BITSHARES, YOUR BANK ON A BLOCKCHAIN
Hello Steemians,
Here’s an interresting article about Bitshares, about where it comes from, what it is exactly and what we can speculate about and hope for its future.
I’m far from being an expert on the BitShares subject so, for now, I’m just translating an article I read online in french ( source in the description). But there will be more coming soon.
Let me know if you enjoyed it and found it of interest !
If you are not yet familiar with the BitShares ecosystem, rest assured, you are not alone. Although BitShares have occupied 4th place on coinmarketcap in recent months, it seems that even for most digital currency aficionados, this is still unknown territory. The French seem to be particularly lagging behind, since they represent only 1.35% of BitShares wallet owners.
But I will risk a prediction: you may hear a lot about it in the coming months, when the marketing campaign begins. Indeed, the BitShares system has already reached an important size despite a very reduced communication. The marketing campaign for BitShares has not started yet because the wallet is still in beta version, the windows version is still notoriously unreliable and frequently buggy. When version 1.0 of the wallet, scheduled for the first quarter of 2015, is available, every effort will be made to make known this ecosystem which has the ambition to be to the business world what Bitcoin is to money.
As I use a number of acronyms and English words throughout the article, you will find a glossary at the end. Words in bold in the article are defined in this glossary.
Before I describe the unique features of BitShares, let me step back and look at Bitcoin's vision of the future.
Bitcoin's vision
By demonstrating that it is possible to create a monetary system that does not need regulation, that freedom of expression and access to the Internet are enough to achieve consensus on who owns what, Bitcoin has opened a new path that goes far beyond a "simple" reform of money and currency. Welcome to the blockchain revolution, a technology that promises to profoundly transform society, by decentralizing domains as varied as voting, domain names, banking and financial services...
A utopia within reach, therefore, that would provide all human beings with the same free access to efficient, transparent, and privacy-enhancing services. Everyone is free to participate in the maintenance of the network, no one can control what others do. There is not even a need to trust other actors, as security is guaranteed by the protocol. However, a major obstacle stands in the realization of this utopia: mining, and its consequences, can be seen as the antithesis of Bitcoin's great ideas:
Bitcoin is extremely efficient, but mining is a huge waste. Currently, $500 million is spent on electricity and equipment each year, and this will only increase with greater adoption of Bitcoin. This is still cheaper than current payment systems, but the fact remains: this money is spent to secure the system, without producing any value.
Bitcoin wants to allow instant exchanges using all the potential of the Internet, but mining remains slow. It will always take several minutes before a transaction is validated, which prevents the exchange of value in real time.
Bitcoin advocates decentralization, and promises everyone to be able to participate, but mining naturally tends towards centralization. Those who have access to the cheapest equipment and electricity have a better return on their investment, and because of the scale effects, mining is more profitable for large miners. Moreover, if two miners decide to join together, they no longer compete with each other and both benefit. Thus, decentralized mining cannot be profitable, and a limited number of actors will dominate the system.
We can note that these limits are not the limits of the blockchain in general, but the limits of the mining. Thus, even if mining is for many defenders of Bitcoin which guarantees its value, mining also seems to be its Achilles heel.
Bitcoin: a DAC in the red
Daniel Larimer, founder of BitShares, proposes to adopt another point of view on what Bitcoin is. Rather than considering a Bitcoin as a coin, one can see it as part of a Decentralized Autonomous Company (DAC), whose blockchain is the accounting register that describes who owns what in the company.
This CCD generates revenue in the form of transaction fees. However, transaction costs are insufficient to remunerate the company's employees, namely the miners: the DAC Bitcoin is therefore obliged to raise capital by issuing new shares: the Bitcoin mined. Bitcoin holders' shares are therefore highly diluted: by almost 10% by next year, with about 1,314,900 new Bitcoin if my calculation is correct (10 minutes per block * 6 * 24 hours in a day * 25 BTC per block * 365.25 days in a year), for 13,592,725 Bitcoin currently outstanding.
Moreover, it may be noted that at no time do Bitcoin holders receive a dividend: holding (keeping) Bitcoin therefore only has a financial interest if the number of users is likely to increase, i.e. if external capital comes to bail out the coffers. Seen from this angle, the DAC Bitcoin is a company in the red, entirely dependent on the arrival of new external capital to operate.
From this perspective, Bitcoin does not appear viable in the long term. Of course, this point of view is not an objective point of view. Bitcoin is not really a company. The other point of view, more adopted, is to see Bitcoin as gold: something precious to discover, which can serve as a store of value. If Bitcoin's analogy with gold holds, then BTCs have a bright future in the long run. Personally, I do not think that the analogy with gold holds perfectly, notably because Bitcoin are not rare in the same way, in the sense that one can create as many clones as one wishes, which one cannot do with gold. I also think that mining will become a real problem, especially with ecological issues that will only increase. However, I don't see the growing craze for Bitcoin falling back, and in any case, there is room for many blockchains to cohabit.
