EB140 – Manfred Karrer: Bitsquare - The Decentralized Open-Soure Cryptocurrency-Fiat Exchange

Transcript

[Music] this episode of epicenter Bitcoin is brought to you by Jax Jax is the user-friendly wallet that works across all your devices and handles both Bitcoin and ether go to J ax. and embrace the future of cryptocurrency [Music] wallets hi welcome to Center Bitcoin the show which talks about the Technologies projects and startups driving decentralization and the global cryptocurrency Revolution my name is Sebestian and I'm M Roy and I'm Manfred Cara hello Manfred

soell so Manfred is the uh is the founder of bit Square which is a project trying to create a decentralized Fiat to Bitcoin exchange we have a lot of centralized exchanges and have had lot of lots of issues with them and this is one of the serious projects that that is close to implementing The Exchange functionality from Fiat to Bitcoin in a decentralized fashion so we hope you enjoy this episode but before we start let's have an intro from Manfred yeah hello and thanks for inviting me to your show a pleasure to be here uh yeah uh I'm a software developer since 15 years more or less and was working or in a financial institution as well for a few years so I

have seen a little bit the other side as well and uh before was musicians and musician and I get into Bitcoin more or less 2011 and since two and a half year I'm working on bit square and yeah wanted to become active in the Bitcoin space and I thought the lack of a decentralized Fiat exchange where you can exchange Bitcoin to Fiat was for me one of the most important missing links and I tried to find a way how to solve this and I was surprised that it's possible to solve it and that I could go on with this and now it's life and people are using it already and yeah seems that it works excellent so you have users already oh yeah so actually it's already

live on the main net since January and since April we had our uh official beta launch so and I made then a presentation tour in Europe and Israel in 11 cities all in all and people are using it yeah Al we have quite a lot of trade going on and it's still boot stripping of course and a lot to do and a lot of work open but you can use it for many altcoins we have more or less 50 altcoins so it's not only to Fiat it's also Bitcoin to altcoin and all the major altcoins and as well as many other Al coins and basically all field currencies all countries where you are able to make a a transfer in Fiat or a bank or so you can use with bit with bit Square so we are

not limited to certain set of currencies and we we have seen already trades from all over the world from Brazil from Malaysia Philippines wherever many Al for sure more than 20 countries all in all and um yeah because we have very the concept is buil in a way there that we don't have any uh really effort to support another currency or so because as soon as the uh the users can set up their uh bank account in bits Square they can use it so in in the in the Bitcoin space you know there there's a lot of ideology and sort of uh ideal Iz ation of decentralized services and the whole

system being decentralized and of course you know exchanges have always been sort of the uh the point at which you know you need to be an essentialized system uh in order to be able to exchange Fiat to uh to to to any cryptocurrency why did you think that it was important uh given sort of the uh the wealth of exchanges out there and different types of exchange services to build something that was completely decentralized yes I think we have lot of problems with the centralized uh systems I mean one of the most obvious is the security risk and like many of the bitcoiners remember with Mount GX that was a huge incident and it's going on all the time I mean especially in the AL

coin space we see every few months some uh there are some incidents that funds get stolen and exchanges shut down but I think a much more important issue for me is the privacy and I think when we are not able to protect the users's Privacy uh with Bitcoin when they're using Bitcoin that their Bitcoin addresses don't get connected with their real life identity we are not only creating a huge threat for the society uh but we are all also destroying the Bitcoin as a currency because it destroys the fundability when you cannot be sure that the Bitcoin what you are receiving from somebody cannot be uh confiscated someday from some exchanges who are

doing such stuff uh then uh people will not it will not get adoption because people will not have the security that they can use Bitcoin in future and it adds a lot of uh uh costs and friction to the system and we would end up in a in a yeah in a similar way uh system like the Fiat uh where they have put way too much features into the core system and then the core system itself is completely flawed and expensive and slow and I think we have to really work on this to prevent that and that's for me the main Ro motivation behind bit square and uh decentralization is actually just a tool it's not the means by itself it's uh I mean uh when you're building a

system where you really Pro uh protect users privacy you will get at some point at least are in conflict with some countries who are not respecting users privacy and want to apply more and more surveillance about all um um stuff what we are doing especially the financial transaction which are very important data even more important like uh like normal exchange of information and I think to avoid that such a project get easily shut down you need to build it really censorship resistance and to get censorship resistant you need decentralization and this censorship resistance and decentralization need to be applied to all levels not only on the conceptual level how the exchange works

or on the technical level that we are not using servers at peer-to-peer Network it also need to be applied to the organizational structure and I think that's one of the biggest challenges because we don't have many blueprints for solving this and that's one of their next Milestones what we have to implement in pit as well so this is a pretty ambitious project just going into it and sort of conceptually imagining what a decentralized exchange could look like and not to mention the uh the complexities of dealing with Fiat transfers uh over you know the Legacy banking system what made you think that you could solve this problem when you first went into creating big Square I was not expecting that I can S I was

just interested to get it was like a puzzle or like a yeah you have you have here a challenge and uh many people tried to solve it and nobody fault it really there was a lot discussion going on at this time and I just was kind of like Challenge and tried to get so far I I could and there have been a few system out in this time or not a few one especially which was called nashx which were using a a little bit a similar system basically were just U utilizing multis to avoid the astral function and but it was a centralized server based system and so on but that was a big influence that has shown okay on the conceptual side with the tools of

