Binance introduces semi-automated token reserve management

The company has switched to a “semi-automated” process for managing the inventory that backs the tokens it issues. In late January, it was discovered that Binance was discreetly storing collateral with user funds in the same wallet.

Bloomberg reported that the company accidentally stored collateral for nearly half of the 94 Binance-peg tokens (B-tokens) in a single $16 billion wallet that also held client funds.

On February 23, Bloomberg stated that Binance has now created a partially automated process that ensures that B-tokens are “always transparently backed.” This is achieved through a system that “allows new coins to be minted only after collateral has been added to the appropriate wallet,” he added.

Binance B-token transparency

A representative of Binance told the agency that the exchange has transferred the assets they have secured to special wallets in recent weeks. There is one for each network, which shows the 1:1 support for each component. They added:

“This collateral has always backed our users’ B assets and has always been available for withdrawal at any time. Now we just show it on chain in special wallets where it will stay until needed.”

The move may be a PR exercise to increase reserve transparency amid a regulatory crackdown on central exchanges.

The semi-automated system could allow Binance to intervene if an incident affected B-token stocks, Bloomberg speculated.

Research analyst at blockchain data firm Kaiko, Conor Ryder, said it still gives them the ability to hit the switch if worst comes to worst before adding:

“But it’s not an ideal fully automated system, and we’ve seen in the past that Binance has mismanaged the kind of slicing process that’s going on here.”

He concluded that a fully automated process just to ensure it doesn’t happen again would be ideal. “There is still an element of trust that needs to be placed in Binance and the management of these reserves,” he said.

Application of zk-proofs

On February 10, Binance improved its proof-of-stake system by implementing zero-knowledge proofs in the form of zk-SNARK.

It allows users to check that the total net balance of each account is not negative. It also shows that all user assets are part of Binance’s claimed total net balance.

Zk-proofs are a cryptographic method of proving the validity of a statement or data without revealing the data or statement itself.

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