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LINK · 8w

Proof of Reserve: Bringing Transparency to DeFi Collateral

Over the centuries, financial markets have maximized the value humans have been able to create. However, the global financial system of today commonly operates in an undercollateralized and highly opaque manner, creating systemic risks that can result in market-wide failures. Decentralized Finance (DeFi) provides an alternative by offering highly transparent smart contract-powered financial products that provide superior security guarantees through overcollateralization. With the growth of DeFi comes an increasing demand for new collateral types that extend beyond native on-chain assets to include cross-chain tokens, fiat-backed stablecoins, tokenized real-world assets, and more.

To ensure the end-to-end transparency of the DeFi ecosystem, we have developed Chainlink Proof of Reserve, on-chain reference feeds that provide smart contracts with the data needed to calculate the true collateralization of any on-chain asset backed by off-chain reserves. Operated by a decentralized network of oracles, Chainlink Proof of Reserve enables the autonomous auditing of collateral used within DeFi in real-time, ensuring users’ funds are protected from unforeseen fractional reserve practices and other fraudulent activity from off-chain custodians.

Chainlink Proof of Reserve generates a higher degree of transparency for the DeFi ecosystem around asset collateralization, giving users proof they own what they think they own and increasing their trust in financial products. To bring to light the importance of such a mechanism, we will explore the Proof of Reserve reference feeds already implemented by top DeFi teams, as well as provide context for future use cases and implementations.

Verifying the Reserves of Tokenized Bitcoin and Cross-Chain Assets

With now over $2B of Bitcoin tokenized and bridged onto the Ethereum blockchain, the demand for cross-chain tokens within DeFi is ever growing, representing an increasing percentage of colla...

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