If you have spent any amount of time in the crypto world, you no doubt have heard about the hacking of Mt. Gox.
After the hacking and subsequent loss of roughly 450 million USD, Dan Larimer understood that exchanges were the weak link in the blockchain.
He developed BitShares as the first decentralized exchange where you can use BitAssets to trade currency in a trustless way.
What makes exchanges the weak link in the blockchain system is the fact that they are centralized. When you buy crypto in an exchange, either with fiat or another cryptocoin, you are essentially buying an IOU towards a future redemption of your coin. You don’t actually own the coin until you withdraw it into your own wallet.
This leaves the possibility open to be exploited very easily.
BitShares is a truly decentralized exchange that is completely on the blockchain. It even has a user friendly wallet that you can name rather than relying on a string of random numbers and letters.
How Does BitShares Work?
BitShares is a peer to peer distributed ledger. It works with a Delegated Proof of Stake protocol.
Working the exchange on a blockchain rather than a central server means that the block transactions need to be verified and agreed upon. The Bitcoin blockchain uses a Proof of Work protocol, so blocks need to be mined, which takes time to verify a block and is expensive.
Bitshares, instead works by voting for delegates or Witnesses, so the validation process is streamlined. A BTS token holder can vote for 120 delegates. The top 101 delegates validate the blocks. The token then pays the delegates for their work.
Not only is this more efficient but it’s also safer since there is no incentive to try to game the system. Since taking down the blockchain will undermine the value of their own tokens.
By using the Delegated Proof of Stake (DPoS), transactions can be done quickly. Though it has yet to be tested, in theory BitShares can handle 100,000 transactions per second compared to Bitcoin’s 5 per second.
Transaction fees will be paid by the BTS token. To bypass the IOU nature of current currency exchanges, BitShares uses BTS tokens as collateral for an exchange. This results in the token being used more as an equity than as an altcoin.
The transaction fees, which will amount to fractions of cents instead of dollars, will be paid by these tokens.
Then there are payments which are done by use of Smartcoins. Since markets are volatile and to get more people using the platform they need to trust the value of it, there are coins tied to fiat that does not fluctuate. For example, there is a bitUSD that is always going to be 1 bitUSD per fiat USD. 1 week, 1 month 1 year from now it will still be 1 bitUSD to 1 fiat USD.
You can invest in the USD, or other Smartcoins like bit EUR, bitGold, etc, and know that it will trade at the same value as other traditional exchanges. This difference makes it very stable compared to other crypto exchanges.
There are also digital assets, called User Issued Assets. These can be literally anything of value, with the value determined by the issuer. Something as small as loyalty points from an issuers rewards cards to property deeds can be registered with a smart contract and placed on the blockchain.
This means incredible liquidity on any assets. Somebody could put up their assets in gold, stocks, property etc and then use it to borrow or exchange for fiat, or other crypto currencies. You could then withdraw that to be able to make payments or put in your mattress if you are so inclined.
What is Bitshares, then, is not such an easy question to answer.
Everything about it is decentralized. The software it uses is open source. In theory anybody can take that software and create their own decentralized blockchain exchange.
Even the way they pay their workers is decentralized. Anybody can propose a project to start on the blockchain and the delegates vote on it. If they get approved, they get paid in tokens to work on their project. The token holders, then are the company.
It started out trying to be a decentralized NYSE sort of crypto exchange, but has morphed into something more utopian than that even. One thing it isn’t is a currency.
Though they issue their own token, BTS, the token is just for ease of use and to pay it’s witnesses and make payments. The value of BTS of course rises and falls. But, that is the nature of a token. It isn’t mean to be used as a currency. That is what the Smartcoins and User Issued Assets are for. The BTS token is equity or collateral to represent the coins or currency being traded.
Just like in most airplane crashes, user error is almost always the case for crypto currencies getting hacked or stolen. Though it remains to be seen if Bitshares will end up the top dog in the decentralized exchange realm, it definitely has signaled that centralized exchanges can be replaced.If crypto is going to have a future of an actual currency, then it has to be indeed trustless. If current exchanges continue to erode that trust then we may be seeing more exchanges based off of the example of Bitshares.