Thursday, 15 August 2013

How likely is a decentralised exchange for bitcoin?

There is no doubt that for some, bitcoin is more than just a currency, or a commodity, it is an ideology. Its fundamental characteristics of being decentralised and open-source, and its disruptive nature, appeal to the libertarians out there.
Yet, when it comes to exchanging bitcoins, the majority still have to go through a third party; one of the exchanges, or a broker, who all take their cut. Even the partly-decentralised exchange platform of local bitcoins still requires users to go through a company-owned website, so for some bitcoiners, and not just the purists, a fully decentralised exchange cannot come soon enough.

It is a topic, which will be discussed in a panel at next month’s European Bitcoin Conference taking place in Amsterdam. One of the panel members is Mike Hearn, software developer for Google and one of the brains behind much of the bitcoin technology for Android. When we interviewed him, we touched on his first introduction to bitcoin and his dealings with Satoshi (see our earlier post) during the very early days of the currency, but soon moved on to his thoughts about decentralised exchange.

The problem is that centralised exchanges are financial institutions, which have to interface with the banking system, the one system bitcoin tries to remove. However, “they’re not going anywhere,” Hearn says, stating that, “if you want to move large sums of money they are the best way to do that.”
A direct, peer-to-peer exchange system sounds good in theory but in practise, Hearn believes there are limitations, and it comes down to trust. “It becomes very difficult to do this swap in an entirely fraud-free way,” Hearn says. “Someone always has to go first, and whoever goes first risks losing out... You can’t swap money for bitcoins atomically.”

Hearn explored some way of instigating a decentralised exchange system using social networks at the London bitcoin conference last year.

However, he says not too much has developed since then because “the centralised exchanges are working.” Despite the banking system being “slow and expensive” he says, “It is hard to get around that as your money starts off in the banking system.”

In a bitcoin utopia, the main exchanges might be redundant but Hearn thinks that is a long way off becoming the reality. “It is not clear the decentralised exchange concept is going to work very well so for now I don’t see them going anywhere.” He refers to the fact that even if a person were to try to trade through a social network via the internet, every movement peer to peer, would go through the banking system with the banks taking a small fee. He also raises the risks of taking part in a decentralised exchange system. “The assumption is that banks won’t figure out what you’re doing, and why you’re suddenly sending and receiving wire transfers. What we’ve seen is people getting their bank accounts terminated because banks view them as a money transmitter and abusing the banking system.”

Of course, some people circumvent some of these problems by meeting up face to face to trade small amounts of cash but the issue is how to scale that up. “A decentralised exchange would marry the best of both worlds,” Hearn explains. “You could have the scale of a standard exchange but with the decentralisation of in-person trading.”

One UK company has announced its plans to create a decentralised exchange for fiat and crypto-currencies. Metalair is looking for investors and donors for what it claims will be a “double-spending proof, fully decentralised exchange mechanism” for its open-source software. It is also hoping to promote the adoption of all cryptocurrencies by providing an exchange for bitcoin and litecoin as well.

Despite Hearn believing the future of bitcoin is bright, he is not quite as enthusiastic about that of other alternative crypto-currencies. When asked about such digital currencies as Litecoin and Feathercoin, he seemed sceptical. “Most alt coins haven’t introduced any compelling technical changes and I don’t see any reason why they’d be competitive in the long-term,” he says.

Mike will be speaking at the European Bitcoin Convention, which takes place from September 26th – 28th

By Louise @ Bitscan

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