Bitsquare: The ‘Missing Link’ for Decentralized Bitcoin Exchange

Bitsquare: The ‘Missing Link’ for Decentralized Bitcoin Exchange


The need for trading cryptocurrency on a safe exchange means a lot to the digital currency community, especially after the failure of many businesses. Compromised exchanges, either by hacks or “exit scams,” have plagued the Bitcoin space for a while now. A decentralized exchange is one concept that has been introduced to the discussion and is currently being developed by a few people within the crypto-environment. These operations use techniques that keep users’ funds away from a centralized location at all times; some of them also offer various degrees of anonymity as well.   

Also read: 4 Platforms That Believe the Future is Decentralized recently got together with Manfred Karrer the founder and developer of a decentralized exchange in the making called Bitsquare. He gives our readers an in-depth look at the project he’s creating and why decentralized applications will fit best with this new technology. Karrer also tells us his feelings concerning the block size debate and his opinion about the current state of Bitcoin.    

“The problem with centralized exchanges is not only the risk for loss of funds and privacy. That model will likely end up in a highly regulated and expensive system.”

— Manfred Karrer, Bitsquare (BC): Can you tell our readers what Bitsquare is?

BitsquareManfred Karrer (MK): Bitsquare is a fully decentralized exchange for trading Bitcoin against national currencies (USD, EUR,) or alternative cryptocurrencies. It aims to solve the current paradox that we have a decentralized currency but no way to purchase it in a decentralized and privacy-protecting manner.

Bitsquare is a Desktop application (all major OS supported) with which users can view, publish and accept trade offers for Bitcoin. These offers are submitted to a public offer book. All communication goes through a custom P2P network over Tor. The way how the exchange works is more similar to exchanges like LocalBitcoins than to exchanges like Bitstamp. But unlike those, Bitsquare is fully decentralized, meaning that Bitsquare never holds any bitcoin, fiat currency or altcoin.

Not relying on a central control entity requires some alternative protection mechanisms to enable safe trading. Luckily Bitcoin provides a very powerful tool for that – Multisig transactions. A security deposit is used as additional protection and is fully refunded when the trade is successfully completed. A decentralized arbitration system will be in place to solve disputes. The arbitrator is the third key holder in the 2 of 3 Multisig escrow address, but is only needed in case when something goes wrong (E.g. a trader does not send or receive the fiat money).

I saw the lack of decentralized exchanges as an important missing link […]. Bitsquare was the result of that effort.

BC: How did you get involved with cryptocurrency?

MK: I heard first about Bitcoin early 2011 and my first enthusiastic impression was: Wow – that will make the banks obsolete and force the state to redefine itself – redefine in the spirit of organizing public goods and services for the communities instead of being a center of power, monetary control, and paternalism. I had the feeling that Bitcoin might become even more influential and disruptive than the Internet itself. The chance to be a witness in the early years of such a revolutionary development created the desire to participate. I saw the lack of decentralized exchanges as an important missing link, and I started to research how to fill that gap. Bitsquare was the result of that effort.

BC: How is Bitsquare a decentralized compared to traditional means of trade?

BitsquareMK: Centralized exchanges are hosted on proprietary servers, implement a centralized arbitration system or rely on KYC. For this reason, they have a single point of failure, control, and censorship. Decentralization is needed to achieve censorship resistance and avoid any single points of control or failure. Decentralization is the core principle in Bitsquare, and we apply it to all aspects of the project:

  • Infrastructure: Bitsquare uses a P2P network (there are no servers);
  • Security: Bitsquare does not hold users funds (neither bitcoin nor fiat);
  • Privacy: Bitsquare does not hold users data (no registration, uses Tor);
  • Openness: It is open source (AGPL license);
  • Independence: It is funded by donations and personal savings;
  • Governance: Bitsquare is organized as a DAO (Decentralized Autonomous Organisation), comprising the people who build, support and maintain the project;
  • Sustainability: Trading fees go to arbitrators and the DAO.

But a community which has a common goal – like making Bitcoin a success – should strive for solutions which are efficient and have been proven to deliver great results.

BC: Just recently the centralized exchange Cryptsy failed. Do you think a decentralized architecture would have prevented this?

MK: Yes, definitely. The problem with centralized exchanges is not only the risk for loss of funds and privacy. That model will likely end up in a highly regulated and expensive system. Like with banks or stock exchanges the user needs to trust those companies to a very high degree – and that trust can easily be abused. It can be expected that the existing laws and rules for traditional financial institutions will be applied to those cryptocurrency exchanges as they are operating in a similar way. To avoid all those problems we need to develop alternative models.

How can an exchange prevent loss or theft of users’ funds? How can an exchange prevent theft or abuse of users’ data? The answers are simple: Don’t hold users funds or data! What’s more, we should ask ourselves: what is really the strength of Bitcoin? Do we want just another PayPal or are we interested in Bitcoin because it has demonstrated the world that we do not need to rely on trusted 3rd parties?

BC: The platform offers trades in dollars, euros, yen, and altcoins as well. Can you explain how this is done?

MK: In fact, Bitsquare supports any fiat currency, which is supported by our payment methods. Currently, we support SEPA, OKPay, PerfectMoney, AliPay, and Swish. With all those payment methods we support now 23 currencies in total (including the most widely used currencies like YEN, CNY, RUB or CHF). That will be further expanded in the future when we add new payment methods.

p2p_economyOn the altcoin side, we support 16 highly relevant currencies initially, but that will be expanded as well, should we see demand for it. Before users can trade they need to set up their preferred payment method and select the trade currency. For example, for OKPay they only need to enter the account number. This is the only data exposed to the trading peer. The user can then trade 21 currencies since OKPay supports an internal currency exchange. In the case of altcoins, the trader remains completely anonymous as only the altcoin address will be exposed to their trading peer.

