Proof of Reserves

The reason it is necessary but not sufficient is worth being precise about, because the gap is where the risk lives. Reserves are one side of a balance sheet. Without an equally rigorous attestation of liabilities, an exchange can show assets that exceed the balances it chose to include.

The point-in-time limitation has a specific exploit. Assets borrowed for the block in question and returned afterwards satisfy the check completely, a maneuver observed across several 2022 and 2023 attestations.

Encumbrance is the third gap and the least discussed. Coins can be visible on-chain, provably held, and already pledged as collateral somewhere else. Nothing in the attestation reveals that.

A meaningful implementation is continuous rather than periodic, covers liabilities as explicitly as reserves, is signed by an auditor who accepts liability for the opinion, and discloses encumbrance. Most published attestations satisfy none of those four. The right question to a venue is not whether it publishes proof of reserves but which of those four it commits to.