Fireblocks, a provider of multi-party computation (MPC) wallet services, has introduced a novel trading platform for institutions engaging with centralized exchanges, as revealed in their Nov. 28 announcement. This platform, named “Off Exchange,” enables institutional traders to exchange tokens without needing to deposit them into the exchange first. Fireblocks asserts that this approach will reduce the counterparty risk associated with centralized exchanges and avert crises similar to the FTX collapse.
In a discussion with Cointelegraph, Michael Shaulov, co-founder and CEO of Fireblocks, detailed how Off Exchange operates. It allows trading entities to place assets into a “shared” or “interlocked” MPC wallet, secured by a private key divided into three parts, or shards. The trading firm holds one shard, the exchange another, and the third is activated by an oracle. To validate a transaction in this wallet, two of the three shards must be used for signing. This setup ensures that neither the trader nor the exchange can independently withdraw assets.
Typically, transactions are authorized when both the exchange and the trader sign, Shaulov noted. However, if either party becomes unresponsive for a certain time, a third-party oracle can step in to provide a secondary signature under specific conditions. “For instance, if the exchange is compromised and becomes unresponsive for a set duration, then the trader can reclaim their principal without the exchange’s consent,” Shaulov mentioned.
As per the announcement, Off Exchange is already being utilized by institutional trading firms like QCP Capital, BlockTech, and Zerocap on the Deribit centralized exchange. Over the next few months, Fireblocks plans to extend support to additional exchanges, including HTX, Bybit, Gate.io, WhiteBIT, BIT, OneTrading, Coinhako, and Bitget. Currently, Off Exchange is exclusively available to institutional clients, as confirmed by Shaulov to Cointelegraph.
Centralized cryptocurrency exchanges have historically faced significant counterparty risk challenges. In 2014, the Mt. Gox incident led to a loss of over $473 million due to a security breach. In 2018, the Canadian exchange Quadriga ceased operations, failing to return user funds and resulting in losses exceeding $169 million, later facing accusations of operating as a Ponzi scheme. More recently, in 2021, the FTX exchange halted withdrawals, leading to around $8 billion in investor losses, followed by bankruptcy proceedings and fraud charges against its CEO.
Fireblocks’ announcement suggests that Off Exchange could prevent such occurrences, which it attributes to the crypto trading market’s structure, where exchanges act as both custodians and trading venues. By using secure MPC-based shared wallets to lock funds, this issue can be circumvented, the company states.
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