It's my job to provide a snappy overview of BitShares before moving to the interview portion of this article.
But the simple fact is that BitShares is more than a cryptocurrency. It utilizes financial tools and contract types of which I'm no expert. The kind Wall Street cats must specialize in. And so I really don't completely understand it, which makes me equally suspicious and excited.
That's why I reached out to Ken Code, BitShares' public relations manager. I asked him my n00bie questions.
So in lieu of the snappy overview that I should be giving you, here's one straight from the BitShares website:
“BitAssets, the currency of BitShares, are digital asset tokens that have eliminated the burden of price volatility. This means that bitUSD, bitEuro, bitCNY and bitGold will always trade near par value for the dollar, euro, yuan and gold on cryptocurrency exchanges worldwide.”
CoinTelegraph: Why does the world need BitShares?
Ken Code: There are many reasons, but here are a few:
BitAssets – these market-pegged assets become “smart currencies,” pegged by market forces to underlying fiat currencies (USD, EUR, CNY) or commodities like gold and silver. This provides stability, allowing merchants to hold the currency rather than selling it quickly to avoid volatility of first-generation crypto currencies like bitcoin.
The ability to hold between transactions minimizes the taxes, fees and counterparty risks incurred going into and out of fiat in search of stability.
“[Bitshares’] security costs are a tiny fraction of [Bitcoin] and transactions are confirmed in an average of five seconds.”
Industrial strength – I love Bitcoin, but it wastes hundreds of millions of dollars annually on miners it pays to secure the network and often takes more than an hour to confirm a transaction. This is not a very practical solution for real world asset trading. BitShares is a platform for deploying profitable businesses with low overhead. Its security costs are a tiny fraction of this and transactions are confirmed in an average of five seconds.
Functionality – the key functionality of Bitcoin and most of its clones is, in essence, a new form of checking account that has no counterparty risk. BitShares goes beyond that basic service to provide a wide range of other counterparty-free financial services. BitShares takes Bitcoin’s concept of an incorruptible public ledger and applies it to many profitable business models.
CT: Does BitShares offer a native currency, or just futures contracts?
KC: Yes, the native currency is called bitshares (BTS). Viewed as a mere currency, it is every bit as volatile as first-generation currencies like bitcoin. But, viewed as equity in BitShares the unmanned company, BTS value is derived from demand for the company’s incorruptible products and services.
So BTS makes an excellent form of collateral with which to back stable smart currency derivatives and other financial products.
“BitShares derivatives have zero counterparty risk, and that makes all the difference.”
CT: Derivatives trading has a bad name after the 2008 tax-backed bailouts of bad financial actors. Why is derivatives trading with BitShares different?
KC: Derivatives have gotten a bad reputation because of the corrupt ways in which the world’s financial institutions have implemented them. Many are backed by little – if any – collateral, and there is no transparency about where all the counterparty risk may lie.
The blockchain eliminates these opportunities for abuse through transparent backing by 200% or more collateral enforced by incorruptible open source software. BitShares derivatives have zero counterparty risk, and that makes all the difference.
CT: Do any merchants accept bitshares for payment?
KC: A few are beginning to, but we see this as Stage Two of the evolution of BitShares. Right now, we are positioning BitShares as a decentralized exchange free of counterparty risks and the costs of trading in and out of fiat all the time.
It is not starting out competing with Bitcoin; it is offering traders and all centralized exchanges a way to protect themselves from being compromised by hackers, bad employees, and corrupt governments like we've seen with Mt Gox, BitStamp and BTER.
Over time, we expect many exchanges to offload their back-end trading engines to the BitShares blockchain where they can enjoy much deeper markets and better security while continuing to compete via their front-end user experiences and customer service.
As this happens, use by merchants will expand naturally. There are already a dozen common shopping carts that we have provided with the ability to accept BitShares smart currencies.
CT: Does a person need to engage in futures trading to profit from BitShares, or can it also be a buy-and-hold thing?
KC: There are many ways to profit from BitShares. Just holding the core BTS asset exposes you to the growth potential of a whole new financial services industry.
Holding one of its stabilized smart currencies (BitUSD, BitCNY, BitEUR, BitGold, BitSilver and even BitBTC) exposes you to the price movement of the underlying asset to which it is pegged. These assets also pay a yield based on how long you hold them.
“Merchants will eventually profit from its much lower fees, instant confirmations and stability that allows them to stay in a secure digital account without paying to cash in and out with every sale.”
This enables you to construct your own weighted basket of currencies as a savings account that is hedged against the risks of holding any single fiat currency. And you can change that basket’s weighted mix in ten seconds.
Merchants will eventually profit from its much lower fees, instant confirmations and stability that allows them to stay in a secure digital account without paying to cash in and out with every sale. Ultimately, most everyday users will enjoy the products and services via third parties without even knowing they are using BitShares. Thus, we are marketing BitShares first and foremost as a set of tools that enable third parties to serve their customers better and more profitably.
CT: Explain the 101 delegates system.
KC: BitShares delegates take the place of Bitcoin miners in certifying the validity of changes to the global public ledger. Anyone with a BitShares account can seek election as a delegate.
BitShares holders get one vote per each BTS token they own and can use their wallet interfaces to tell the blockchain which delegates they trust. The top 101 delegates with the most owner approval are authorized to take turns adding a block of transactions to the ledger. So this is a mechanism for explicitly determining who the owners trust most to sign the blocks.
Bitcoin miners appoint themselves to wield this authority and bitcoin holders have no say at all in how long they can serve.
Delegates can only include valid transactions or the rest of the network will reject their block. So it is hard to earn enough trust to get elected and very easy to lose it under the certainty of being caught misbehaving.
CT: Why does there need to be a central group of delegates? Could BitShares function without it?
KC: Delegates are distributed around the world and are far more decentralized than Bitcoin. BitShares has a way to hold block producers accountable while owners of bitcoin and its clones do not.
With Bitcoin, over half the blocks are signed by two or three individuals (owner/operators of large mining arrays or pools). These two or three people control what version of the software is official and publicly collude to implement hard forks.
With BitShares, no delegate is permitted to sign even 1% of the blocks and each must have a reputation that is among the most approved by BTS owners.
With Bitcoin, mining entities appoint themselves and there is nothing that actual bitcoin holders can do to get rid of a bad actor that controls a lot of hash power. BitShares owners can fire delegates who lose their confidence in ten seconds.
“[Distilled trust] enables products and services that are beyond the reach of first generation systems, no matter how ‘trustless’ they may claim to be.”
To regain such trust, a disgraced delegate must start over building a new reputation capable of being elected.
Finally, the BitShares delegate architecture produces a useful by-product that we call “distilled trust”. Such trust is a useful commodity in its own right. For example, selecting software versions, publishing information feeds and choosing system parameters are functions that benefit from having trusted humans in the loop.
This enables products and services that are beyond the reach of first generation systems, no matter how “trustless” they may claim to be. Bitcoin inherently trusts the several large pool operators to faithfully run the software specified by its core developers who are themselves in positions of trust. Bitshares just makes this trust explicit, accountable and quickly revocable by BTS owners.