Fireblocks launches trading system to mitigate centralized exchange risk

Multi-party computation (MPC) wallet provider Fireblocks has released a new trading system for institutions that use centralized exchanges, according to a Nov. 28 announcement. Called “Off Exchange,” the new system allows institutional traders to swap tokens without first depositing them on the exchange. Fireblocks claimed this system would help to eliminate counterparty risk on centralized exchanges and prevent future FTX-like collapses.

Today, we’re excited to launch Off Exchange, a new solution that enables trading firms and asset managers to truly eliminate exchange counterparty risk. Read on → https://t.co/FLl3AufE0s pic.twitter.com/s4P5kyNy3O

— Fireblocks (@FireblocksHQ) November 28, 2023

In a conversation with Cointelegraph, Fireblocks co-founder and CEO Michael Shaulov explained how Off Exchange works. He said it allows trading firms to deposit assets to a “shared” or “interlocked” MPC wallet, whose private key comprises three shards. The first shard is held by the trading firm, the second by the exchange, and the third is “triggered by an oracle.” For a transaction in this wallet to be confirmed, two out of three shards must be used to sign the transaction. This means that neither the trader nor the exchange can unilaterally withdraw assets.

Under most circumstances, transactions are confirmed when the exchange and trader sign the transaction, Shaulov explained. But if either the trader or exchange is unresponsive for a period of time, the third-party oracle can provide a second signature under certain conditions. “For example, one of the conditions is that if the exchange is hacked and it’s unresponsive for a certain period of time, then the trader can basically get back the principal without the approval of the exchange,” Shaulov stated.

According to the announcement, Off Exchange has already been implemented by institutional trading firms QCP Capital, BlockTech and Zerocap, which are using it to trade on the Deribit centralized exchange. In the coming months, the team plans to roll out support for other exchanges, including HTX, Bybit, Gate.io, WhiteBIT, BIT, OneTrading, Coinhako and Bitget. Off Exchange is currently only available for institutions, Shaulov confirmed to Cointelegraph.

Centralized crypto exchanges have been plagued by issues of counterparty risk throughout their history. In 2014, users lost over $473 million on Mt. Gox, when deposits they made to the exchange were stolen through a cybersecurity exploit. In 2018, Canadian crypto exchange Quadriga shut down without returning users’ funds, resulting in over $169 million in losses to users. The exchange was later accused by regulators of being a Ponzi scheme. In 2021, investors lost approximately $8 billion when crypto exchange FTX stopped processing withdrawals. The exchange is now going through bankruptcy, and its CEO has been convicted of fraud.

In its announcement, Fireblocks claimed that Off Exchange will help to prevent incidents like these, which it said “stem from the unique structure of the crypto trading market, where exchanges play the role of both a custodian and trading venue.” This issue will be avoided by “locking funds in secure MPC-based shared wallets,” it stated.