Bitcoin there might be a way to solve it and I think uh when you do an exchange with a random stranger on the internet of course you need security and the classical way how to solve this is to find an escro a trusted third party uh where both Traders are trusting in this uh in this trusted third parties and then he's holding the money and so on and he's uh yeah solving the problem that's traditional way but of course it introduce a lot of problems so yeah he can steal money he can get hacked he get all the data and the governments get all the data from them so you lose privacy and with Bitcoin soosi has proven that it's possible to transfer money in a trustless way without this trusted third

party and I think it's should be also possible to do it in exchange with other currencies and yeah and we have the tools Bitcoin like multisig which Ena that basically and with a few other additional tools uh we could build a system which is at least safe enough it probably you never get a 100% secure system because the Fiat system by itself has its flaws what we cannot solve unfortunately like bank chargebacks but we can deal with that in a way that we are limiting the risk that the risk are at least are not higher like when you're using normal uh bank transfer also in the normal fat world when you are sending fear to somebody else there's also uh risks included and you cannot

escape this those completely so let's walk through an example let's imagine that it's me and Sebastian that want to exchange Bitcoin I I I have the Fiat leg so I might have Euros in my bank account that I want to exchange for Bitcoin and Sebastian has Bitcoins that he would like to exchange for euros and we have the bit Square bit Square software installed on our computers what really goes on behind the scenes what are the steps we need to take to exchange as on the conceptual side we using three different tools for getting the security one is the multis AL we are using two of three multis for

as the escrow part and the other side uh the other part is a security deposit so both Traders need to put up a small security deposit which will end up in the multi as well and that's needed to uh to uh yeah to be sure that both Traders are following the trade protocol it's basically the game theoretical part that you are uh yeah that you give in incentive to both users that they are doing their work what they should do in the process and the third part is the arbitration system a decentralized arbitration system if anything goes wrong if one tries to scam the other or their technical issue or their usability issues then a third party which is the

third key holder in the multis AL the the three keys are held by the two Traders and this arbitrator uh he can step in and they are communicating and he will uh solve the the case at the end and try to find out what was going on and then he will with the winning party do the payout to the winning party and uh but he cannot steal money because he has only one uh key and it's needed two keys to make the payout and usually the arbitrator is not a part of the of the trade at all it's just he's just providing the key for creating the multis but he's not active at all and he does not know actually about the trade uh so when everything go goes fine at the end the two Traders are

doing the payout with their keys and that's it so to make it more practical so when you want to uh you want to buy Bitcoin you have fat and you want to buy Bitcoin and Sebastian want to sell his Bitcoin then um uh either you can uh check out the offer book as it's um there's a decentralized offer book in bit Square where you can see all the buy and the sell offers and you can pick one of the off of those offers or if you don't like the prices of the offers also you can create your own offer and can publish it to the PB Network init Square so let's say you want to create your own offer so you create your offer where say Okay I want to buy uh one Bitcoin or 0

comma five Bitcoin for the current price 600 EUR whatever and this offer get then published to the pp Network and in this offer is only the data included what's needed that somebody else can take the offer and the only identifying data which is kind like a connection to you is your on address so we are using a peer to-peer network over tour and we are using this T hidden Services where you don't have an IP address but you have an on address which is basically similar to a Bitcoin address and you are much more private with with that like uh with normal internet connections where your IP addresses much more connected to your real life identity with the internet provider so the other Trader can can uh contact you then when he's uh

taking your offer he uh contacts you with this on address and he does not know anything more about you he doesn't know uh your bank account data or your name or whatever it just knows uh the way how you want to uh buy Bitcoin maybe you say over saer in Europe it's the most popular payment method and the amount and the yeah U all the the constraints of the trade and then uh Sebastian at the moment and you have not Al the Bitcoin when you creating it this offer you have to reserve the money for the trade in your local application in your bits square application in bits Square you has a full wallet it's a it's

spb wallet you don't need the whole blockchain and you are you have to uh yeah to transfer from an external wallet first the money to your bit Square Wallet and then this money for the trade uh is what's for the trade is reserved in a wallet when you want to buy Bitcoin uh you need also to put in the security deposit which is at the moment 0 comma 01 Bitcoin which is about yeah six Euro that's quite low that might be a little bit higher in the future we will adopt on the situation and that's as I said before uh needed that you are later following the trade protocol but I will go into that detail a little bit later

so you need to uh Reserve this small amount of money in your bit Square Wallet uh so that when somebody's taking your uh your offer that the trade can start and Sebastian when he want to take your offer uh he need to uh yeah to fund also his bit Square Wallet when he's selling you half a Bitcoin then he also need to put up his security deposit and a small trading fee which is at the moment yeah close to the mining fee and and Mining fee also uh so he has to uh deposit to bit Square this 0 comma five and then 01 whatever Bitcoin and then is happening a a handshake between the two

