What are 100% reserves?
A centralized trading platform like Quanto maintains a ledger to track user balances within its internal database. This introduces the challenge of proving that all user assets are securely held and fully accounted for. To address this, Quanto utilizes a Merkle tree structure, where the hash of each user's asset balance is stored in the leaf nodes. This cryptographic approach enables users to independently verify that their assets are included in the total platform holdings. Through PoR audits, users can validate that the sum of all user balances in the Merkle tree matches or exceeds the platform's reported reserves. If verified to be 100% or more, it confirms that Quanto holds all user assets in fullโproviding complete transparency and ensuring 100% reserve backing.
How do we manage to maintain 100% level of reserves?
If the total number of tokens held by Quanto on-chain equals or exceeds the combined balances of all user accounts at the time of a snapshot, it demonstrates that Quanto maintains full backingโensuring a 100% reserve ratio for those assets.
How to build the Merkle tree with hashed user id and user balance?
- Quanto begins the Proof of Reserves process by exporting hashed user IDs (UIDs) and their corresponding balances from its internal database.
- Each hashed UID and balance pair is individually hashed and then concatenated to form a unique data block.
- These data blocks are processed through a consistent hashing algorithm to generate the leaf nodes of the Merkle tree.
- The leaf nodes are then hashed together in pairs to form parent nodes, and this process continues recursively until a single hash remainsโknown as the Merkle root.
What is a Merkle Tree?
In cryptography and computer science, a Merkle tree (or hash tree) is a data structure where every leaf node contains the cryptographic hash of a data block, while each non-leaf (intermediate) node contains the hash of its two child nodes. Merkle trees enable efficient and secure verification of large data sets by allowing users to validate individual data entries without revealing the entire structureโmaking them ideal for integrity checks and proofs of inclusion.
How do we use a Merkle Tree to provide Proof of Reserves?
Quanto stores the hash of each user's account balance as a leaf node in a Merkle tree. To verify that all user assets are fully backedโwithout revealing any private or sensitive dataโwe integrate zk-SNARK technology into the process. This allows Quanto to prove solvency and transparency while preserving user privacy. The verification process consists of two main steps:
1. zk-SNARK-assisted auditing: We use zk-SNARKs to validate that all user balances (represented as leaf nodes in the Merkle tree) are correctly included in the platformโs total asset holdings. For each leaf node, the following conditions are confirmed:
- The sum of all user balances matches the total assets held by Quanto.
- Each userโs net balance is greater than or equal to zero.
- Any modification to a user's balance results in a change to the Merkle root, ensuring data integrity.
2. User-side verification: Users can independently verify the authenticity of the proof by checking the Merkle root hash using zk-SNARK verification. This enables Quanto to provide a 100% reserve audit that is efficient, privacy-preserving, and verifiableโstrengthening our commitment to transparency and user trust.
What are zk-SNARKs?
zk-SNARKsโshort for Zero-Knowledge Succinct Non-Interactive Argument of Knowledgeโare a powerful cryptographic tool that allows Quanto to prove the existence and correctness of user asset reserves without revealing any underlying data. By leveraging advanced mathematical proofs, zk-SNARKs enable efficient and privacy-preserving validation of reserves, ensuring that Quanto holds 100% of user assets while disclosing nothing about individual balances.
Thanks to their non-interactive design, high efficiency, and strong privacy guarantees, zk-SNARKs are widely used in blockchain systemsโfor secure on-chain transaction verification, safeguarding sensitive data, and enabling trustless identity authentication. At Quanto, this technology underpins our commitment to transparent and verifiable operations without compromising user confidentiality.