Enterprise-Grade Infrastructure in 2025 w/ Michael Shaulov (Fireblocks) - Digital Assets Special #2

There is not exactly an OG terminology over there in custody because how quickly it devolves and how quickly you need to innovate in order to stay relevant. It's not like a secret that when we started, we basically were one of the first folks that introduced this concept of MPC wallet as a service. Table stakes is like a great business, and Tether and Circle can publish how much they make—anyone will be jealous. Is Tether the next Kodak? Would you be fast enough to adopt and change your business model or not? In order for us to really get to mass adoption, we need to solve for law enforcement and for basically making sure that there is a safe and resilient economy where you don't have fraud, money laundering, or terrorist financing. The two big things will be Bitcoin and the second thing is a Bitcoin Reserve. Even if that doesn't happen, the thing that I'm most excited about is really what's happening with stablecoins and payments.

Yeah, I think one of the interesting conversations we had was actually with the folks from Solana on how they say this ecosystem develops, and basically the fact that you have so many use cases that can live on the same blockchain—from payments and tokenization and some of the replatforming of traditional finance flows to some crazy memecoin stuff—and why it actually makes sense that it will sit on one sort of like homogeneous infrastructure, and how that actually drives future-proofing for them in terms of scale. That was one of the interesting things that I discussed over there. There were many others, to be honest. We had conversations with folks from BlackRock about how they see the future, but that's probably the stuff that is most interesting.

I'm not a trader. I did buy some Dogecoin for my kids because they asked me for Dogecoin. They already did like 400%, so they think they are some kind of investment geniuses at the age of nine. And then we did some funny stuff with memecoin, but I'm definitely not a memecoin trader.

Yes, I think the custody space evolved a lot, and I think it also continues to evolve, to be quite fair. There is not exactly an OG terminology over there in custody because how quickly it devolves and how quickly you need to innovate in order to stay relevant. It's not like a secret that when we started, we basically were one of the first folks that introduced this concept of MPC wallet as a service. It was basically, ask Curve and Unbound, Curve ended up with PayPal, Unbound ended up at the hands of Coinbase, and we were the only one that stayed course as an independent provider. But the reality over there is that, you know, why that was important for people: if you look at what happened before, we brought MPC into the crypto mass market. I don't know, a group of three or most of the secure technology was based on multisig, which was a great concept as a security concept, but the problem with it was that it was purpose-built for Bitcoin, and then as more blockchains came, it was not designed for a universe where you have a lot of different blockchains with a lot of different underlying technologies, because you basically ended up with a lot of underlying fragmentation of how this was managed. So MPC actually came in at the right time, basically in 2018, to solve a shift in the blockchain market where you started to have a lot of different blockchains, and that gave us momentum. What happened next was that people were like, okay, but the first version of MPC was somewhat slower, and it was mostly for hot and warm wallets, so it didn't solve for all the use cases. So over the years, we basically increased the stack. We now have cold wallets that are based on MPC. We just made an announcement last week that we released a new MPC algorithm that is called our kind of flexible MPC algorithm. Most of the industry standardized on a called MPC CMP, an algorithm that Fireblocks published as open source, and now we basically introduced a new MPC algorithm that is called MPC BAM, and that actually provides you 100x performance enhancement. So when you think about custody, or wallets, we are following the use cases. The question now is not how do you only keep Bitcoin safe; the question is how do you create systems that look like Apple Pay, where you can come with your wallet into a shop and buy coffee, and the experience feels good. So the long story short is that it did evolve and basically addresses all those different use cases. And then also there were some regulatory use cases, for example, we now also support HSMs, but that is more applicable for banks or special regulations like Hong Kong.

Yeah, I do think that there is a lot of excitement around smart wallets or account abstraction, and I think there is definitely something to say about the fact that it is a very exciting technology. The problem at the moment with account abstraction is that you don't have a silver bullet. It's a technology that has a very significant fragmentation. It works one way on Ethereum, it will work in a different way on other EVMs, it doesn't exist on Bitcoin, it works in a different way on Solana. So if you have basically decided to build an application that is only on, let's say, Polygon or on Base, I think it is a frontier that is already relevant and people are definitely putting it into production. If you are still building an application or a use case that is agnostic or indifferent to what is the underlying blockchain, and you don't want to bet on a specific horse in the race of which blockchain is the best, fastest, most scalable, then yes, MPC is still the silver bullet in the space.