bit Square clients so he is contacting your Onan address and your client is then uh yeah post are creating the multis they're putting in their inputs it they're exchanging also then the bank account data in that process as soon as Sebastian has paid his trading fee then the account data will be exchanged and then the uh multis will be published to the Bitcoin Network and a contract will be also created as all the trade details uh a Chason file will be created and a hash of that will be added to the multi as well so we have a kind of like a triple entry uh system where in the blockchain everybody can prove that the trade contract has that both users had

agreed to the trade contract because otherwise you would not sign the multis and at that point uh the trade has really started and then at this point the money has not left your wallet it just has been locked up in this multi6 so both in the inputs of both users has been transferred to this multis address and it has been uh yeah it's locked up so to get out the money again at least two people need to cooperate and then uh Sebastian or no you get the uh the information okay Sebastian has taken your offer and you need now to wait for at least one blockchain confirmation otherwise Sebastian could double spend

theoretically and after one blockchain confirmation you can start the the Fiat transfer the Euro transfer so uh after this 10 minutes in average uh you go to you get displayed all the bank account data from Sebastian uh when you use another payment method like okay you only have an account number you more priv or when you use an altcoin you only get the altcoin address and then it's basically completely private but of course which banks you need the name you need the account number you need yeah those data what you need to make the bank transfer you get from him and uh then you go then and that's the important part uh we are not dealing with the bank transfer in the system you

go like with local Bitcoin you go off system you go to your banking web page do the transfer and as soon you have done the transfer you confirm it in bit square and the system is sending a message to Sebastian and then Sebastian get the message okay mayor has sent the money and then depending on the payment method okay for instance is instant or perfect money we all supporting those payment methods which are much more modern and better in a way uh so when you use a payment method which is instant or with Alin it's also quite fast depending on the on the blockchain um then uh he can start to com confirm the receipt when he's online in in a few

minutes or so with sa it can take up a few days when you have bad luck often it's just one day or the same day or when you use the same bank or so it's uh in some countries uh instantly also or the same day at least and when yeah he has to go to his banking web page uh check that he has received the money from you there is a reference txt field with a trade ID and he also has to check that it's really coming from from from this name he also get your banking details so he can cross check that no that nobody tried to do some strange scams or so that really money was coming from you and then when he has received the money he confirms Us in bit square and with that moment when he confirms

the pay uh the payment receipt the system is creating the payout transaction so it's again a handshake between the two clients and the uh yeah the payer transactions created with both key of both users and then you received the trade amount the 05 Bitcoin and Sebastian or both users received the security deposit back so the security deposit was just in place that nobody's lazy because at the end when Sebastian has received the money he could be lazy because he has got the money and has sent the Bitcoin he don't need to confirm but to avoid that people are not fair and not continuing uh he's interested to get back his security deposit when he would never confirm it

then it goes to the arbitration system and he will lose his security deposit so he's has the incentive to follow the trade protocol and in the beginning as well when he will take your offer uh you could never go to your banking web which and never start a trade and then he's running out of time as every payment method has a a maximum allowed trade period which depends on the normal speed of the payment method which is usually one day for altcoins and for fast or for in payment method like okp and for sa unfortunately we need to uh use it quite long 8 days because uh when it's a long weekend it can take up to four or five or more days with saer in the worst case

and after this time you can contact the arbitrate and then he will lose time and so he has a lot of disadvantage and to avoid all these problems uh we use the security deposit so when you are not following your duty that you need to make the the fear transfer then you will lose your security deposit and so that should be uh the game theoretical part that the people are because at the end we are we putting the work as the the unfortunately the banks are not able to provide open apis some payment methods like OK and perfect money are able to do this but the big banks with their billions they cannot implement this for whatever reason uh and for that reason we cannot automate the Fiat transfer and

for that we need the human work to do this labor and to uh be sure that the humans are reliable we are using this game theoretical element of the security deposit let's take a short break to talk about Jax Jax is a cryptocurrency wallet designed by the people at D Central maybe you been thinking of buying ether but haven't gotten around to it because he didn't know what wallet to use which one is easy which one is secure Etc well there's an easy way now and that way it's Jack Jax easily and securely stores both Bitcoins and ether not only does it store those currencies you can convert them right in the app so with built-in shapeshift integration you can for instance transfer Bitcoin into the wallet and directly convert it into ether or vice versa and since there's

only one seed it's easy to back up and it's easy to sync Jax has wallets for literally every platform every device for Mac Windows Linux iOS Android or extension wallet for Chrome and Firefox ja is made by the people of the Central and they have a proven track record of Awesomeness in 2013 they created crypto kit that was the very first browser extension Bitcoin wallet at the time and the way to think about Jack is that it's crypto kit on steroids if there was doping controls for cryptocurrency wallets Jax would be illegal highly illegal fortunately they're not and the great thing too about the decentral team is just they keep putting out new

features and new features for Jack and it just keeps getting better and better at a at a disturbing Pace I would like to add so go to ja.io that's jxx doio to download your wallet and you'll understand what it's like to use a Next Generation cryptocurrency wallet we would like to thank Jack for their support of Epic Center so uh let's just walk through kind of the major systems that are uh that are needed for something like pit square because it seems that you are putting together a lot of different Technologies to make this work so in this scenario when I put my offer let's say I am offering €600 for one

