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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