TL;DR: There is a market niche for a global unbounded
organization that efficiently adapts and morphs to the needs of the market and the desires of it's shareholders.
I believe BitShares is that
The upper limit of this corporation is bound only by the size of the global economy. The current main use for trading tokens of value are financial derivatives purchased by large institutions and well educated individuals who reside in geographical locations favoured by financially powerful nations who have capital to risk.
A system that can drop the barriers to entry and allow everyone in the world access to the global economy will rapdily expand the total value of the economy.
BitShares will not only rapidly grow to meet the existing market, it will rapidly grow the size of the market itself.
Currently this potential is valued at around $20M.
Bitcoin cannot both remain trustless and include price-feeds and contract enforcement at the protocol level. Prices require an external entity, and can therefore never be trustless.
I believe there are two key markets that will be disrupted by cryptocurrency.
The store of value
market and the investment
For reasons I shall explain I do not believe a single system can efficiently fill both of these niches.
Two cryptocurrencys, one in each market, will become the major systems in the future. Bitcoin (store of value) and BitShares (investment).
I do not think that BitShares will "kill" Bitcoin due to the tenets of Game Theory.
If the first cryptocurrency fails, what does that say of the prospects of an alternative?
Therefore an external exchange is required for a decentralized derivatives market. The prevailing exchange will be the one that is most efficient and least risky.
Maximum efficiency will come from a cryptocurrency with settlement and price finding mechanisms at its core.
Fractions of a second count in derivatives markets and the trade-execution time saved by implementing these features at the protocol level is a huge advantage. Traders need assurances that their trades cannot be reversed, so the quicker the network can come to a consensus and finalize all transactions the better. A purpose-built cryptocurrency for a derivatives market will come to this consensus much faster than bitcoin can and be publicly auditable on a blockchain in real time.
There are several main issues that result in numerous competing exchanges existing in today's financial market and if all of these issues were solved then only one exchange would be needed to meet the needs of the market.Counterparty risk mitigation
- holding value on several exchanges.
A single party guaranteeing the IOUs traded on its exchange carries counterparty risk – that they may default on their obligations.
The risk is factored into the cost of doing business with this exchange.
A reduction in counterparty risk results in a reduction in cost of doing business there.
If counterparty risk is eliminated from an exchange then separate exchanges cannot compete on mitigating this risk.
A decentralised exchange where ONLY the users are able to spend their own funds (hold their private keys) and that has many parties providing price-feeds has negligible counterparty risk.Competition of fees that each exchange charges.
If fees required to trade on an exchange are negligible <£0.0025 and much lower than the total value of the trade then separate exchanges cannot compete on fees unless they offer
significant advantages to entice customers away from the established exchange that has the
largest market depth/liquidity.
Would you rather pay 0.25p to trade on the largest, longest running exchange with the highest liquidity – or would you choose to trade on a newer exchange if it could offer fees of 0.2p? Bearing in mind that transaction fees pay to keep the network (exchange) secure against attack.Systemic risk in the trading platform
- The code might get hacked and trick users.
The risk that a fatal bug in the code exists but has not yet been exploited decreases over time and with the number of people auditing the open source code.
A separate competing exchange cannot surpass the incumbent/leading decentralised exchange without significantly simpler code (less potential bugs) and without being active for a sufficient amount of time. During which time the incumbent has attracted even more capital due to an even greater reduction in risk (due to increased uptime with no fatal flaws). The competitor would have to be much better in order to catch up. Laws in different geographical regions
- bureaucracy involved in global transfer.
Cryptocurrency can be transferred globally in seconds. There is no inefficiency in moving funds between jurisdictions except when 'cashing out'.
Separate 'gateways' to real world assets will still exist and they will be able to issue derivatives on the decentralised exchange that track the spot price given by the external 'gateway'. This allows arbitrage between spot prices from several gateways all within the decentralised exchange ecosystem.
The gateways would accept these derivatives 1:1 with the funds they hold on their gateway (cash reserves in bank accounts etc) in order to reach the customers who trade on the decentralised exchange.
As this transfer is near instant the user can 'cash out' to real world assets whilst only being exposed to counter party risk for a very short time. Participants are encouraged to stay within the ecosystem where there is no counterparty risk. Increasing numbers of users holding value on the exchange leads to increasing value of the underlying collateralizing cryptocurrency due to the increased demand for collateral used in assets traded.Arbitrage
Currently, due to the time delays in moving funds from one centralized exchange to another (days with fiat, 10-60 minutes with bitcoin) a trader wanting to take advantage of arbitrage opportunities must hold value across several different centralized exchanges.
