Multi-party computation (MPC) wallet provider Fireblocks has released a new trading system for institutions using centralized exchanges, according to a November 28 announcement. Called “Off Exchange”, the new system allows institutional traders to exchange tokens without first depositing them on the exchange. Fireblocks claimed that this system would help eliminate counterparty risk on centralized exchanges and prevent future FTX-like collapses.
Today we are pleased 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) 28 November 2023
In a conversation with Cointelegraph, Fireblock co-founder and CEO Michael Shaulov explained how Off Exchange works. He said it allows trading firms to deposit assets into a “shared” or “interlocked” MPC wallet whose private key contains three shards. The first shard is held by the trading firm, the second by the stock 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 stock exchange can unilaterally raise assets.
In most circumstances, transactions are confirmed when the exchange and trader sign off on the transaction, Shaulov explained. However, if either the dealer or the exchange does not respond for a period of time, the third-party oracle may provide a different signature under certain conditions. “For example, one of the conditions is that if the exchange is hacked and it does not respond for a certain period, then the trader can basically get the principal back without the approval of the exchange,” said Shaulov.
According to the announcement, Off Exchange has already been implemented by institutional trading firms QCP Capital, BlockTech and Zerocap, which use it to trade on the Deribit centralized exchange. In the coming months, the team plans to roll out support to other exchanges, including HTX, Bybit, Gate.io, WhiteBIT, BIT, OneTrading, Coinhako and Bitget. Off Exchange is currently only available to institutions, Shaulov confirmed to Cointelegraph.
Centralized crypto exchanges have been plagued by counterparty risk issues 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 user funds, resulting in over $169 million in user losses. 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 payouts. The stock exchange has now gone bankrupt and its CEO has been convicted of fraud.
In its statement, Fireblocks argued that Off Exchange will help prevent incidents like this announcement, which it said “stems from the unique structure of the crypto trading market, where exchanges play the role of both depository and trading venue.” This problem will be avoided by “locking money in secure MPC-based shared wallets,” it said.