A fast and fluid trading platform
Throughout history, centralized exchanges have repeatedly proven unreliable and untrustworthy. Whether it is MF Global, Mt. Gox, or BitStamp, many people have been cheated because they allowed a 3rd party to hold their funds. It doesn’t matter how big they are, or how many auditors, regulators or insurers are involved, every kind of fraud, abuse, and theft can occur. In the modern financial system, these transgressions happen all too frequently within centralized banks and exchanges operating across the world. It is time for a change. Keep reading to learn about the benefits of using the world’s first fully decentralized exchange, the BitShares Decentralized Exchange.
Decentralization gives the BitShares blockchain robustness against failure. When a centralized exchange is compromised, millions of dollars and thousands of users are impacted all at once. In a decentralized system, any attack or failure impacts only a single user and their funds. Users are in control of their own security, which can be much better than any centralized entity.
There is a fixed cost associated with attempting to hack an exchange or an individual user. The difference is the size of the reward. If you place a multi-million dollar bounty on attacking a specific exchange, then you can expect a lot more effort to be put into compromising that exchange than would be put into attacking your individual account.
Within a given company, multiple people usually have access to customer funds. You may have heard the expression, “Three can keep a secret if two are dead”. Currently, all centralized exchanges end up depending upon multiple people who share the responsibility of guarding the secret key that controls the funds. If any one of them is compromised, everyone’s funds are put at risk. Because of this, being individually responsible for maintaining your own secrets is the only safe option.
Fast, but not too fast
With the BitShares blockchain your trades execute in seconds, just like any centralized website interface. Unlike centralized exchanges, there can be no high-frequency trading, front running, or hidden orders. This puts all traders on a level playing field.
On Wall Street, traders go to great lengths to get as physically close to the exchange systems as possible, because their trading bots make decisions so quickly that the speed of light is a considerable factor. A decentralized exchange is location-neutral, and gives everyone equal opportunity.
Every Dollar, Euro, bitcoin and ounce of gold held as a SmartCoin on the BitShares exchange is backed by up to twice the reserves of traditional centralized exchanges. The traditional banking system has long practiced what I like to call fictionalreserve banking, more commonly known as fractional reserve banking. In the Bitcoin ecosystem, we demand at least 100% reserve. A single hack, mistake, or theft can quickly turn a 100% reserve system into a fractional reserve system, or worse, a no reserve system. Without any reserves, it is unlikely that an exchange can give you the funds it owes you.
By always maintaining reserves, you can rest assured that the BitShares blockchain is solvent in almost any market. All of the reserves are kept as BTS held on the blockchain, and they cannot be stolen, because there are no private keys that can be compromised to steal the reserves.
You can trade any amount, at any time, from anywhere, without withdrawal limits. All other legally compliant exchanges have daily withdrawal limits. Those who wish to exceed standard limits must provide increasingly invasive levels of documentation. Some exchanges, such as Coinbase, even limit what you can do with your money after you have withdrawn it. Other exchanges demand documentation of how you earned your cryptocurrency.
With the BitShares blockchain, no one must approve your account. You have complete financial freedom.
At just a few cents per trade*, the BitShares blockchain is one of the cheapest exchanges around. Other exchanges charge a percentage of your transaction volume. For a $1000 trade on BitStamp you will pay $5 vs less than $0.01 (Jan 2015) to make the same trade on the BitShares exchange. The more traditional exchanges like E-Trade or Scottrade charge over $5 per trade. Taking these price comparisons into consideration, clearly it doesn’t get any cheaper than the BitShares exchange.
* on SmartCoin pairs. Trading fees for User-issued assets may vary
Trade Almost Anything
Trade in Gold, Silver, Gas, and Oil in addition to your national currency and cryptocurrencies. Few limits exists on what can be traded on the BitShares exchange, given enough interest. The BitShares exchange can support assets that can track stocks, bonds, indexes, or inflation. Companies can issue their own stock on the BitShares network and allow easy, low-cost trading with complete protection against naked shorting. What other cryptocurrency exchange allows you to trade in gold and silver? Learn more about how the BitShares blockchain creates trust-free digital assets pegged to almost anything.
Roles of an Exchange
The roles that traditional exchanges perform today encompass:
- Receiving cryptocurrency and issuing IOUs.
- Receiving fiat and issuing IOUs.
- Processing an order book.
- Redeeming IOUs.
Each of these stages requires a high degree of trust and direct counterparty risk, because they involve an IOU from the exchange. To get the best liquidity and lowest spreads requires a large and active order book, and this means that most people gravitate toward a few core exchanges, leaving everyone exposed to the same counterparty risk.
Moving money into or out of an exchange often incurs a significant time delay, which means that active traders must keep their funds on the exchange. This magnifies the amount of risk to users of the exchange. It also magnifies the risk to all users in the cryptocurrency ecosystem. Each large security breach results in significant sell pressure, from both the thief looking to cash in their loot, and from regular users hoping to sell before the thief.