Transaction validation in BitShares : DPOS
It is by adopting this other point of view, which consists in seeing the blockchain as the accounting register of a DAC, that the idea of the BitShares ecosystem was born. BitShares is not a simple altcoin, but has an original and open source code. Thus, the BitShares Toolkit is available on github, and it is destined to be at the origin of many projects. By forking this toolkit, anyone can create their own DAC: the BitShares Toolkit provides the infrastructure to generate assets and share them on a blockchain.
In BitShares, the validation of transactions, i.e. their integration into the blockchain, is no longer based on the Proof of Work (mining), but on a system specific to BitShares: the Delegated Proof of Stake (DPOS).
How secure is the network?
The blocks are generated by 101 delegates, who are the nodes of the network. They must validate one block each in turn, signing it with their private key: if their computer is not available when it is their turn, the block is missed, and the next delegate takes over. Delegates are elected by BitShares owners. Each BitShares user can vote for 101 delegates of his choice, and his vote has a weight proportional to the number of BTS owned (hence the Proof of Stake).
Any user can register their BitShares client as a delegate, but only the 101 with the most votes will validate blocks. Delegates are therefore put in competition, and must prove themselves to win the support of users and be elected. In exchange, they get paid. For each block validated (delegate 1 block every 101*10 seconds), they receive between 3% and 100% (this percentage is the delegate's payrate) of 50 BTS (number which will decrease with time).
The payrate is freely determined by the delegate, but only delegates capable of convincing a sufficient share of the electorate will be elected: they must therefore justify their salary. This system allows developers, marketers, etc., to be paid within the system ! Thus, rather than being money thrown out the window, inflation (all relative, limited to 6% this first year if ever there were 101 delegates paid at 100%, which has virtually no chance of happening) makes it possible to finance actors highly motivated to advance the ecosystem. They should create far more value than they consume, and all BitShares holders benefit.
Transaction fees (0.1 BTS per transaction) are destroyed: it is as if they were redistributed to all BitShares owners. Initially, these transaction costs were higher than the operating costs, and DAC BitShares could be said to be making a profit. Dilution, i.e. the creation of new BTS to pay delegates, has recently been introduced, and currently the number of BTS in circulation is increasing.
So much for the overall vision of how the network works. You can find more complete explanations on the BitShares wiki. If you are interested in DPOS security, you will find a discussion about it on successcouncil.com.
The creation of assets
The main functionality offered by BitShares is the creation of assets by users. I prefer to use the English term here, because the active French term is not really clear. Besides, if you have a better translation, I'll gladly take it. The BitShares blockchain initially includes only one asset: BitShares, whose symbol is BTS. Two types of assets are then added: assets generated and controlled by users, and assets indexed to a market price.
Let's start with user-generated assets. For a certain amount in BTS (currently 500, subject to change), any user can create his own asset, which he can share as he sees fit. The creator of the asset will have the possibility to keep the power over his asset, i.e. he will have the possibility to block users and recover their funds - which is necessary to respect the laws of certain countries - or not to keep this power. Even if the possibilities are immense, I won't dwell on the subject, because what distinguishes BitShares from other "Blockchain 2.0" technologies is its mechanism allowing to have assets whose value is indexed to the market price in the real world.
Indeed, BitShares implements a decentralized exchange market. To do this, it is necessary to create virtual assets, called BitAssets, whose value is indexed to the market pegged assets. For example, a BitUSD represents the value of one US dollar, a BitBTC represents the value of one Bitcoin, and a BitGold represents the value of one ounce of gold. You can also create BitAAPL indexed to the Apple share value, or any other commodity on the market!
This feature is BitShares' stroke of genius, but it's also what gets him many scam accusations: owning BitGold is not the same as owning gold. However, the mechanism behind the creation of BitAssets is extremely well put together, and is based on reliable economic principles, which I will try to describe to you.
How the peg market works
We are entering the technical world of finance: it is good to note that I am absolutely no specialist, I discovered this universe only a few months ago, so I hope that no foolishness has crept into my explanations.
We will take the case of the BitUSD, whose value is indexed to the price of the dollar. One BitUSD represents one dollar of BTS, regardless of the current BTS price. In the initial state, there is no BitUSD in circulation.