Bitcoin I I'm interacting with uh the bit Square decentralized offer book so you have one system to create an offer book and this system works over tour so that's one important subsystem of your application then once Sebastian takes up my offer and our trade starts then you need a game theoretical design which ensures that both and I are going to complete our trade successfully so this game theoretical part is implemented on the Bitcoin blockchain itself through the use of multi- signature addresses right and the third thing is um in case of any disputes between me and Sebastian

you need another system of arbitrators to judge these disputes and uh decide in in the favor of the party that that executed the protocol correctly so the third big system then becomes the AR arbitration system and once you stitch together all of these three systems along with a user interface and a wallet then you get start to get the application that is Bid Square exactly yeah so on the technical level We have basically at this peer-to-peer Network that's a custom peer-to-peer Network developed by myself it's basically similar to the peer to-peer Network used in Bitcoin but it has nothing to it's a different technological Al I'm using chav and not

C++ and uh it's a flood fill or gossip algorithm so you are sending out your data to all your connected nodes and then they are sending out their data again to their connected nodes and when you receive data what you have already stored locally you are not continuing sending out the data because otherwise it would be endless and that's a very robust and very sensorship resistant model that's the reason why Sosi used that and not use the DHD it de uh as a distributed hash table which is also very uh common for distributed uh networks but that has much more uh risks with subil attacks and so on I don't want to get into details and I used it before but I never got it really working

stable in the real Network and that's that was basically the reason the main reason why I used T to get uh the nut troversial problem solved with firewalls and so and that's the biggest challenge with the peer top system that you get over all this uh Network configurations and so on and you don't want the users to be a technician to know how to configure the router so to to be uh be able to use bit Square it should be a oneclick install and people don't need to know anything about this and luckily to has solved this probably best from all peer-to-peer networks because yeah they managed to get even over the firewalls of uh some governments who want to uh hide them and that was the

main motive to use tour but of course then we get all the Privacy for free uh with tour and that was a huge bonus as well because with a DHT you have a privacy issue with the IP address as well and with tour with tour hidden Services uh you have all this benefits and for the people who are not so familiar with tour and just heard about the mainstream media that the criminals and drug dealers are using it it's basically a security and privacy layer it's a technical uh solution for making your internet connections more secure more private and it's fantastic system it's much better like other systems what we using what everybody's using what they're browsing their banking web page

https uh that's much less secure and much less uh censorship resistant like tour and I think yeah it's a fantastic system and there are a few other Alternatives out like ITP as well but anyway uh back to the topic as a tour and this peer-to-peer uh Network that's basically the backbone of and the biggest challenge at the end for a P2P application because there are basically no readymade systems out I tried to use one before like the CHD but it was not really ready for such a system so architecturally uh what seems very interesting to me about your choice is um so a lot of different projects are trying to implement decentralized

exchanges or decentralized systems of different kinds now one of the favorite Methods at least in the ethereum ecosystem has been to have the order book or offer book right on the blockchain itself now you you have explicitly chosen for the offer book to be off blockchain so this is like a big contrast with all of the other projects now the second thing is if you look at other decentralized projects um many of them are gravitating towards ipfs or implementing their own DHD like um open Bazar is implementing its own distributed hash table now what seems very special about bit square is you're rejecting both of these Solutions and you are coming up and you are saying

that a flood field Network just the one that Bitcoin uses is the best to implement an order book um can you explain why and what other uses can this flood field Network be put to uh maybe I answer first the second part I was actually looking into ipfs and I think it's very interesting project and also into Bor and or other existing Solutions and I wanted it was a big challenge for me to start with a new PTP Network because it's really difficult and a lot of work and it took me a few months and it was not my goal to implement my own custom P2P Network it was just a need because all the other systems were not really tailored for my needs I mean ipfs yeah it has this

arching system where you can store data forever that's absolutely not needed the opposite I don't want that offers which are already taken are stored forever they there's no need for it if people want to do it they can do it offline off yeah off system but the system don't need this at all it's very temporary data and privacy protection is one of the main goals and uh with bit toring for instance it's about big files and distributing the files and so it's it's Al and persistent storage as well I have a lot of uh use cases where I need to exchange data between the peers directly without storing anything and when I store data I need also I need protection

for the data owner so when you are creating your office uh it's protected by cryptography with uh signatures and with encryptions on that you are the only one who can remove the offer nobody else can manipulate or can change your offer and so on and you yeah there's and those I have not found a system which has offered all these features what I really needed so I built exactly a system system tailored to my needs and not more I should not I didn't have the time and resources to build a general purpose system for other which might be interesting for other people as well maybe it's interesting for other people and I already created a sub a library where people can reuse it if they want

but uh I just implemented what I need when people need other features they have to addit and um yeah and the other reason why I don't store it in the blockchain is uh for me that would be a use abuse of the storage uh capacity of the blockchain it would be very expensive and for me the blockchain the only reason where I need the blockchain and for only generally uh the only reason where uh the blockchain makes sense is to have protection against double spand only when you have to solve the double spand uh problem you need a blockchain and to have a sensorship resistance and uh yeah like for hashing data and storing important data