With the ability for a decentralised exchange to hold derivatives of the spot prices given by centralized exchanges there is no longer any need to hold value on separate centralized exchange that present counterparty risk.Competition for market share
A decentralised exchange based on cryptocurrency allows anyone to hold shares in the exchange itself so all participants profit as the value traded on the exchange increases. There is no need to set up a competing decentralised exchange because there is more profit to be made by assimilating and bringing value to the existing market-leading exchange.
A decentralised exchange would be more similar to the internet (an ecosystem) than a telecoms company (a private company that seeks to profit from said ecosystem).
Designing and building a competitor to the internet would be a huge task and very risky so there is more profit with less risk in just growing the existing ecosystem by providing complimentary services.
================================================================With decreasing demand for separate exchanges comes an increase in the liquidity and market depth offered by the most successful exchange.
This leads to an increase in its market share, which in turn breeds even more liquidity making it even more attractive as THE place to trade value.
For the reasons stated above the most successful exchange will be:
A Decentralized Autonomous Corporation (DAC) with (low) fees that adequately cover the expenses of securing the network.This DAC (likely to be Bitshares) will:Be Decentralized
Counterparty risk (of maliciously quoted prices) decreases as the number of 'nodes' offering price feed data increases and is almost eliminated completely if the DAC/exchange holds no custodial funds. Have very low fees
A DAC exchange built with a cryptocurrency can transfer the underlying collateralizing asset irreversibly in seconds for very little cost.
In most cases, a trading exchange merely transfers the value of the asset, not the asset itself.
One party takes a short position on the value and is matched to another party who wants to
take a long position. The 'short' party gets a loan to invest elsewhere and pays interest on this loan to the 'long' party who is able to peg their value to an asset of their choice whilst
earning interest. Be a Corporation with shareholder voting rights
The most successful exchange will adapt to market conditions and customer desires fastest.
Shareholders are anyone who holds the cryptocurrency used as collateral in all trades. Every transaction/trade made on the DAC is also an opportunity to prove how many shares you hold and cast votes for how the DAC should be run.
Shareholders are invested in the success of the DAC so will act in its best interest – to stay in business earning profit.Be Autonomous
Top down central planning is an inefficiency.
Shareholders vote directly for several parties, known as 'Delegates' who they think will bring most value to the DAC. Delegates are tasked with validating transactions and providing price-feed data and are rewarded with a share of the transaction fees paid by users of the DAC. The more Delegates the more decentralized the DAC is.
Placing a limit on the number of Witnesses/Delegates (individuals or corporations in their own right) creates a competitive market for Delegate positions whilst limiting the expenses of validating transactions. Failure to perform tasks in a timely manner will result in being voted out by the shareholders and each Witness/Delegate will compete on the amount of compensation they require for their services. Shareholders will favour efficient delegates who donate the largest % of their income to the shareholders (by way of 'burning'/destroying some of their income and reducing the total money supply, thus increasing each shareholders share of the total DAC.)
Votes for Delegate positions occur 24/7 so any badly behaved Delegate could lose it's privileged position overnight.Cater to as large a market as possible
The current main use for trading tokens of value are financial derivatives purchased by large institutions and well educated individuals who reside in geographical locations favoured by financially powerful nations who have capital to risk.
With cryptocurrency comes the ability for the tokens of value to contain data that can only be utilised by the current holder of the token. This brings countless new use cases for these derivatives/tokens of value.
One example is Peer Tracks – a company using a DAC to issue scarce tokens that represent a share in the value of music sales made by a particular artist. It aims to be a competitor to Spotify that instead of paying artists with advertising income it encourages artists to crowd-sale shares in their future career. A user who finds talent they like can invest in their career. If they make it big the value of the tokens they hold will have increased dramatically. 'Hipsters' are now financially incentivized to invest and advertise music they think will be the next big thing.
How many more genres of music do you think there will be if a record label is no longer needed and musicians do not need to 'sell out' to appeal to a mass market large enough to be worth the investment of said record labels?The DAC can provide banking services to internet connected users
(individuals or businesses) with no questions asked as there are no compliance costs as no custodial funds are held. This will allow a truly free market to emerge as 'unfavourable' industries can no longer be stifled with denial of financial services.