Yeah, so just maybe half a step back. When we think about what is one main mission at Fireblocks, it's addressing all the risk—custody and cybersecurity risk, which we discussed a second ago, is definitely key—but then you have the counterparty risk. This counterparty risk issue existed or still exists in the system, and FTX was maybe the Armageddon event of how this unfolded, but we shouldn't forget Three Arrows, Genesis, BlockFi, and everything that happened. So the challenge is really how you create a new market structure in which both institutional, but honestly you can even extend it to retail, can allocate funds to the exchange, and the exchange is able to give them credit to trade, and the exchange knows that it can access those funds and settle the transactions and have the funding for what it's owed. And the client knows that if the unordinary happens, and the exchange goes bust like FTX, they're not going to lose the principal that they've allocated, or that the funds are not being misappropriated—basically the exchange shows you that you have a balance of 100 coins, but actually they moved it to some kind of sister trading firm that is now losing all that money. So there are different solutions for that. I think that historically some of the players in the space took a tri-party approach, basically building on the concept of a centralized clearing house, a concept from the 60s. This is the way Euroclear, Clearstream, DTCC, and all those guys work. There is an appointed third party that is usually has some kind of custody license, everybody gives them their money, they're tracking the balances, and at the end of the day they will settle it according to the rules. That was one way to do off-exchange. We took a very different approach, a crypto-native approach. We said, what can we do to not introduce another third party that now, instead of taking risk to the exchange, you're shifting the risk to someone else? That also has its problems—maybe less conflict of interest, but from a balance sheet standpoint and concentration of risk, it has almost the same level of issues. So we built this off-exchange solution, and our off-exchange solution is fundamentally different because it is able to do two things. We launched it with Deribit, with QCP, with Bit, and so on. What it does is it basically creates this kind of almost onchain account using MPC, where the exchange holds part of the key and the client holds part of the key. There's also some resolution mechanism if there is a disagreement between them, but eventually everybody knows that the funds are locked—they can actually see them on chain being locked. Fireblocks is not introducing its own risk into this; we are not a party to that trade or to that settlement. It honestly has been one of the most complicated things that we've built over the years, and it took us quite a lot of time to bring it to market. But we believe that this is a much more future-proof approach to where the industry, and probably even the traditional financial market from a market structure standpoint, wants to go. Because the entire ethos of crypto is to reduce as many intermediaries and counterparty risk that those intermediaries bring to the table, and this is a very crypto-native approach to solve the problem. So far, it was showing really good results. We launched it earlier this year, and now there is more than half a billion dollars locked in those custodial accounts. It's very flexible, we are opening it up to more and more assets. We partner with folks like Hashnote, that now are able to deposit tokenized money market funds into it, so you can even earn interest on whatever you allocate to the exchanges. It's been going pretty well.

Yeah, but actually to your point, it's kind of interesting. I actually do see it as some kind of soft DeFi or even mini DeFi, because it's true that you're not using the EVM language to execute that, but you're basically creating some form of DeFi capability using MPC. Now, by the way, we are thinking on how we can evolve this through true DeFi, EVM-based technology, to the next phase of evolution, to build more sophistication into it because there are limits of what you can do with MPC, for example cross-collateralization. But I do view this as a step into DeFi, so it's kind of a hybrid solution for some folks. The reason why we're doing it with MPC and not with pure DeFi is that, clearly, if you want to trade on Deribit—which is one of our biggest partners for this—how do you do Bitcoin, Ethereum, and now tokenize? You don't have a really good solution right now on DeFi to actually do this.