To create a BitUSD, someone has to agree to short sell it to someone who wants to buy it. The shorter (an ignoble Frenglish neologism, I agree, I apologize flatly, but it's crazy what the French lack word in the field of... trading) sells BitUSD that he does not own, and commits to buy them back within 30 days (this number is likely to change). To guarantee that he can cover his short sale, i.e. buy back as many BitUSDs as he has sold, the shorter must immobilise 200 % of the value of his short sale in BTS. These BTS set aside are called collateral. When a banker makes a loan, he does the same thing: he does not lend dollars that someone else would have deposited in the bank, but he creates them. The collateral which guarantees these dollars is for example the borrower's house... Moreover, the BTS deposited by the buyer are also sequestered, they will be returned to the shorter only when the latter has covered his sale : thus, each BitUSD in circulation is really covered by 3$ of BTS !
Thus, to sell 100 BitUSD short, the shorter must set aside the equivalent of $200 of BTS: these BTS cannot be used before hedging his short sale. The number of BTS to be collateralized for each BitUSD sold is called the price feed. The price feed is published by the delegates. At least 51 of the 101 delegates must publish a price feed for this asset for the market to be functional. Delegates can publish this award by hand, or use a bot that will search for information on the exchanges of their choice. The median of the different prices provided by delegates is used as price feed.
Once the short sale has been made, the shorter has 30 days to cover his sale, i.e. he must buy back BitUSDs from anyone who wants to sell them. When the shorter buys back BitUSDs to cover his short sale, they are destroyed. If it does not cover, the redemption is made automatically after 30 days, taking the most advantageous offer at that time. If, at any time before the 30-day maturity date, the BTS price falls so that 66% of the collateral is needed to cover by buying at the price feed, the shorter is obliged to buy back immediately: this is called a margin call. In this case, he also incurs a penalty fee of 5% (on what remains of the collateral).
The motivation of the shorter is to make a profit, by buying back less expensive than what he sold. Thus, the shorter is betting that he will later be able to buy back BitUSD at a lower price than the current market price, i.e. the price of the real dollar will decrease compared to the price of BTS. The BitUSD buyer may have several motivations. Conversely, the buyer is betting that the real dollar price will rise compared to the BTS price. The creation of BitUSD is therefore based on the existence of two players who make opposite bets on the future price of BTS against the dollar. Note that at no time do these two players trade real dollars. On the other hand, their respective balances in BTS will be redistributed according to the real dollar price.
Market forces mean that the price of BitUSD will converge towards the dollar price. As soon as the price (in BTS) of a BitUSD becomes lower than the price of a paper dollar, this represents an opportunity to hedge its short sale by making a profit: the shorter will therefore hedge, which will reduce the number of BitUSD in circulation. Conversely, as soon as the price of a BitUSD is higher than the price of a paper dollar, it creates the opportunity to take a short position (= to sell some short).
Note that this system guarantees that a BitUSD buyer can always resell them within 30 days against a BTS dollar (determined by the price feed) if he wishes! Indeed, nobody is obliged to sell, on the other hand there will necessarily be a shorter somewhere who will have to buy back at one time or another at the market price.
For the full explanation, in the original version, refer to this post on the bitsharestalk forum. And if you are not convinced by these technical explanations, know that in practice, it works very well: you can see the price of BitUSD on this page.
Why own BitAssets
BitUSD combines the advantages of blockchain (decentralization, fast and almost free transactions, cannot be confiscated) with the stability of the dollar: they are an ideal cryptographic currency. As a bonus, keeping BitUSD generates interest! This interest comes from transaction costs (a small portion of BitUSD is burned on each transaction), on the one hand, and market fees, on the other. In BitShares' internal market, people get exactly what they want. Suppose there are only the following two orders: Albert buys 10 BitUSD for 55 BTS/BitUSD, and Bertrand sells 10 BitUSD for 50 BTS/BitUSD. In this case, Albert pays 550 BTS, and Bertrand only receives 500 (each received exactly what he asked for). The remaining 50 BTS are burned, and redistributed in the form of interest. This operation also has the advantage of limiting high frequency trading.
This peg market system is not limited to BitUSD. All the values of the real world, if they find enough volunteers to exchange them and for the market to be liquid, and if enough delegates publish a price feed, can have their virtual counterpart in the form of a BitAsset : BitAssets can also be exchanged against each other, making it possible to implement an entire, decentralised exchange market, accessible to almost everyone at no cost. This is combined with the possibility of issuing one's own assets, which may well be the shares of a company: in this way, one can finance its projects. BitShares is theoretically capable of providing almost all the services of a bank: savings with interest, stock market investment, financing! I leave you to imagine the possibilities.