These users now have access to anon/pseudonymous assets tied to value of their choice which can earn a return greater than inefficient traditional banks can provide.Enable businesses to use the DAC ecosystem for their own needs
. 'User Issued Assets' are not backed by collateral but by the assurances made by the party/business that issues them. This allows start-ups to have IPO style crowd-funding with none of the compliance costs.
It also allows things like airline miles, gift vouchers, discount coupons etc. to benefit from the user-base and security provided by the DAC and prevent counterfeiting.Provide Identity Verification services
so that things like user website login and proving you are a human user and not a bot can all be controlled from within the DAC. There will be no need to create and remember separate logins to all your websites.
You will also be able to attach your ID (could be anonymous) to the ownership of your physical assets.
For example the keys to your car could instead be private keys held on your account on the DAC. If you want to sell your car, you can then transfer ownership to another user by sending them the 'keys' irreversibly.Provide gateways to external services
A derivative can be issued on the DAC that tracks the value of spot prices of assets quoted on external exchanges. These 'exchanges' could include bitcoin exchanges, stock exchanges, gold vendors and the like. This allows arbitrage between spot prices across several exchanges all from within the DAC ecosystem. The gateways/external exchanges would accept these tokens 1:1 with the funds they hold on their exchanges in order to reach the customers who trade on the DAC and collect their fees from every trade.
The DAC users can now 'cash out' of the DAC to fiat, gold, silver and other real world assets by trading their value to the external exchange. As this transfer would be near instant the user is exposed to the counterparty risk of the external exchange for a very short time.
This ability will encourage more capital to stay within the DAC ecosystem as they can trade out of the ecosystem via many different gateways at will.
More users holding value within the DAC leads to an increased demand for shares in the DAC (the collateralizing asset) which leads to an increasing market capitalization of the DAC and an increased value in each share.
Derivatives held on the DAC can also be traded peer-to-peer for cash to avoid compliance (KYC/AML - Know Your Customer/Anti-Money Laundering) and revealing your real-world ID.
This also allows users with internet access but limited traditional financial infrastructure to participate in the DAC.Provide Price-Feeds and Validate Transactions
Privileged stakeholders, known as witnesses and delegates, are financially invested in the success of the DAC and so are chosen to provide the computational power to validate transactions and to provide up to date prices on assets traded. The ledger of transactions each witness presents to the network is checked against ledgers presented by the other Delegates and if there is consensus then the ledger is updated. A 'bad actor' cannot do serious damage or steal anyone's money - just disrupt service temporarily.
While these Witnesses/Delegates do assert some level of control over the network they are held accountable for their actions and will face consequences immediately if they act against the interests of the shareholders. Delegates hold a privileged position so there will always be many competing parties ready to take their place should they dissatisfy the shareholders in any way. Honesty is heavily rewarded and malevolence is punished swiftly.
Potential witnesses and delegates compete for shareholder votes on the efficiency of tx-validation, price feeds, extra tasks they pledge to undertake and on the amount of their income they will 'burn' (destroy) to decrease the share supply which increases the value all remaining shares.Provide ease of use and secure account recovery for the user.
All assets held by a user on the DAC are stored using the same private keys, so only one back-up (words written on paper, a file on a USB stick or an encrypted file stored online) is required.
All assets can be stored-under and sent-to an easy to remember username that is unique and of the users choice. e.g “Send x Gold/Silver/BTC/USD/Asset to JohnSmith23”
Direct trading between all assets is possible. BTC/GLD, USD/OIL, CNY/CHE etc
>100% collateral backing each asset. 100% by the 'long' position and currently 200% by the short who lends the asset into existence. Shorters post an interest they are willing to pay and long positions receive the average interest offered by all shorts of that asset. (Subject to change.)
The derivatives are fungible and divisible so can be used as a currency in their own right.
All asset-specific contracts mature on the same day every 30 days so all the derivatives can traded as equals. These 'training wheel' limits will be removed once the market is large enough to support contracts expiring on different days.
Each user gets exactly what they ask for or no trade is done. The difference between the ask and the bid is captured in fees for the network. (Subject to change.)
=============================================================The current state of BitShares and the risks of a competitor
Only 2.5 billion currently exist and they are highly divisible so there is no upper limit to the number of trades this total supply can support.
