Fireblocks, a groundbreaking platform for digital asset management, on 28th November 2023, revealed ‘Off Exchange,’ a novel solution to transform how institutional traders engage with exchanges for digital assets. Fireblocks stated that this system is designed to eliminate counterparty hazards on centralized exchanges and mitigate the likelihood of collapses similar to what was observed in the case of FTX.
“At present, we are thrilled to introduce Off Exchange, an innovative solution that empowers trading firms and asset managers to eradicate counterparty risk associated with exchanges.”
The Innovative Fireblock Functionality
During a discussion, Michael Shaulov, CEO and co-founder of Fireblocks, clarified the functionality of Off Exchange. He mentioned that it enables trading firms to place assets into an “interlocked” MPC wallet, containing a private key formed by three shards. The initial shard has the trading firm, the second is under the control of the exchange, and the third is activated through an oracle.
To validate a transaction in this wallet, two out of the three shards must be employed to sign it. Consequently, neither the trader nor the exchange can independently withdraw assets.
Typically, transactions receive confirmation through the joint signing of the transaction by both the trader and the exchange, as explained by Shaulov. However, if there is a lack of responsiveness from either the trader or the exchange within a specific timeframe, the third-party oracle may offer a secondary signature under specific conditions.
As an illustration, Shaulov mentioned that, under particular circumstances, if the exchange encounters a security breach and remains unresponsive for a specified duration, the trader can reclaim the principal without requiring the permission of the exchange.
As per the declaration, Off Exchange has already been utilized by institutional trading entities Zerocap QCP Capital, and BlockTech. They are employing this solution for trading activities on the centralized Deribit exchange. Over the next few months, the team intends to introduce compatibility for additional exchanges.
Fireblocks to Mitigate Counterparty Risks
The risk associated with exchange counterparties in the trading of digital assets involves various potential challenges, such as the danger of cyber breaches and the possibility of financial insolvency, These challenges are magnified in the cryptocurrency trading sector because exchanges serve both as custodians and trading platforms. Previous occurrences, like the downfall of FTX, have clearly emphasized these susceptibilities.
In the official statement, Fireblocks stated that Off Exchange is crafted to prevent incidents similar to these. Since its establishment in 2018, Fireblocks has consistently worked towards eliminating counterparty risk within the digital asset ecosystem.
The introduction of Off Exchange signifies a significant achievement in advancing the reduction of counterparty risk in the cryptocurrency trading market. This is accomplished through an inventive methodology that brings forth fresh advancements in MPC and blockchain technology.
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