BitShares project purpose and description
What is Bitshares?
Bitshares is a blockchain project that has been in existence since July 2014. It is primarily a decentralized cryptocurrency exchange as well as an open source financial platform. It was created to solve some of the inherent risks in cryptocurrency exchanges which have led to some disastrous losses such as the Mt. Gox hack and other similar hacks on other exchanges.
As much as cryptocurrencies are decentralized currencies in their very nature, storing and trading them on centralized exchanges introduces an element of centralization where the user has no control over their money.
Scores of users have lost significant amounts as a result of placing their trust in centralized exchanges. Bitshares thus created a model decentralized platform that is difficult to hack since all the data is not centrally stored. Dan Larimer who is the founder of Bitshares (and also happens to be the co-founder of Steemit and EOS) wanted to find a solution to this problem by improving on the proof of work mining algorithm.
To achieve this, he came up with the Delegated Proof of Stake (DPoS) which is a consensus algorithm that makes the system decentralized and gives it more speed and flexibility.
What is the problem that Bitshares Solves?
As we have mentioned earlier, centralized exchanges carry an inherent risk of hacking attacks as seen in the examples mentioned.
Other than this, centralized exchanges can be manipulative when the exchange controls the whole buying and trading process for the user, this presents a conflict of interest. Lastly, speed and efficiency have been a significant hurdle for many centralized exchanges and this has served as a deterrent for many would—be cryptocurrency investors.
It is never a guarantee that a user’s order will be met in good time and worse still certain actors are given preferential treatment to have their orders filled first before the rest can be considered. This takes away from the core of decentralization.
Bitshares seeks to eliminate these challenges through decentralization and delegation of some tasks. This gives the user control over their transactions, security, and privacy.
How does Bitshares solve the problem?
Bitshares has employed different technological methods to address each of the issues they seek to tackle.
When setting up an account with Bitshares, the KYC process is not as stringent as it is with other exchanges, they will require minimal personal information from your end.
In addition, your personal data is never stored on any centralized servers making it very appealing to privacy-conscious individuals.
The cryptocurrency market is associated with extremely high volatility. Bitshares uses something they refer to as Smartcoins to offer some form of stability to the platform.
As opposed to how many cryptocurrencies work, Bitshares has attached the Smartcoin to real value assets and the value of the Smartcoins is pegged on these assets.
Bitshares also gives users the option of converting their holding to stable cryptocurrency assets which are attached to fiat currencies.
In Bitshares, users do not necessarily have to convert their cryptocurrencies to fiat and this helps in maintain user anonymity. For example, the BitUSD is pegged on to the US dollar at a ratio of 1:1. These features create stability on the Bitshares platform.
Bitshares uses an open source blockchain consensus mechanism known as Graphene it is said that Graphene can process up to 100,000 transactions/ second which is more than what Visa and Mastercard can handle combined. With this technology, Bitshares is highly scalable and efficient.
Efficiency in mining
As mentioned earlier, Bitshares uses a modified verification method referred to as the Delegated Proof of Stake mechanism to verify transactions. The traditional proof of work or proof of stake algorithms are highly resource intensive, making it difficult for users to keep up with mining requirements.
This, in turn, creates a form of centralization where mining is left in the hands of a few financially able miners. This is especially true with the advent of the ASIC mining chips.
In this model, users are rewarded for holding onto (staking) their coins but in addition, they are allowed to delegate their stake to others. This creates a governance layer.
The user can delegate their stake to others who act as witnesses and they verify transactions. Since only a few nodes (witnesses) are involved in the verification process, the system becomes more efficient and less time-consuming.
Since the witnesses can be elected out at any given time, decentralization is still maintained in the system.
One of the weaknesses of centralized exchanges is that they handle all order matching functions, fiat, and IOUs and hold the cryptocurrency assets for the users at the same time.
The first poses the risk of conflict of interest where the buyer is still the broker and the seller. Secondly, since all these data is stored centrally it creates a potential target for hackers.
Bitshares has circumvented this risk by introducing a trustless gateway to handle buy and sell orders while transferring the coins to the user’s personal wallet.
These transactions are all recorded and verified on the blockchain. Unlike other exchanges, Bitshares does not hold private keys for users and this keeps them in full control of their funds.
So in a decentralized exchange, the user has full control over the security of their assets and risk of hacking is minimized unless the user compromises the security of their private keys.
What makes Bitshares better than its competitors?
Unlike other cryptocurrency exchange platforms such as Bittrex, Bitfinex, and Poloniex, Bitshares is a decentralized exchange that allows users to be in full control of their digital assets.
Bitshares is also highly scalable due to its utilization of a technology known as Graphene. Graphene is capable of handling up to 10,000 transactions/ second.
The DPoS verification method also makes it very cheap to transact on Bitshares. This means that you can use Bitshares to but extremely cheap items as the fees are considerable.
An investor can also make profits from small trades as the fees charged are negligible, you cannot do this on other major exchanges as the fees charged are prohibitive.