into blockchain as as a hash to prove that you had the data and so on to prove history that in important use case and for money system like Bitcoin or domain name system like namecoin to be sure that some data exists or are only transferred once and not double spent that's another important uh use case but I think many people are for instance ethereum they get everything from ethereum the p network and all this and they're trying to abuse the system for stuff that's not really needed you can do it often and it's much cheaper and much more efficient it's just the problem for most people that the solutions are not out there so I mean

with ipfs we getting closer to more systems but it's still I think not yeah I think still at the moment when you try to build a a peer-to-peer application probably you will not find a system which is really optimal fit to your purpose and you have you need a lot of work to get there and then people are looking for readymade stuff or try to put it on etherum or whatever but I think that's a very wrong and will not scale and will become too expensive and it's a abuse of the idea it's not my opinion at least okay uh in the white paper you talk about some of the limitations of bit Square currently like in its current form and I obviously this is a project that just came out of beta and that you know is still evolving and

as you mentioned before the show you know there are a lot of things that will change in the in the coming months and years can you talk about some of the major limitations of uh of bit Square as it stands now and and how you plan to address those yeah from a users perspective and what many users or some are complaining about is the trade limitation so when you're making an offer for Sapa for instance it's at the moment 0a 75 Bitcoin the limitation for one offer but that doesn't mean that you cannot trade hundreds of Bitcoin the same day with different users so you can create hundreds of offers or take hundreds of offers there's no limitation at all but in one offer there's a limitation and that's basically because

in the field system you never have a 100% security against bank chargeback so when you do the exchange and then one day later uh the cender of the field make a bank charge back then the other lose his Bitcoin and usually that doesn't happen easily and often because it's not easy to make a charge back and your bank makes a lot of problems when you try to do this often but it happens in criminal activities like with stolen bank accounts so when somebody wouldn't this be wouldn't the aeration process take care of this uh no because the Bitcoin is already released at that moment and then the sender of the field uh yeah when he will give back the money he's not obligated usually to do this but when he don't do it he get more

troubles with the police and so then they try they they ask maybe you connected with the with the criminal and so on and the main protection is the amount of the trade because when those criminals especially with stolen bank accounts they want to cash out all the money there because with every transaction they have the risk that it get discovered and then the account get closed and they cannot cash out more so and I that's Al so backed up by some real life experience from professional local Bitcoin traders who have done thousands of Trades and they got scammed one of this guy he made 5,000 saer trades in he got scammed three times and at least two times it was with very high amounts 5,000 EUR so those are looking for trades where they can cash out all

in one and they should not be very interested in Bitcoin in bit Square where they need to make 10 trades and it takes more time for them and they're risking more that it get discovers and then the other yeah will not continue anymore so that's the M that's the main point why we are reduce why we are limiting that and the other thing is that uh with all the know your customer rules and so it's usually does not apply to very small amounts so usually you can deal with a few hundred EUR or less than two at least less than 2,000 Euro uh is is out of this regulatory stuff and that's another secondary Advantage at least when we keep the trade limits low

we have less pressure from that side but that's not the main reason because bits is designed to um to yeah to avoid this pressure also in future when it becomes relevant and but it's a for the moment also help to that um that we're not getting in conflict with that another another uh what are other limitations are it's not really suited for day Traders and speculators so when you want to make hundreds of Trades and very quickly and want to make a small Arbitrage of a few Cent with trading pots and so uh bit square is more like local Bitcoin or like shape shift it's a little bit a manual and slow process uh you cannot uh and also on your bank

account when you don't when you're not the professional Trader when you make 100,000 volume in trades then probably the bank raise the flag so probably starts already with 10,000 EUR it's more designed for people who really want to hold the Bitcoin who are not mainly speculators and for those in future probably we will offer another system a kind like a decentralized cfd so uh that's basically where you're betting on price movements because the speculate speculators are not really interested in holding Fiat money or Bitcoin they are just interesting to make profit from Price movements so uh those systems like contract for difference or spread

betting is much more ideal for such type of uh people and it's Pro probably possible to implement such a system in bit bit square and that's planned for for the future but we have too much other stuff on the road map first and yeah what's another limitation uh I mean the current arbitration system uh as we have uh plan this decent arbitration system and that's quite a lot of effort and it's not implemented yet because it was not absolutely needed for using bit square and I didn't want to wait another half a year to to get it out so we decided to launch bit Square also with uh without this decentralized arbitration system so I'm at the moment

the only arbitrator and maybe there are later a few other people who I have a natural trust relationship and I know I I know that they are not scamming and that's enough for solving the disputes and solving the problems the complexity in the decentralized arbitration system is to make it really secure when any random stranger from the internet uh want to become an arbitrator I need to be sure that he is not colluding with one of the trade and try to scam the other Trader and to make this secure it's a little bit a complex system let's talk sorry to cut you off there but let's talk about what an ideal arbitration system would look like then so at at the moment we're using you're using human arbitrators I I didn't know