For sure. I think most people that are in the institutional DeFi space or have been in that space for some time know that we almost single-handedly brought DeFi to institutions at Fireblocks, and it almost happened by mistake back in the beginning of 2020. We had one of our key clients, Paradigm, that told us, 'Hey, look at this, this is really cool. We're doing these strategies on Compound; you should integrate them.' I saw that and said, 'Wow, this is quite exciting.' My CTO and co-founder at the time, who is now our chief product officer, he actually had some kind of roadmap that he was looking at, and then we launched it, and the rest is history. So we have probably the vast majority of institutional clients that are on DeFi using Fireblocks. The long story over there was that the way DeFi expanded into the institutional market was essentially: okay, there are a lot of DeFi applications, how do you provide a reasonably secure access to those DeFi applications? But that approach still has to be very open, because the strategies are almost infinite. Tomorrow morning, there is a new nugget swap protocol, and there will be someone that will want to connect to that and do markets. In order to do that, we basically had to establish our DeFi browser extensions, we have the WalletConnect connectivity, and so on, which allows arbitrary access. On top of that, we were building more and more security stack. The last things that we've done throughout this year was to enhance our policy engine with regard to create transaction security and transaction simulation, so we're basically pre-screening the decentralized application that you're connecting into. Just to share some numbers: from the beginning of the year, we scanned 880,000 connections and over 4 million transactions that were executed, and we blocked over 160 of them because people were trying to connect to phishing websites that would have drained everything from their wallet. So we're quite proud of it—a lot of money was saved from getting hacked. The next iteration of that is clearly the allowance manager. A lot of people are not really familiar with how DeFi works, but actually when you're connecting, for example, to Uniswap or to Aave or to any DeFi application, you're actually granting them the right to pull assets from your wallets. This is how DeFi actually works. It's almost like giving someone a reverse right to be able to debit your account whenever they want. So when you have a protocol that is being compromised, or just as good hygiene, it's best to always close that permission after you end up using it, because if you forget it and after a month that protocol is hacked, the hackers will withdraw on the basis of that permission. So we actually built that into our UI, and it's very easy for our clients to do that. Then I think that what we started to think about is how do we really change the game on the hackers? Because still, as I outlined, there were 160 attempts that we had to block. Honestly, it's an alert that shows in your app, and there are a lot of red screens over there, but someone can make a mistake, and it's also quite heuristic, so it's not guaranteed to work. There's always a 0.1% chance of a false negative, and you allow that to pass through. In order to change that game, we're now taking an approach where we say: okay, there are a set of DeFi utilities that are blue-chip utilities. The first one that we selected is Uniswap. For that, we say this is the swap protocol that everybody is using, and if the only thing that you want to use is swap, then let us build an extremely secure way—a secure-by-design way—for you to do swaps by integrating Uniswap into the Fireblocks UI, wrapping it with all the policies and security mechanisms. When you do that with the assumption that Uniswap is also taking their first share of accountability on protecting their protocol, then you're not susceptible to all those phishing attacks. You can't accidentally access a Uniswap that is not really a Uniswap. We are planning to extend that to bridges, lending markets, and so on. I think this is an interesting point to explain why we're doing it besides the security aspect. It is related to what you said at the beginning of the podcast: the market is shifting. For the crypto trading hedge funds, yes, they want the full span of the rainbow of all the DeFi applications. But if you're talking with a payment company that only wants to swap USDC to USDT or USDT to USDC, very basic operations, they don't need the new nugget swap that was released yesterday. They want a secure, conservative way to go and benefit from DeFi. We believe that creating this kind of app store of pre-vetted, fully secure applications that are operationally available to them will be able to bring the operators of DeFi into the mainstream financial use cases. That's the approach that we're taking there.

Yeah, I mean, look, at the moment we are processing, depending on the blockchain, between 10 to 30% of all the transactions on the blockchain. For example, 15% of the transactions on Bitcoin are going through Fireblocks. That's a big responsibility. Similar numbers for stablecoin volume. So this is a big responsibility as we see it. What we are doing continuously is trying to understand what are the use cases and what people are trying to do, and find the solution for them—a product and an experience that solves for the use case and the security. Because as I can explain, people don't want to hear this, but at the end of the day, security depends on the use case, the flexibility, and the performance. We always try to take a security-first approach and find the optimal solution for them to give them that gateway into the use cases that they need. But it's also starting to become very clear that you can't paint everything with one brush or one color.