Proof of Reserve (PoR) is an oracle function used in the context of decentralized finance (DeFi) to verify and provide transparency about the reserves held by a financial institution or platform. It aims to ensure that the assets claimed by the platform are backed by sufficient reserves and that the platform is not engaging in fraudulent practices such as fractional reserve banking. Projects on Cardano that would require PoR include fiat-backed stablecoins such as ANZENS (USDA) and MEHEN (USDM), and real-world asset trading platform TVVIN.
The PoR oracle function operates by providing real-time, on-chain verification of a financial institution’s reserves. It verifies the authenticity and existence of the assets held by the institution without revealing sensitive details about the institution’s operations. The function typically involves a trusted third party, such as a custodian, or in theis case a blockchain oracle, that validates and attests to the reserves held by the institution.
Here’s a simplified explanation of how the PoR oracle function works:
- Reserves Verification: The financial institution must first provide proof of its reserves to the trusted third party. This proof can be in the form of periodic or real-time reporting of balances held in specified reserve accounts.
- Trusted Third Party: The trusted third party is responsible for validating the institution’s proof of reserves. They perform independent checks, or verification processes, to ensure that the assets claimed by the institution are indeed available and match the reported balances.
- Oracle Integration: Once the trusted third party has verified the reserves, their attestation is integrated into an oracle system. This oracle can be a decentralized network of nodes that provides the verified information to the blockchain.
- On-Chain Verification: Smart contracts or DeFi protocols can then utilize the PoR oracle function to query the verified reserve information. The oracle retrieves the data from the trusted third party and makes it accessible on the blockchain, allowing users to verify the institution’s reserve status before engaging with the platform.
- Transparency and Trust: By utilizing the PoR oracle function, financial platforms can provide transparency and build trust with their users. Users can independently verify that the platform’s claimed reserves match the verified information provided by the trusted third party. This transparency helps prevent fraud, as it becomes difficult for platforms to engage in deceptive practices without being detected.
Overall, the Proof of Reserve oracle function enhances the integrity of decentralized finance by ensuring that the assets held by financial institutions are properly backed and verifiable. It promotes transparency, trust, and accountability, which are crucial for the growth and adoption of DeFi platforms.