E.g A $1 derivative could be collateralized with 0.00001 bitshares one day in the future if bitshares were valuable enough.The theoretical maximum supply of BitShares is 3.7 Billion. The 1.2 B yet unissued shares are kept in a reserve-pool and every day a fraction of these funds are directed where the shareholders deem most useful. There is a hard-limit on the number of reserve-pool funds available each day, and the yet-undesignated reserve-pool funds cannot be spent by anyone.
They can either be: burned and removed from the supply forever, recycled and sent back to the reserve-pool for use later, or pledged to Worker Proposals as payment to complete shareholder desired tasks.
Each BitShare is currently worth $0.0046 (21/04/15)
The current market cap of bitshares is $11.5M
Metaphors matter. If BitShares were a currency, we would want it to have a limited supply. If BitShares were a company, it would happily issue new shares to propel growth by attracting new infusions of cash, services, or intellectual capital. What should BitShares the community do? We think it should fairly recognize the contributions of all of its members – past, present, and future. Fast-growing companies recognize that, as long as the value infused from new sources exceeds the value of shares issued, the future value of everybody’s shares will increase. The BitShares community will therefore use the company metaphor, not the currency metaphor, to inform its growth policy decisions.
How will this work? Well, Bitcoin has for years issued 50 new bitcoin “shares” every block to incentivize its mining “employees” to do the work required to secure its network. This policy gradually increases the supply of its shares but does nothing to increase their value because the work done has no residual benefit. The net cost of this wasteful work is about a half billion dollars per year. If that new money didn’t have to be spent on outrageously expensive security, it could grant 101 small businesses an annual budget of 5 million dollars each to do something useful, something to promote Bitcoin’s growth.
BitShares is able to use its DPOS technology to do exactly that! It will also offer up to 50 BTS per block to incentivize 101 employees (delegates) to secure the network PLUS do something useful to grow stakeholder value. Since its DPOS security mechanism is so efficient, almost all of the BTS issued will go toward software, marketing, and infrastructure. Stakeholders must approve new issuances by explicitly approving any new-hires that they are convinced will add more value than they consume. They may choose to issue zero new shares; and, there is a hard-coded limit of 50 BTS per block (~6.3% annually). It will likely be half that – far below Bitcoins ~10% inflation.
=================================================================QuestionsHow many more people and how much more capital can benefit from exposure to a derivatives market in this new system compared to the old system?Will there be as much competition between exchanges if the main exchange is highly trustworthy, highly secure and has negligible fees?
It is much cheaper to assimilate and provide value to the customers of the existing BitShares DAC than it is to create a competing ecosystem, which the bitshares DAC would bridge to anyway.
This is much the same as starting an internet company to benefit internet connected customers instead of trying to design a replacement for the internet itself.
Separate ventures that DO NOT
compete as a derivatives market but instead provide value to DAC customers will greatly benefit from working together with the BitShares DAC.
E.g a separate cryptocurrency that provides true anonymity to its users would benefit by providing a gateway to the DAC in order to access the customers of the DAC and the DAC benefits from a partnership with a desirable product.
Ventures that DO
compete will have a very hard time. Would you hold assets on a new, untested exchange when you could hold the exact same asset value on the established DAC?
There are very few efficiency savings a competitor exchange/derivative market could make that would not be desired and implemented by the shareholders of the existing DAC.
If the competitor struggles to get initial customers then how will they be able to grow?
=========================================================But what if it's not Bitcoin or BitShares?
Even if a competitor surpasses Bitcoin for the store of value market or BitShares for the derivatives market then who is going to be best placed to convert assets into this new competitor?
Those who already hold cryptocurrency. For the time being no such viable competitors exist so at least for now Bitcoin and BitShares will continue to grow as their utility is realized by more of the global population.
It is estimated that there are currently less than 1 million Bitcoin holders. That leaves 99.985% of the population who are yet to hear about and benefit from cryptocurrency. If they all understood what they could get out of it, how much more value would be within the crypto ecosystem?
It is my researched opinion that the systemic risk of Bitcoin or BitShares failure is far outweighed by the systemic risk of counterparty default in the traditional banking system.
Bitcoin and BitShares are just more volatile in the short to medium term. Such volatility can be solved by holding market-pegged SmartCoin assets to stable commodities of the users choice. Funds never need leave the BitShares ecosystem.
The reason that Bitcoin and Bitshares have such low valuations is PR. The global advertising campaign is yet to take place.
With the BitShares referral system, marketers are encouraged to attract new users and will be paid up to $80 to do so.So, do you think BitShares will increase in value?