that you were the only arbitrator but um in the future you mentioned before the show that the ideal system would be a decentralized one where uh we didn't have to rely on on on this human aspect how do you plan how do you see that as a as a system to be implemented and and what is the road map there when you think that this would be released in maybe I give a little bit of an overview how it works in the system Al the arbitration system it's another subsystem in the application uh it's basically like a customer care system so when you have a problem when the software detects that there is a problem from software box or whatever then you get displayed a button open a dispute or a support ticket or after the trade period is expired or you

can you get also this button displayed for opening a dispute and then you are connected the arbitrator also we tour and all encrypted and so on and then there is a chat system built in in the in in bitsquare system uh where uh under the support section where you basically have a chat like looks like uh whatsa or something like if you have both sides and you see the messages you even can send date and then uh you communicating with the arbitrator you never communicate with the other Trader directly and that's with uh some reasons that because it could open up a lot of social engineering attacks and so on so we are avoiding that the Traders get direct contact when there are problems

then there is this kind of customer care agent who helps you to solve the problem and he then contacts yeah he's in contact them with both Traders the other Trader get also the message that there in dispute open and the arbitrator contacts him and ask what was going on and uh until yet there was Zero attempts of scam it was only software problems FX or ability problems that people yeah make some mistakes with the transfer or whatever and and people were very helpful yeah nobody tried to scam the other so it was very easy it was really customer care work until yet it was not really a dispute resolution but in future of course when it gets bigger someday the scammers will come and try

to cheat the system and then the arbitrator need to find out uh who who is uh yeah who has done the right stuff and who was the scammer so for instance in when you both have done the trade and maybe Sebastian never received the money and maybe you have been a scammer and never sent the money but you you sent a message and so on and then uh yeah the arbitrator asked them both okay you say you have sent the money he said he doesn't receive the money so there is some conflict either the bank has a problem that's also very probable problem but if not then uh some of the users has done either a mistake or tried to scan the other then we will request um a cryptographic proof of your side

and that can happen in two ways that can happen either that you are asking your bank for a digital sign statement that for instance in meite that he has started and has done the transfer to Sebastian and on Sebastian's side just a statement about this time period that he has not received uh this fun so history of the last week or whatever and this uh sign statement from the bank the arbitrator can then verify but unfortunately the bank are super slow they're not offering this that would be a very easy tool what every Bank could offer by default to get this statement cryptographically signed and everybody could uh work much easier with banks but of course they are living back in the

80s and they are still not delivering this so I don't count too much on this but the people can use this if they want to use it and another very interesting project where we don't have time to get deep into it but um just want to mention it quickly an alternative for that is a TLS notary or page Diner that's a Firefox plugin what you install and with that you get a cryptographic proof of any https web page that this page is not temper tempered so you can go to your mayor for inst and can go to his banking web page where he can see his trans uh uh outgoing transfer he can filter the history that only this transaction is visible and then make such a

cryptographic screenshot of this page it's not a screenshot it's not a graphic screenshot it's a complex uh actually we we we've had Adam Gibson on the show before to to explain T notary so yeah yeah he was actually one of the first contributors to bit square and found a very important flow in the very first concept where we wanted to build it without arbitration with a two of two multis and he uh yeah he he was he who discovered the flaw and then I had to change the so very helpful to both also Dani the other guy and yeah back um that's a fantastic system because with that you get a cryptographic proof of any hgbs web page without the

involvement of the bank or of the provider of the web page and the arbitrator can then verify uh this and he cannot temper it so when when I get the me this proof then I'm sure Maya has done the transaction when he has not done the transaction he cannot deliver this proof and then on the other side we see the same so um on the receiver side it's a little bit more complex because of course you uh when you want to prove that you have not received you have to include a certain uh time span or make the search filter with the transaction ID or whatever so you can also prove then your side and then the arbitrator knows what's the when one was the scammer yeah he Cann approve this and

when one is uh maybe what uh the people don't want use it because they don't understand the system it's too sketchy for them to have such a a system installed when Miha is rejecting it for instance but you are proving this and I see okay you have not received the money then may is losing because uh everything What's following up cannot be 100% uh secure or uh secure evidence so when one is proving this then the other has one already when the other is delivering the evidence and that's already a lot of pressure for this scammer because the scammer don't know if the other will prove it so most of the scammers probably will don't even try it because they know they cannot prove it and then

the other will prove it and they are the Los already when both are not delivering this or cannot deliver it I mean unfortunate this only works with more or less 70% of the web pages so it might be a technical reason why they can proove it as well and then we go to the next level and that would be first an uh I ID check so we try the arbitrator uh require real life identification with passport and or whatever they want to to give when he say no real life I don't want to give but my Facebook account you have can have and then it depends what the other uh deliver when he has much stronger proof he has a much better card at the end and the next level would be that you make a more classical way that

you make a Skype chat and you force him to navigate to your banking web page and show you this and then it it's never 100% secure because you could you're technically very good you could cheat this and so on but I mean the summarizing of everything and the impression also for the arbitrators for the arbitrator it's probably good enough for the huge majority of cases to get a a good solution and even if it fails and arbitrator make a wrong decision in one case it's not the end of the world it's more or less at the moment maximum two Bitcoin when it would be with alquin we have a high limit with Fiat it's 0 75 Bitcoin actually with Fiat there is zero

