Fireblocks unveils “Off Exchange” trading system to tackle counterparty risk

Fireblocks, a provider of Multi-Party Computation (MPC) wallets, has introduced a new trading system for institutional users engaging with centralized exchanges. Dubbed “Off Exchange,” this system enables institutional traders to execute token swaps without the necessity of first depositing assets onto the exchange. According to Fireblocks, Off Exchange is designed to mitigate counterparty risk on centralized platforms and prevent incidents akin to the collapse of exchanges like FTX.

Michael Shaulov, the co-founder and CEO of Fireblocks, explained that the Off Exchange system allows trading firms to deposit assets into a shared MPC wallet. This wallet’s private key comprises three shards, with one held by the trading firm, another by the exchange, and the third triggered by an oracle. For a transaction to be confirmed, two out of three shards must sign the transaction, preventing unilateral withdrawals by either the trader or the exchange.

Shaulov detailed that transactions are typically confirmed when both the exchange and trader sign. However, if either party is unresponsive for a specified period, the third-party oracle can provide a second signature under specific conditions. For instance, if the exchange is hacked and unresponsive, the trader can retrieve the principal without the exchange’s approval.

Institutional trading firms QCP Capital, BlockTech, and Zerocap have already implemented Off Exchange for trading on the Deribit centralized exchange. The system will soon extend support to other exchanges, including HTX, Bybit, Gate.io, WhiteBIT, BIT, OneTrading, Coinhako, and Bitget. Currently exclusive to institutions, Off Exchange is expected to address counterparty risk issues historically associated with centralized crypto exchanges.

Fireblocks aims to prevent incidents like those seen with Mt. Gox in 2014, Quadriga in 2018, and FTX in 2021, which resulted in significant losses for users. The company believes that Off Exchange’s approach of securing funds in MPC-based shared wallets will help overcome challenges arising from the dual role of exchanges as custodians and trading venues in the crypto market.