Centralization Compromises Privacy
Cryptocurrencies depend upon a public ledger ,which makes privacy challenging, because everyone can see every transaction. Bitcoin gives every user one or more account numbers, and that gives many people a false sense of security. People assume that as long as no one knows your account number and you use a new account number with every transaction that no one can tie all of your bitcoins to your real life identity.
This is where the large centralized exchanges become a problem. In order to comply with government regulations, exchanges must know everyone they do business with. Since many bitcoin transactions flow through an exchange, the exchange learns who everyone is and can start to track who is doing business with whom. Coinbase is already closing accounts based upon who you do business with after withdrawing your bitcoins.
In order to have even the slightest bit of privacy, the exchange functionality needs to be divided among hundreds of parties who are unlikely to collude to compromise identity. This is not economically practical today, because the exchange order book creates market incentives that naturally tend toward centralization in just a few exchanges with the vast majority of market share.
Separation of Powers
There is no reason why the same entity needs to be responsible for issuing IOUs and for processing the order book. It is only because these two roles are combined that we have a tendency toward centralization in the Bitcoin exchange space. If we want to create a decentralized exchange then the first step is to move the order book on to the blockchain where everyone can see it.
In this model, exchanges merely become gateways that receive USD and issue GatewayUSD on the blockchain. Later, they receive GatewayUSD and then execute a wire transfer. They will make their money entirely on transaction fees and not from a percentage of market fees.
The blockchain allows users to trade, for example, BitstampUSD against BitfinexUSD, in order to easily move funds from one gateway to another. Users could even trade BitstampUSD against BitstampBTC or BitstampUSD vs BitfinexBTC.
Unfortunately, simply moving the order book to the blockchain is not enough, because the market will naturally centralize around a few gateway IOUs and the markets for them. BitstampUSD is not fungible with BitfinexUSD because they have different trust profiles and regulatory considerations. Any of these IOUs are subject to default just like the IOUs that currently exist on the exchanges’ internal databases. What we need to do is move the trust from individual issuers to the blockchain itself.
Collateralized Blockchain IOUs
The heart of the BitShares blockchain is the SmartCoin system which enables the creation of 200% collateralized IOUs from the BitShares network. A BitUSD has all of the properties of Bitcoin combined with the price stability of the US dollar. At any point in time you can sell a BitUSD for at least 1 dollar worth of BTS. If at any time the value of the collateral falls below a certain point the blockchain will automatically buy back the BitUSD with a dollars worth of BTS.
When you hold BitUSD the value of your holdings will remain pegged to the dollar so long as BTS itself has reasonable volatility. Reasonable volatility in this case means that it can handle greater volatility than Bitcoin has ever seen in its lifetime. The price of BTS would have to fall to less than 1/3 its starting price in less than 24 hours and then stay there. No legitimate, widely adopted cryptocurrency has ever seen that kind of price movement. This means that BitUSD is secure against just about everything but an unfixable software bug in the BitShares protocol itself. By the time the BitShares ecosytem matures to the level Bitcoin is at today, we expect the probability of that kind of bug to be similar to that of Bitcoin having such an event.
Global Unified Order Book
Once the market adopts BitUSD and BitBTC as more reliable and decentralized alternatives to BitstampUSD and BitfinexBTC, you will see the majority of trading volume move toward BitUSD vs BitBTC. The only time someone would want to move from BitUSD to BitstampUSD is when they are in the process of withdrawing to the traditional banking system.
The impact of a global unified order book is to end all arbitrage opportunities, minimize spreads, and maximize liquidity. By having the trades executed on the BitShares network, we also eliminate high-frequency trading and front running. High frequency trading and front running depend upon centralized exchanges with high volume and deep markets. When the vast majority of trading activity moves to a decentralized, trust-free exchange, the remaining centralized exchanges become much less appealing to high-frequency traders.
BitUSD to USD Gateways
Many gateways prefer the low-risk approach of one-for-one redemption and will simply allow the GatewayUSD to float against BitUSD with a small but variable spread in the market. Users then pay a small variable conversion cost as they exit from BitUSD to fiat USD through GatewayUSD.
On the other hand, many users will want a direct conversion from BitUSD to fiat USD. In this mode of operation, the gateway takes care of providing all of the liquidity within a fixed percentage transaction fee. The gateways then compete on offering the lowest possible spread.
Once this happens, BitUSD is effectively as good as USD with a small fixed conversion fee. This fee will likely be no more than the withdraw and deposit fees that current exchanges charge. At that point, the BitShares blockchain will be a fully operational exchange with many banking partners and no limits. At no point in time will user deposits ever be subject to default or confiscation by an exchange or gateway. A truly decentralized exchange will have been realized, and the original vision of the BitShares blockchain completed.
New to the BitShares Blockchain? Read more about the BitShares Blockchain core features in the following articles. They have been posted originally at www.BitShares.org
What is the BitShares Blockchain? The Ultimate Guide for Beginners What is the BitShares Blockchain? Originally written by Aaron Mangal at Coincentral 12 NOVEMBER 2017.