On November 28th, the Multi-party computation (MPC) wallet provider Fireblocks announced the release of a new trading system for institutional users on centralized exchanges. This system, called “Off Exchange,” enables institutional traders to exchange tokens without the need to deposit them on the exchange beforehand. Fireblocks claims that this system will help eliminate counterparty risk on centralized exchanges and prevent future incidents similar to what happened with FTX.
In a conversation with Cointelegraph, Michael Shaulov, co-founder and CEO of Fireblocks, explained how Off Exchange works. He mentioned that it allows trading firms to send assets to an MPC wallet, either “shared” or “interlocked,” with three separate segments of keys. The first segment is held by the trading firm, the second by the exchange, and the third is “activated by an oracle.” To confirm a transaction within this wallet, two out of the three segments must be used to sign the transaction. This means that both the trader and the exchange cannot unilaterally withdraw assets.
In most cases, transactions are confirmed when both the exchange and the trader sign the transaction, Shaulov explained. However, if either party does not respond within a specified time frame, a third-party oracle can provide the second signature under certain conditions. Shaulov stated, “For example, one of the conditions might be if the exchange gets hacked and doesn’t respond within a certain time frame, then essentially, the trader can recover their principal without the exchange’s approval.”
According to the announcement, Off Exchange has been implemented by institutional trading firms such as QCP Capital, BlockTech, and Zerocap, which are using it to trade on the centralized exchange Deribit. In the coming months, the group plans to expand support to other exchanges, including HTX, Bybit, Gate.io, WhiteBIT, BIT, OneTrading, Coinhako, and Bitget. Shaulov confirmed to Cointelegraph that Off Exchange is currently only available to institutional organizations.
Centralized cryptocurrency exchanges have faced difficulties due to counterpart risks throughout their history. In 2014, users lost over $473 million on Mt. Gox when the deposits they sent to the exchange were stolen through a cybersecurity breach. In 2018, Canada’s cryptocurrency exchange Quadriga closed down without returning funds to users, resulting in losses of over $169 million. This exchange was later accused by regulators of being a Ponzi scheme. In 2021, investors lost approximately $8 billion when the cryptocurrency exchange FTX stopped processing withdrawals. The exchange is currently going through a bankruptcy process, and its CEO has been charged with fraud.
In their announcement, Fireblocks claims that Off Exchange will help prevent such incidents, stating that it “stems from the unique structure of the cryptocurrency trading market, where exchanges act as both supervisors and trading venues.”