Note that BTSs cover all BitAssets in circulation. Mechanically, the BitShares market cap must be at least 3 times the market cap of all BitAssets combined. If the use of BitAssets increases, the value of BTS increases.
The genesis of BitShares
This short BitShares story is not necessarily interesting for everyone, but I include this paragraph for those who would have seen the different BitShares products (PTS, AGS, ...) and who are wondering about it.
The first DAC organized around BitShares was called BitSharesX, for BitShares Exchange, whose goal was to implement a decentralized exchange market. Since BTS are not mined, all of the 2 billion (initially) BTSX was to be distributed from the start.
To do this, the developers first used a Bitcoin clone, which they called ProtoShares (PTS), and whose possession would grant the right to recover BTS when the system was implemented. In this way, BitShares already had a place in the market before their existence! Subsequently, the developers also raised funds through Bitcoin and PTS donations between January 1, 2014 and July 18, 2014, in exchange for AngelShares (AGS), which also grant the right to receive BTS but are linked to a Bitcoin or PTS address, and are therefore not exchangeable.
Recently, the number of BTS has increased by 500 million (by the way, the name has changed from BTSX to BTS) during the merger. This controversial move was used to "buy back" two DACs, BitShares DNS and BitShares VOTE, and to end the role of PTS. Indeed, Daniel Larimer felt that the different DAC BitShares would compete with each other, and that his own involvement in these different DACs was a conflict of interest. Since the merger, all the developers of these different DACs have been working on a single DAC, BitShares, which currently focuses on the exchange market, but which will implement in the future the DNS (Domain Name System decentralisation, similar to Namecoin) and VOTE (decentralised voting) functionalities.
The future of BitShares
BitShares is a complex environment that is rapidly evolving at the moment. Developers of the main DAC (also called the SuperDAC) are working hard to develop the latest features of Protocol 1.0, which implements the trading market, by the end of the year, to be able to provide a secure base for platforms that will sell BitUSD and other BitAssets. It will take a few more months for the GUI to allow access to all these features without going through the console and get the 1.0 wallet.
New functionalities will then be integrated. It is expected that the SuperDAC BitShares will implement voting features: by allowing to verify the identity of users of the blockchain, they will be able to express their opinion on various subjects of society. Even if these votes will probably have no legal value, it opens the way to digital democracy, to polls that cannot be tampered with... the possibilities are staggering. BitShares should also be able to integrate a decentralized blockchain-based DNS system (like Namecoin, but with DPOS instead of mining). Finally, the developers have expressed their willingness to allow Turing-complete scripting, allowing smart contract implementation.
Other CCDs based on the BitShares toolkit are under development. I will mention two. BitShares Music, coupled with peertracks software, promises us the decentralization of music production. The artist can finance himself directly from his fans by selling ArtistCoin, which he will broadcast himself. The artist controls what can be done with his corners: they can be spent on music, or other services, limited only by the artist's imagination. For example, Bustin Jieber may decide that all owners of 10000 JieberCoin on the blockchain can come to his private party in his villa. BitShares music will thus allow artists to live on a different business model than selling records. Moreover, it also gives more power to the fans: everyone can speculate on the artists he likes. This will encourage people to get to know the artists we support! The DAC BitShares Play will allow decentralized games of chance, based on random numbers drawn by the blockchain, with chances of winning much more favourable to players than in institutionalized games.
This is only the beginning. Almost all areas of life can be revolutionized by blockchains. BitShares has the ambition to decentralize banks, but also to provide a general framework to do everything you can dream of doing on a blockchain.
If BitShares excites you: where to start?
So it's simple: everything is in English... You won't find anything in French except this article.
To download Windows clients (which is apparently still very buggy) and Mac : http://bitshares.org/downloads/ ; for linux, instructions for compiling the code are provided here : https://github.com/BitShares/bitshares.
To buy BTS: BTER, poloniex (low volume, rather bad reputation, but I had a good experience with customer service), BTC38 (by far the largest volume of BTS, but it's in Chinese...).
To follow all the news and discussions: the forum. There are a lot of posts, it can be difficult to find your way around. There's a small French section, I'll answer if you come and say hello! The developers show exceptional transparency, which I find rare in the crypto world: they reveal their ideas live on the forum, and do not hesitate to question themselves. Daniel Larimer knows exactly where he is going, and has sometimes had to make choices that have been much contested, but he always explains himself by arguing on the forum.
The wiki, not always perfectly up to date (it changes quickly!)
The weekly hangouts. For those who are really interested. Each week, Daniel Larimer presents his new ideas, the progress of the program, and answers questions.
Source : https://le-coin-coin.fr/1515-bitshares-votre-banque-sur-une-blockchain