The fiat (or altcoin) transfers are done outside of the Bitsquare application. The bitcoin buyer needs to perform the payment on their banking webpage (or altcoin wallet) and afterwards confirm inside the Bitsquare application the completion of this payment. Thus, the bitcoin seller will be informed once the buyer has done the fiat (or altcoin) payment. The seller then needs to confirm the receipt of the payment and in the case of altcoin transaction: whether there are sufficient confirmations on the altcoin blockchain.

BC: You seem to be getting close to a beta launch can you tell our readers how things are going with the roadmap?

MK: We are currently in the process of testing in smaller groups. If the tests continue to run successfully, we will expand those testing sessions to a wider audience. Testing a P2P application has its own challenges. To cover a huge multitude of network environments we want to test with as many real (anonymous) users as possible to be sure the system runs stable and safe. We will announce the start of those larger sessions via our communication channels (newsletter, mailing list, blog) and in Bitcoin media outlets. Our target is to get as many users as possible to participate in these stress-tests to ensure the P2P network is stable under real life conditions. Once those tests give us sufficient confidence in stability and safety we will work towards launching the beta version.

The P2P network inherits the high privacy protection of Tor, which is fully integrated into the application, so users do not need to set up anything.

BC: In October you discuss DHT, Tor Hidden Services, and Tor. Can you tell us how you are working with these tools?

BitsquareMK: Bitsquare used initially a DHT but, later on, we decided to use Tor as our network layer as Tor is superior to surpass all kind of NATs and firewalls. A P2P node combines the functionality of a client and of a server and consumes very little bandwidth. Bitsquare uses a Tor Hidden Service for the server part while the client part utilizes Tor. In that way, the P2P network inherits the high privacy protection of Tor, which is fully integrated into the application, so users do not need to set up anything.

BC: What is your overall opinion currently with the Bitcoin environment right now?

MK: I think Bitcoin is going through interesting times of maturation and – despite never ending obituaries – is doing pretty well. The way how the block size debate was handled gave me good confidence that the core developers and the scientific community is very strong and resistant against manipulation attempts and pressure. The strategy to discuss such a controversial and complex topic at two conferences and the request for scientific research to get a better base for decision making was a sign of excellence. A solution like the Lightning Network or Segregated Witness are for sure more complex than changing a parameter, but they are solving a problem in a dimension which scales.

That the mainstream media as well as a big part of the Bitcoin community on social media platforms are exercising a very different strategy is a sign that communication is still an unsolved and highly problematic area which requires better solutions. Emotionally driven disputes, personal defamatory attacks, egocentric personalities, ideological differences, different knowledge levels, professional manipulation (e.g. paid trolls), … all that makes politics and communication inherently difficult and a toxic cocktail. But a community which has a common goal – like making Bitcoin a success – should strive for solutions which are efficient and have been proven to deliver great results.

The success of scientific methods outperforms by far the poor methods used in mainstream media and politics. I would love to see more usage of tools like Liquid/Delegative democracy which is a very efficient communication and decision making platform used by the Pirate Parties. Beside those loud but at the end insignificant turbulences I think that the lack of decentralized exchanges and marketplaces is a big problem. Luckily there are some projects like BitMarkets, OpenBazaar or Mercury out which are trying to fill that gap.

I think Bitcoin is going through interesting times of maturation and – despite never ending obituaries – is doing pretty well.

BitsquareAnother concern for me is Bitcoin’s weak anonymity – which becomes very relevant in combination with centralized services where the anonymous address gets matched to a real life identity. Confidential Transactions, JoinMarket or CoinShuffle are great efforts to fix that shortcoming. But my main concern with Bitcoin is the power concentration of miners. Though there are interesting scenarios possible where the mining economy might get disrupted fundamentally by new circumstances. Imagine there is for instance a mesh network using Bitcoin for micro transactions and it needs an autonomous money supply. If the router has a Bitcoin miner integrated, the tiny amounts needed for operation can be delivered autonomously and if those routers would be used on a large scale, the economics of mining would be changed fundamentally. Those routers could not compete economically with more efficient industry scale mining farms. Instead, they would get subsidized by other objectives than simply earning money: Objectives like enabling IoT devices to be part of an autonomous value exchange network, running smart contracts or acting as a DAC.  

BC: What is the overall mission of Bitsquare?

MK: Bitsquare aims to give people who care about decentralization and privacy the possibility to purchase and sell bitcoin in a way which follows the same principles as Bitcoin itself. A Bitcoin native exchange.

Thank you, Manfred, for speaking to us about Bitsquare and giving our readers insight to the project being developed.

Do you think decentralized exchanges will fix the issues of people losing their money trading? Let us know in the comments below!

  • Jose Carlos

    Great idea. Hope to try it soon.

  • Anyone who values Bitcoin remaining a permission-less form of value transfer should support the concept of peer-to-peer bitcoin exchanges.

  • freebeer

    how you explain:
    1. decentralization and server (central???) in tor hidden service?
    2. how you will take fees: “Trading fees go to arbitrators and the DAO” if code is open source and everyone can recompile it without fees?

    or its just client open source and server side is closed source and centralized? 🙂

    • Re 1: There is no server. A Tor hidden service is running inside the application.
      Re 2: Trading fees are very low so there is nearly no incentive to scam here. Beside that there is a verification if the trade fee is paid by the other peer in the trade process. Rule violations would lead to a failed trade.

  • John Beamer

    2 of 3 Buyer and Seller can steal Arbiters deposit. If arbiter makes it elsewhere then its not decentralized and that party can take their deposit or just extort.

    This doesnt make any sense. Use 2 of 2 multisig instead and eliminate the stupid arbiters.