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Reserve liquidity Meaning

Reserve liquidity is the "Buffer" of cash and liquid assets held by a financial institution-like an exchange, a bank, or a stablecoin issuer-to ensure they can meet all withdrawal requests, even during a market panic. It is the "Safety Net" that prevents a bank run from turning into a total collapse.

In the crypto world, transparency of reserves is now the primary metric for judging a platform's health.For a stablecoin like USDC, reserve liquidity consists of Cash Equivalents like short-term US Treasury Bills. These are assets that can be sold for cash almost instantly without losing value.

For a crypto exchange, reserve liquidity means holding the actual "Spot" assets (the BTC or ETH) rather than IOUs. If an exchange has 100,000 BTC in user deposits, they must have 100,000 BTC in their reserve wallets to be considered "Fully Reserved."The failure to maintain reserve liquidity is what led to the collapse of FTX.

They used customer deposits to make risky bets, leaving them with no liquid reserves when users tried to withdraw their money. This has led to the rise of Proof of Reserves (PoR), where third-party auditors or smart contracts verify that the assets in an entity's wallets match their liabilities in real-time.

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