Proof-of-reserve transactions are transactions provided by a certain custodian to prove ownership for an amount of funds. For example, lets say an Exchange currently holds 30 thousand Bitcoins on behalf of its users, if anything happens to the exchange, say a hack, the exchange might need to prove to its customers that their Bitcoin is in safe hands, currently any company that wants to perform a proof-of-reserve must do it in its own way and accordingly, their users have to understand the construction to be able to verify it, this makes the process not very common among custodian companies as it’s both tiresome and would require educating their users on technical terms.
A new BIP was proposed as a way to formalize a standard format for constructing these proofs, making it easier for custodians and users with existing wallet infrastructures to understand these proofs. Proofs are formatted as a regular Bitcoin transaction with small differences. This transaction must be unspendable as its sole purpose is to demonstrate the availability of the funds, not spending them. The proof must be linked to the issuer, preventing custodians from just copying other custodians’ proofs.