First Decentralized Exchange Launched in Beta: Interview with Bitsquare Founder

Decentralized cryptocurrency exchange Bitsquare has finally launched in Beta on April 27. The exchange was presented to local Bitcoin community at Fab Lab event in Barcelona by project founder Manfred Karrer. The event is the “starting point of a 6 weeks tour through European cities to present Bitsquare at local Meetups and conferences.”

“After 3 months of extensive testing on the Bitcoin mainnet, the Decentralized Bitcoin Exchange is now ripe for a wider audience.

We would like to thank everybody who helped testing, providing liquidity, giving feedback or spreading the word. We extended our community channels with a new Forum, a Slack channel and more,” reads their statement on Bitsquare’s website.

As ForkLog previously reported, the exchange had announced launch of its beta platform earlier this week. The project’s key feature is its inherent decentralized nature, which involves absence of any intermediaries and transactions in a peer-to-peer network, similarly to decentralized online market OpenBazaar.

Forklog (FL) talked with project’s founder and leader Manfred Karrer in order to understand the underlying logic of the exchange’s decentralization, as well as to inquire into possible security issues, so that the project’s current state and future goals could be clearer.

FL: There are many well-functioning exchanges in cryptocurrency industry. What’s the point for a decentralized exchange? Could you explain the super-goal of your project?

Manfred Karrer: Bitsquare fills a gap in the cryptocurrency ecosystem. While the blockchain technology prides on decentralization, currently the process of entering this ecosystem still relies on centralized exchange markets, which are a single point of failure, control and censorship. In addition, traders need to trust the centralized arbitration system for solving disputes. Most importantly, these exchanges collect users’ data as part of Know-Your-Client (KYC) regulations, and hold users’ funds to perform the trading. As a result they can either run away with users’ funds, or constantly attract adversaries looking to steal large amounts of neatly collected user identities and coins from inadequately secured wallets. Unlike traditional exchanges, Bitsquare never holds user data or funds and therefore is not required to follow KYC regulations. There is no central point to attack, as Bitsquare is peer-to-peer, following the core principles of the Bitcoin ideology. Decentralization is the core principle in Bitsquare and it is applied to every aspect of the project, including infrastructure, arbitration, governance, communication, and so on. The goal of the project is to achieve censorship resistance and avoid any single points of control or failure any party participating in the cryptocurrency ecosystem.

FL: How will users get additional security? How are the wallets secured? Can I use my own wallet?

Manfred Karrer: Users already benefit from the additional security of not entrusting their funds in centralized exchanges. Since Bitsquare does not hold user funds, they are as secure as the user wants them. The internal wallet offers password protection and is funded by the user’s own wallet. Communication between peers is end-to-end encrypted and routed over Tor. Bitsquare trades use three levels of protection: security deposit, 2-of-3 multisignature escrow address, and a decentralized arbitration system.

FL: Traders’ inability to perform high frequency trading is usually considered the major drawback of p2p systems. Have you resolved this issue in your project?

Manfred Karrer: Bitsquare currently imposes a limit of 1 bitcoin per transaction, but there is no limit on the number of trades.

FL: What will be the fees and who will be the benefactor? Why actually we need those fees? The other question is whether it will be possible to use other cryptocurrencies than bitcoin or even fiat to make a 0.01BTC deposit?

Manfred Karrer: To create or take an offer, each party locks a security deposit of 0.01 BTC in a multi-signature wallet. This deposit is returned in whole to each party upon successful completion of the trade. In the event of a dispute, a provably-random arbitrator is assigned to the case. He or she then follows an established arbitration process and examines the evidence that each party supplies. The arbitrator then decides how to distribute the deposits based on the examined evidence. The purpose of the security deposit is to discourage untruthful behavior, which is bound to not pay off in the long run.

In addition to the security deposit, a fee of 0.0005 BTC is collected from the trader creating the offer, while the offer taker pays 0.001 BTC. These fees go to fund the decentralized ownership model – the DAO. Once paid, they are not returned, even if the offer is cancelled. This serves as a protection against spam, market manipulation or data harvesting. The code for executing those payments is included in every client software and the fee payments gets verified by the other trader.

Lastly, a standard mining fee of 0.0002 BTC is required to execute the transaction in reasonable amount of time.

As the base currency for the trade protocol is bitcoin, the fees are also only payable in bitcoin.

FL: Currently the exchange supports 20 altcoins, including Ethereum, Siacoin and Dash. Do you plan to add more options for traders? What will the procedure be like? Could users add their cryptocurrencies of choice to the listing?

Manfred Karrer: Bitsquare is open to include additional altcoins. The altcoin community can follow the steps described in our forum to add their favorite coin. Of course, coins that are clearly a scam will not be included in order to protect traders. Common sense will be applied to determine which coins are a scam and which are not.

FL: Do you expect skyrocketing volumes at Bitsquare during the first year? What are your expectations?

Manfred Karrer: As with any peer-to-peer application, the network effect is at play in Bitsquare as well. The value to users will increase with the number of traders who participate. While it is difficult to estimate how the network effect will play out, currently there is no existing exchange offering privacy protection and decentralization on so many levels. As people become more conscious about the issues of trust, censorship and centralization with traditional Bitcoin exchanges, we expect more traders to move to Bitsquare and contribute to the rise of its trade volume.

FL: Could you tell us more on how is your project related to DAO concept?

Manfred Karrer: Bitsquare is not a company. It is an open source project implemented as a Decentralized Autonomous Organization (DAO). The DAO offers a solution to the typical problem of open source projects, where monetary incentives often lack to sustain the project’s operation.

Bitsquare’s DAO offers distributed ownership of the project and anyone who contributes can become a shareholder. The trading fees collected from offers (create offer fee and take offer fee) serve as the revenue source for the DAO, and go directly to shareholders. The distribution is based on participation and contributions of skills. A distributed ownership model based on stake not only creates sufficient incentives to keep the project going but is also needed to achieve decentralization and censorship resistance on the organisational layer. For example, the DAO shares also represent voting rights for any important decisions in the project, such as the amount of the trading fee or the implementation of an alternative arbitration process.

 

Speaking of the project’s nature Karrer suggested that “the overall promotion of the project is much more in the spirit of grassroot movements, such as Earth Hour and Occupy Wall street, than traditional marketing strategies or professional campaigning.”

Bitsquare’s beta launch video footage is available here:

Interviewed by Eugene Muratov