Investigating the Top Cryptocurrencies #1: BitShares
BitShares is the #50 digital token in the world by market cap. What is it, and why is it so popular? In this post, I will explore BitShares and give you a layman’s overview of how it works.
This post is part of a new series where I investigate each of the top 50 coins by marketcap. My goal is to help steem’s userbase become the most knowledgable blockchain community in the world.
Why Investigate the Top 50 Cryptocurrencies?
This series was inspired by a simple twitter exchange I had with @lukestokes. It started with him tweeting this question:
I responded, triggering a short conversation:
Hmm… I realized that I know very little about the top 50 digital tokens. I’ve read quite a bit about Bitcoin and Ethereum, and I’m obsessed with steem… but what else is out there? Until I do the research, I can’t speak with any confidence about the space as a whole.
This is why I’m full-time in the blockchain space these days — so I can spend 10 hours a day learning! Bring it on.
Best of all, it’s a chance to *share* this knowledge. I will investigate each of the top 50 coins, and then I’ll turn it into a detailed blog post where I distill the important info for you. If you read all 50 posts, you’ll have a better knowledge of the crypto space than most people.
We can work together to become the most knowledgeable cryptocurrency community on the internet. This is a huge opportunity… and in the process, you’ll develop a keen sense of the best ways to invest your time and money.
Disclaimer: I am not an investment expert and will not be providing investment advice. I will teach you about the top 50 tokens, and you can do what you want with that info.
BitShares — What is it?
BitShares is a decentralized cryptocurrency exchange started by Dan Larimer, the same guy who teamed up with Ned Scott to build steem.
Here are the key features of BitShares:
(1) SmartCoins — Stable Cryptocurrencies Pegged to Real World Assets
A smartcoin is a simple concept. Any digital token that is “pegged” to (i.e. designed to match the value of) a real world asset is a smartcoin.
Here’s how BitShares makes their pegged assets stable & safe:
There’s some difficult finance-speak in there. Step #2 is difficult & crucial to understand, it went over my head at first: “(2) The least collateralized short positions are used to settle the position.”
My first question was this: What is a short position?
I’ll defer to the Nebraska Council on Economic Education on this one — here’s their definition: “The Short Position is a technique used when an investor anticipates that the value of a stock will decrease in the short term, perhaps in the next few days or weeks. In a short sell transaction the investor borrows the shares of stock from the investment firm to sell to another investor.” (source)
OK — got it. So a person (“John”) borrows tokens from a third party (“Investment Co.”) at a cheap price — for example, at $0.98 per token. They then sell the borrowed stock to another third party (“Mark”) at a higher price — let’s say $1.05 — and hope to buy it back at a discount, then return the stock to the original firm. This leaves them with a profit if it works.
Mark is hoping that he can arbitrage the price — selling at $1.10, for instance — while John is hoping the market will force Mark to sell at a loss, such as $1.00, allowing John to buy back at a profit.
If you watched The Big Short — this is what the characters in that movie did to get rich.
The “least collateralized” — in layman’s terms, the people with the worst short positions, are forcefully liquidated whenever someone decides to cash in their SmartCoin for the equivalent pegged value.
None of this matters if you just want to use the currency as a stable token. All of the short and long positions happen behind the scenes, ensuring that average people like you and me can rely on a stable-ish peg. The main use case here is for an e-shop to sell products with the stable token, without worrying about price volatility.
The even deeper details of how SmartCoins work are fascinating, but a bit beyond the scope of this article. All that matters is summed in this quote: “merchants have a financial incentive to advertise BitUSD as the preferred payment mechanism, because they know that $1.00 is the lower bound on what BitUSD is worth.”
One other thing to be aware of: “Privatized SmartCoins.” Users can issue their own smartcoins. This is designed to create pegged assets, for example you can create BitGold, BitSilver, etc — This is NOT a system for creating any kind of token, like what ERC-20 offers — Privatized SmartCoins are much more narrow.
(2) Decentralized Asset Exchange
From the website: “BitShares provides a high-performance decentralized exchange, with all the features you would expect in a trading platform. It can handle the trading volume of the NASDAQ, while settling orders the second you submit them.”
Benefits of a decentralized network:
[2a] — Security: When an exchange is centralized, there is a huge reward (incentive) for people to hack it. One successful hack can earn somebody many millions of dollars… when it’s decentralized, the rewards are much smaller. Even if a hack is successful, it has lower impact on the overall ecosystem.
[2b] — Equal Opportunity — There is no high-frequency trading or “hidden orders” — you don’t need to be physically close to the exchange to gain an advantage, like you do with wall street (every nanosecond counts).
[2c] — Full Reserve — All assets on the exchange are backed with 100% of the asset — no fractional reserve banking.
[2d] — Freedom — No withdraw limits or invasive verification process. You can trade when you want, as much as you want, without revealing private information to a central authority.
[2e] — Low Fees — as the website says, *“For a $1000 trade on BitStamp you will pay $5 vs less than $0.01 (Jan 2015) to make the same trade on the BitShares exchange.”
(3) Capable of 100,000 Transactions Per Second
The specifics of this don’t matter for most people. For the layman, it’s simple enough to understand that this technology is scalable. It can handle the transaction traffic of Visa and Mastercard combined.
(4) Recurring & Scheduled Payments
BitShares enables automatic recurring payments, scheduled in advance. This is achieved through users using two accounts: A “Checking” and a “savings” account.
The savings account holds the majority of the funds, with the keys kept in cold storage (if you are smart about it, anyway). Before putting the keys into cold storage, the user authorizes a certain amount per day to withdraw to the “checking” account — for example, $1,000 per day — and in this way, creates limited risk in the event that the checking account is hacked.
Even if the checking account is completely compromised, the hackers have no access to the majority of the user’s funds, which are safely held in cold storage.
(5) Stakeholder-Approved Project Funding
BitShares started with about $8,000,000 of tokens in its reserve pool — these tokens are issued via stakeholder votes to fund development of the blockchain, paying developers and team “Workers” to improve the protocol.
The reserve pool is replenished through the built-in transaction fees, and ideally will hold its value over time even without any appreciation of the token value.
This is not that far off from how the Steem reward pool works — stakeholders can use their vote power to support users who are contributing to the protocol. The main difference is that steem’s system is inflationary, while bitshares’s is not.
(6) Bitshares uses Delegated Proof of Stake as its Consensus Method
The nature of what DPoS is goes beyond the scope of this article — but you can read a bunch more about it over at the BitShares website.
Price History of BitShares
The price has been mostly steady, with one huge spike in July that has been correcting downwards ever since. Bitshares is very affordable, just ~5 cents per token. Pretty easy to hold a few of these if you want!
My Thoughts About BitShares
BitShares is well known in my home of Steemit, thanks to the fact that both projects were started by the legendary Dan Larimer.
The more I read about BitShares, the more excited I get. The blockchain is elegant and seems to really work. The incentives make sense and the security seems robust.
I love the overall goal of the project — to provide a secure and decentralized exchange that anybody can use. If BitShares succeeds in becoming the most popular cryptocurrency exchange in the world, it could be a huge victory for the blockchain space.
I’ll be exploring BitShares more in the near future, because it seems like one of the best ways to exchange cryptocurrency. If I discover more useful info for crypto-enthusiasts here, I’ll share it on my blog, so stay tuned.
What Do You Think About BitShares?
What experiences have you had with BitShares so far? What are your biggest criticisms of the service?