risk because with Fiat with altcoins there is zero risk because uh the arbitrator can go to the blockchain and see it publicly in the blockchain so nobody can cheat and um yeah that's basically how the system works from uh the user perspective and uh to make yeah to make it really secure this a completely open and decentralized arbitration system uh is planned that that everybody can become an arbitrator and they are basically also Anonymous there so there is no reputation and so on uh but they have to lock up quite the high amount of Bitcoin in a multis so they have to lock up maybe something like five or 10 Bitcoin and it's lock up in a multi of the arbitrators with the

highest reputation reputation means in that sense they those are those arbitrator who are connected with the project maybe me and a few team members where I know we are not scammers because when we are scamming we are destroying our project so the incentives alive align that we are not trying to earn money by stealing a Bitcoin from another and destroy the whole project I mean that would be completely and uh so we are the keyh holders or are the arbitrator who have locked up more money they can maybe uh uh decide themselves how much money they want to lock up but the more money the higher their reputation is and uh yeah and when they are colluding for instance when an arbitrator tried to collude

yeah with one of the Traders and then uh scam the other Trader then the other Trader can request the second round then he will request the bit Square team hey have a look this arbitrator is a scammer I have done everything correctly and then somebody of yeah of this High reputation arbitrators will investigate the case again and when he finds out that he was either colluding or working completely below the quality requirements that for instance here has accepted a Photoshop screenshot which can easily be faked which is not allowed us we have then a clear guidance for the arbitrators and also for the users how is the procedure and what are the requirements and uh yeah when we find out that this arbitrator has violated

the rules he will lose his security deposit depending on the on the severity of his of his um um case he will lose all or just a part and that get confiscated and we get probably a donation for the project or whatever there are also this project is still in the I mean there is some more or less clear ideas but as we have not implemented and I get at the moment a lot of experience uh that experience will flow into the real project and when we start to work on this uh it might change and there are a few uh open complexities because for instance when you have locked up five Bitcoin and then you do

20 you as an arbitrator are used with 20 other trades and at nearly the same time you try to collude with all this and scam then then you can create the damage of 20 Bitcoin but you have only locked up five Bitcoin so to deal with all this complexities that's a little bit of a challenge and there are not 100% Clear Solutions yet but um yeah we still have time we have many other stuff which is more important at the moment for the users because for the users at the moment uh the fact that it should be really decentralized is again for the censorship assistant that become only relevant when bit square is really big and we get political pressure whatever and that's not in case yet luckily and probably will not be the case in half a

year so that's maybe in two years and until this time we have a little bit of space to also yeah use this not perfectly decentralized system but which secures the uh the system at the moment for the users at the end it's only important that uh they have a secure solution and and yeah that's the case at the moment because I'm the only arbitrator and I I think it's clear to everybody that I will not scam anybody today's magic word is offer o FF e r head over to let's talk bitcoin.com to sign in enter the magic word and claim your part of the listener [Music]

reward yeah I mean it it seems to me that the AR arbitration system is actually a point of monetization for your project right because the arbitrators are kind of delivering a service and in theory you could have an organization of arbitrators that deliver this service and make a living out of it so are you thinking of raising some Project funding or creating an organization around this idea yeah it was actually planned that the arbitrators earn money by uh by their dispute so when when they're doing a dispute and one has lost lost then the security deposit will go to the arbitrator as payment for his service but I'm moving a little bit away from this idea for various reasons one is

that it creates a little bit of a negative incentives the arbitrator should be really a customer care agent who try to satisfy both because and I think most of the cases will not be scamed it will be uh technical problems or usability problems and then he don't take the the deposit because nobody want to hurt the system or so they just make a mistake or maybe was a mistake in the software so he don't earn anything basically and at the moment the trading fee Al the the business model is basically the trading fees so they at the moment the trading fees are super low uh but later it will be adopted to the market situation and uh the trading fee are basically the revenue for the project and at the moment the arbitrator

receives the trading fee but it's as I said it's near nothing it's by far not enough money for the effort what I have what the what I'm spending and I think it also will not align really because when you really some cases will take you hours even and to get a a a normal payment in Europe when you work a few hours it would be 100 EUR so and we never can uh use such a high security deposit or trading field whatever to to make this work so I think it does not work very well probably we will add the arbitrators Al I don't want to maybe to change the topic too much but we plan kind like a decentralized auton autonomous organization but we don't want to call this Dow anymore because of

all what happened and so on and it's basically very the opposite of that what uh the da was standing for I call it a synergetic cooperation and that means that all people who are working for the project who are providing any value for the project will become owner of the project and they are the stakeholder and the shareholder and the arbitrator are very important roles in this project so they become they they uh yeah they receive shares on on the number of cases or whatever details are not fleshed out but that's probably the model what I will Implement in future so this synergistic corporation like how does they how does the corporation make money in the end because I mean if I if I get