How can Bitshares be categorized?
Bitshares is first a decentralized cryptocurrency exchange platform. It is also a digital currency, token issuance platform, crowdfunding platform and voting platform.
Bitshares and its vision on security
Bitshares uses the Delegated Proof of Stake model to decentralize transactions.
This shifts the intricate data from one central point on the exchange to different points controlled by the user. In this way, it is very difficult to experience Bitshares hacks.
This is a great security feature that also protects the privacy and anonymity of its users. In addition to decentralization, Bitshares gives further security to its users by significantly reducing the volatility on the platform through issuing Smartcoins.
Every Smartcoin on the Bitshares exchange is backed by a 200% reserve. All the reserves are held as BTS and securely stored on the blockchain. With this reserve system in place, users and investors are assured of the value of their holdings at all times.
Examples of Bitshares use cases/applications.
Bitshares is a decentralized cryptocurrency exchange platform that allows users and investors to trade in a secure and efficient manner. It can handle the trading volumes of NASDAQ if not more and with even greater efficiency.
Other than this, it can also be applied to numerous other segments of the economy. Below is a list of use cases for user issued assets on the Bitshares platform:
1. Deposit receipts
Traditionally banks are tasked with the responsibility of issuing deposit receipts. Banks maintain a database of their customers’ financial holdings and use this to facilitate transfers as instructed. Companies such as Paypal issue deposit receipts and offer cheaper cash transfer services between banks and their customers. Bitshares can hold these customer databases on the blockchain and issue deposit receipts in a way that is faster and cheaper.
2. Customer verification
First and foremost the issuer must know every single customer. BitShares supports this by enabling both whitelists and blacklists. Rather than requiring every issuer to whitelist every customer separately, an issuer may specify a set of identity verifiers that they trust to do this job. This allows issuers to benefit from the network effect of validated users without having to do any direct identity verification themselves.
When an asset enables whitelist, no account may send or receive that asset without being on an authorized whitelist. An accounts fund can be frozen by removing them from the whitelist.
3. Asset seizing
From time to time, an issuer may be required to seize funds as a result of a court order. While this may be unappealing to cryptocurrency purists, it is an unavoidable reality of trust-based assets. An issuer can determine whether or not they wish to revoke this privilege, but it may be a requirement in some jurisdictions.
4. Market restrictions
An issuer who offers both USD and EUR deposits may need to restrict direct trading between their USD and EUR assets to avoid being subject to foreign currency exchange regulations. Some cryptocurrency exchanges allow trading between fiat and cryptocurrencies, but not between two fiat currencies. Without this feature, many exchanges would be unable to issue their assets on the BitShares blockchain.
5. Transfer restrictions
With the Bitshares exchange users can transfer funds from user to user without restrictions imposed on them. This is unlike most cryptocurrency exchanges that have restrictions on transfers of funds outside the market as this is subject to a lot of asset transfer reglations.
6. Bitshares (BTS) as collateral
The Bitshares BTS can be used as collateral for a bond or in smart contracts as the SEC allows corporate shares to be traded on alternative trading systems.
7. Event ticketing
Event ticketing has also gone digital as this makes it reach a broader audience in a way that is economical and efficient. If an event organizer chooses to employ user- issued assets to sell an event, they will have transferred the risk to the audience by auctioning the tokens to the highest bidder who will then resell them to the intended audience.
This will make it possible to raise a lot of money upfront and the issuer can then freeze the token sale on the day of the event and allow the audience to cryptographically check into the event.
Crowdfunding has also gone digital and issuing an asset is one of the most effective ways to raise money. This makes it very efficient and affordable to issue digital coupons and other digital assets as rewards or hooks for crowdfunding.
9. Digital property
Converting physical assets to digital assets and issuing them securely on the blockchain is another way to utilize Bitshares platform. Software and music licenses can be created on the blockchain and issued to users for immutable record keeping so that even if the business or individual issuing is nonexistent in the future, the transaction and certificates will still be available. The same goes for trading cards and online games that can be simulated on the blockchain.
10. Stable cryptocurrency
Smartcoins were a primary inspiration of Bitshares, to tame the volatility associated with the cryptocurrency market. With Bitshares, users can select a given high-value asset such as gold and use it to create a price stable digital asset that is fully collateralized.
This is very appealing to a broad range of investors who may wish to venture into cryptocurrency investment but with some form of assured security. To further enhance the security of the Smartcoins, Bitshares sets parameters such as market restrictions, transfer restrictions and whitelists to safeguard the interest of the investor.
With the recent hacks on major cryptocurrency exchanges, Bitshares has a unique product to offer to the market.
Additionally, Bitshares offers a stable coin, a feature which is currently “hot” in the cryptocurrency market. Lastly, unlike other cryptocurrency exchanges, the Bitshares DEX has no limits on daily trading volumes.
Other exchanges impose limits based on the personal information given away and parameters of financial standing. Not so with Bitshares as the platform has no account approval process in the first place.