Proof of Keys: How to hold exchanges accountable
One of the aspects that make cryptocurrencies so appealing is their ability to be decentralized. This means that no one should have control of your funds except you, of course. Alas, many trade on centralized exchanges and this may bring the decentralized aspect into question. For that reason, the Proof of Keys event takes place every year on 3 January.
Proof of Keys explained
The ideal exchange is a decentralized exchange that allows everyone to have control of their own funds. 2019 is said to be a big year for decentralized exchanges. However, there are still many obstacles facing such exchanges. This includes managing customer support and high liquidity. But at some stage, someone is bound to get this right and we can all enjoy decentralized exchanges. In the meantime, if you are trading on an exchange, it means that you are not necessarily in control of your own funds. Meaning you do not hold the private keys since the particular exchange does.
It has been suggested that exchanges may be shorting or longing with customers funds and in order to disprove the theory Proof of Keys was introduced. The annual event aims to hold third party services accountable by calling their bluff. The question is – Does third party services really have all the Bitcoin/alts that have been deposited by their customers?
To answer the question, crypto hodlers are invited to participate in the annual Proof of Keys by withdrawing funds from third party service providers.
What if my withdraw request is delayed?
Should the third party service provider refuse or delay you’re withdrawal request, this can mean two things:
Majority of exchanges only keep enough Bitcoin to meet average daily withdrawal requests. It is said that about 95% of Bitcoin is kept in cold storage. If your service provider delays your withdraw request, it does not necessarily mean they are scamming you. It may be the case that the process of getting Bitcoin out of cold storage is a lengthy process. The CEO of the company cannot merely walk into the safe where the Bitcoin is kept and retrieve whatever is necessary. There are processes that have to be followed.
Second option, the exchange may be scamming you. It is important to stick to exchanges that have large volumes and are reputable.
However, there are pros and cons to watch out for.
Pros and cons of Proof of Keys
Perhaps the biggest downside of Proof of Keys is the panic it may cause among new and inexperienced traders. This panic may be caused by FUD.
This FUD may be created should the Bitcoin network not be able to handle a large number of withdrawals. This may lead to a backlog in transaction times as well as increased transaction fees.
Another possible scenario is people freaking out if an exchange takes a bit longer to confirm a withdrawal or deposit. New traders may see this as the exchange being insolvent. They may resort to labeling Bitcoin a scam.
The upside of Proof of Keys is that it serves as a way of holding exchanges accountable.
In conclusion, the annual event is in no way compulsory but merely serves as an initiative that ensures exchanges are held accountable. You can choose to participate or not. At the end of the day, remember to always safeguard your valuable cryptos.
For more info on Proof of Keys visit their website. Click here.
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