Fireblocks, Celsius Back Zero-Knowledge Credit Scoring for Institutional Crypto Traders

There’s a ton of innovation right now in decentralized finance (DeFi), but crypto lending more broadly – sometimes called centralized finance (CeFi) – just got a whole lot smarter, too.

Announced Thursday, San Francisco-based trading tech firm X-Margin and cryptocurrency custody provider Fireblocks are working to standardize the fragmented state of lending and borrowing of digital assets for institutional trading. The first users of this institutional credit sourcing platform are lending giant Celsius and crypto hedge fund Dunamis Trading.

Unlike traditional capital markets, cryptocurrency trading began with retail and then gradually evolved towards institutional finance – as opposed to the other way round. A vibrant lending industry has since emerged to take advantage of inefficiencies, such as where firms have to pre-fund accounts at many different exchanges and trading venues. (In the traditional markets, traders only need to have capital at their prime broker, who will allow them to trade across many venues.)

Meanwhile, crypto’s unique and nascent infrastructure allows for plenty of arbitrage opportunities so capital-hungry traders are happy to pay high interest rates.

To iron out some wrinkles and finesse more of a prime brokerage feel to crypto trading, X-Margin has created a privacy-preserving credit management system for lenders and institutions. The partnership with Fireblocks ensures there’s a safe and secure walled garden for cross-exchange lending.

Read more: Signature Bank Goes Head-to-Head With Silvergate in Bitcoin-Backed Lending

“The problem right now for crypto traders is that to get loans or receive leverage from lenders like Celsius or BlockFi, they need to over-collateralize,” Fireblocks CEO Michael Shaulov said in an interview. “So for every dollar of bitcoin they borrow, they have to post a dollar-point-two as collateral for the safety of the loan. Borrowers are suffering because they can't get cheap loans and lenders are at risk because they lack visibility.”

Using the X-Margin Credit system, if Celsius is going to lend to a hedge fund like Dunamis, the fund’s risk profile is made available on the fly, based on all the positions it has across venues like Binance, BitMEX or Deribit, for example. This is done using anonymous data thanks to zero-knowledge proofs (ZKPs), so the lender is not privy to the hedge fund’s whole trading strategy.

ZKPs in action

A former hedge fund trader and market maker on Deribit, Darshan Vaidya, founder and CEO X-Margin, saw early on how privacy-preserving computations and ZKPs (the ability to prove possession of secret information without divulging its content) were going to be instrumental in providing a more efficient trading infrastructure for crypto.

“X-Margin Credit is a provably unbiased arbitrator of trading risk,” Vaidya said in an interview. “We calculate trading firms’ overall risk so that lenders extending credit can make real-time decisions about that, without traders needing to reveal their sensitive trade data to anyone, including us.”

Under the hood, X-Margin’s privacy solution combines Intel SGX private enclaves with ZKPs that are “super-fast relative to what’s out there" and built internally by the company, said Vaidya.

“Our system could be fully decentralized if need be,” said Vaidya. “But you can basically facilitate trust from lender to trading firm with this zero-knowledge calculator in between, without having to have a consensus model to get that trust. Because it's a provably neutral mathematical proof, we've disintermediated some middleman that would normally be required to make that credit decision.”

X-Margin Portfolio Lending is now live and in operation, with Celsius providing a loan to Dunamis Trading, the terms of which are not being disclosed.

“As a lender, this gives us the tools to extend credit with confidence, managing credit risk when the value of the borrower’s trading portfolio changes constantly,” Celsius CEO Alex Mashinsky said in a statement.