, 2023, Silicon Valley Bank, the 18th largest bank in the United States, suddenly went bankrupt, with over 95% of customer deposits lacking insurance coverage. However, just a week before the bankruptcy, its financial report still showed that the capital adequacy ratio met standards. This crisis exposed the flaws in the trust system of TradFi—regulatory lag and auditing 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 autonomy in risk monitoring.
This is not just a technological innovation, but a revolutionary paradigm shift in the relationships of financial power—from "institution-defined security" to "code-constrained security," where users transition from "passive risk bearers" to "active security validators."
**1. Asset Control: From "Custodial Trust" to "On-chain Control"
The core of the TradFi system is the belief in institutions. When users deposit money into banks or brokerages, control is handed over to the institutions. This behavior essentially relies on the trust that these institutions will not misappropriate your assets, but this trust is not unfounded; it is supported by a dual guarantee mechanism of national credit endorsement and regulatory frameworks.
When customers deposit currency into a bank account, they are legally considered creditors, and the bank effectively has the right to control these funds. Most of the money in bank accounts is lent out by the bank to other banks or individuals, and the bank retains cash according to the legally mandated reserve ratio to meet immediate withdrawal demands, which is the fractional reserve model. In addition, funds deposited by customers in investment banks or brokerage firms are held in independent accounts of the trust bank - "customer segregation accounts" (segregated accounts).
However, completely handing over asset control to institutions or intermediaries does not mean that users' assets are free from loss risk; in fact, TradFi also has the risk of "crashing"!
In the TradFi system, institutions aim to achieve profitability by investing client funds into long-term, high-risk assets. This model can trigger a chain reaction during market fluctuations: when assets depreciate significantly, institutional balance sheets shrink, market confidence collapses, ultimately leading to a liquidity crisis or even bankruptcy. For example, in 2023, Signature Bank faced a run due to excessive investment in encryption-related assets and long-term bonds amidst severe interest rate fluctuations, and was ultimately taken over by regulators. Although its indicators were "in line with regulatory requirements" before bankruptcy, the liquidity crisis could not be avoided.
It can be seen that TradFi is always faced with the fundamental contradiction between profit pursuit and user security assurance, and users can only choose to fully trust the self-restraint of institutions and the layered regulatory system behind them (banks, insurance, government).
In contrast, crypto institutions are exploring another path: OKX was the first to launch the Proof of Reserves mechanism after the FTX crisis, using on-chain verifiable public records to validate the adequacy, liquidity, and solvency of platform assets to global users.
Compliant encryption custodians will not misappropriate or re-lend users' encrypted assets, typically maintaining a 1:1 full reserve, unless the user has provided additional authorization to lend or invest user assets. At the same time, OKX has established a series of data protection and account security measures, truly achieving on-chain penetration of asset control rights.
2. Evolution of Financial Transparency Mechanisms: From Report Auditing to On-Chain Consensus
In the traditional system, the security and health of financial institutions completely rely on regulatory requirements (such as periodic financial statements) and external audits for assurance. Banks or brokerages 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 FDIC) assess institutional risk through stress tests, on-site inspections, and liquidity indicators (such as Capital Adequacy Ratio (CAR) and High-Quality Liquid Assets (HQLA)).
However, can financial statements and auditing institutions really guarantee absolute and genuine "safety"? What are the limitations of the traditional system?
It is evident that there is still significant room for improvement in the traditional financial system regarding user rights protection and systemic risk prevention. Users require more than just numbers on reports and inaccurate data indicators; they need a more transparent truth about asset health. Future finance will require real-time data monitoring and high asset transparency, necessitating technology and consensus to reconstruct financial rights relationships.
The Proof of Reserves (PoR) introduced by cryptocurrency exchanges is precisely the way to break the limitations of TradFi, thereby building a security system that users can independently verify.
(1) Asset On-Chainization
(2) Liability Verification (Based on Zero-Knowledge Proof Technology)
(3) Transparent Pricing of Digital Assets
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 Intermediaries" to "User-initiated 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 proofs. Users no longer need to blindly trust the security of a certain institution, but can instead leverage verifiable data to gain informed consent regarding risks.
In the past, it was almost impossible for ordinary users to personally verify the asset-liability situation of exchanges or banks. TradFi transaction records were only kept in the internal ledgers of institutions and regulated clearing systems, and were not made public. The data publicly available to the market was often processed and aggregated. Only authorized regulators and auditors could comprehensively view the transaction details and ledger data of banks.
This semi-closed and semi-transparent financial data essentially undermines users' right to be informed about risks. While it protects trade secrets, it limits the ability to monitor systemic risks to a few institutions, leaving users unable to penetrate and verify the true risk exposures of these institutions. When a crisis erupts, users are often the last to know and become the bearers of the risk.
Trust in TradFi is built on audit reports and regulatory documents, while the encryption industry is reconstructing the security paradigm through cryptographic proof and on-chain verifiability. The Proof of Reserves (PoR) mechanism establishes a complete trust structure—on-chain verifiable assets, public wallet addresses, and user self-verification, forming a new paradigm of asset security in the encryption era. The industry standard has upgraded from a "trust model" to a "verification model."
PoR is OKX's real-time dashboard for asset security, serving as 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. Additionally, the complete code for OKX PoR has been audited by a third party and is fully open source. Users' confidence in the security of their funds is built on verifiable facts, which not only provides a sense of participation and trust for users but also establishes continuous oversight for the OKX platform.
Conclusion
The traditional financial system exposes not merely technical flaws, but the systemic limitations of a centralized trust model—when asset security relies on the self-restraint of institutions and the ex-post intervention of regulation, users are effectively at the end of the risk transmission chain.
Cryptocurrency exchanges are establishing structural security guarantees through technology: the fundamental unity of asset control, payment transparency, and manageable risk. On an on-chain transparent ledger and a user-verified trading platform, trust no longer comes from institutional credit endorsements 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 number in an audit report, but a verification right that every user can exercise. We believe that true financial security is "visible to the eyes and verifiable by hand!"
Disclaimer
The information provided in this article is for reference only and does not constitute, nor should it be considered as (i) investment advice, trading advice or investment recommendations; (ii) any offer or invitation 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 regarding your specific circumstances. You are responsible for understanding and complying with the applicable laws and regulations in your locality.