tokens so let's say I'm an arbitrator and I in in exchange for doing arbit arbitration I get shares or tokens inside the synergy ltic Corporation those tokens will have value only when the corporation makes money of some form yeah ex what would what would be the model there the trading fees are get paid like dividends to all the stakeholders and depending on your percentage when you have 1% of the project you receive over time 1% of all the trading fees so that's the revenue and the business model and how to implement this is uh we yeah the tokens will be repr presented in the uh Bitcoin blockchain as a kind of a color coin but different more simple because again I

just want to implement what I exactly need for my project and not more it's not the general purpose solution it's only what I need and it works basically like this that when you for instance are working for the project and you have done some whatever programming and then maybe you tell me before you you want €11,000 or 5,000 for this or later we agree to that and then you will receive shares which represented the same amount in Euro and we take the late uh the market price the average market price from the last months and then we convert it to the number of shares and then for instance you get U yeah 100 shares for that and one share is represented as a value of for instance thousand satosi so

I make a payment a Bitcoin uh transaction with thousand satosi multiplied by the number of shares let's say 10 shares you get so you get 10,000 satosi and I make a transaction from my origin address which will be a multi6 so the bit square board or the team members will sign this and we will uh issue money we are printing money basically we are creating a new share and sending this share to you so uh and then there is in the oper return a second address from you where uh a Bitcoin address which will be used as the dividend address where you will receive the trading fees in future so we have basically a model model where we are

representing the tokens in the Bitcoin blockchain and additionally the dividend address for receiving the the yeah the trading fees and all is locked up in one transaction and when you can also then trade the shares over bit square and you can sell the shares to somebody else so the handling of the shares will be all integrated in bit Square so you don't need to do anything manually of course and uh when you're selling your share for from this 10,000 shares you're selling maybe 3,000 to somebody else then 7,000 go back to your own address and then in the multi in the in the op return there are two addresses one from the new owner of the 3,000 shares and the second from the owner of the 7,000 shares so we are representing all that

in the blockchain the Bitcoin blockchain alone that has the advantage that we are not dependent to another altcoin or other system and so on or a company and it's very simple to implement basically and the users every node every bit user are uh requesting all the outgoing transaction from this origin address and all the followup so it's a tree of transaction until it finds the last unspent transaction output and that's the actual shareholder because when you have uh sold your share the first transaction is not W it anymore so does this mean that you would have to parse the entire blockchain if you're reading from opper turn no uh because we only need those uh uh

transaction transactions which are origin ating from this origin address right okay and that follow the transactions from there okay that's maybe at the beginning hundreds or thousands but that will not be millions of transactions and even when it becomes that people are trading like hell and we are getting to scaling issues then there's a lot of optimization headro for pruning and for putting snapshots into the code so you don't need to load all the old transaction which already buried in the blockchain and so on so I think it's not that it would not probably work for a general purpose uh color coin solution because then you need to support hundreds or thousands of different color coins and then it's probably cheaper to get the whole

blockchain but for our solution it works and it helps us to yeah to implement everything uh directly in the application so the users have then a a few of all the shareholders so maybe there are a thousand shareholders and uh it sees then the amount of the share of every Shar and so it gets the mapping and then the trading fee will be decided by basically by random but in a way that the other user can verify it so it's using his on and address and the trade ID or a data what you cannot change and then make a selection to one of the shareholder and the higher your amount when you have 10% share you have a probability of 10% that you are the receiver of the trading fee and with

that we have a stream of micr payments from the users directly to the shareholders so bit square is never holding the dividends over there whatever it goes directly to the shareholders and also when somebody managed to hack your client or whatever and then he only can steal that amount from one user from one Trader he need to hack the whole system and the software of all the traders that you really can steal more money and even then we can make a new version and block this and whatever okay so I think it's very secure and very avoids a lot of avoids avoids a lot of all those risks with collecting too much money so we don't have 150 Millions where some can uh steal and we we try also to avoid a lot of this issues with icos that that

people who are Layman who don't have any clue about the projects get tricked into buying that with a lot of marketing and then are yeah and then they are upset because they found out they got cam in a way and we are only giving out the shares to participants to people who are working for the projects and by definition those are experts otherwise their participation test that's a very big difference from uh some of the other projects that we've discussed on this show in the past yeah so to before we wrap things up here uh let's bring it back to to bit Square um you mentioned earlier that the project came out of beta can you tell us about the road map uh and are there any plans to turn this into some sort of a like company that

maintains this open source software with some sort of business model or do you think this is something that will remain open source um over the long term yeah so there as a road map is my next now big task is as the next day is probably when the show is live hopefully the new release already out with a lot of new features and probably we also root and Bitcoin J and maybe all traffic over tour because at the moment the Bitcoin J traffic is not rooted over tour and also there are some other connections like the price feeds which is not really privacy relevant but we would like to get to at 100% to our coverage probably we can make it to get this in the next release as well but then the next big step is this uh synergetic cooperation because that's needed for scale up the

project I'm currently working basically still alone not alone I mean there are a few contributors and it's getting more and more luckily but probably still 90% of the work is on my side and it does not scale up I mean I need more contributors and most people cannot afford it or are not motivated enough to work for such a project in a full-time way or really with more hours like a little bit for a bounty and so this uh this and that's basically the business model and the yeah instead of a corporation we will never create a company for bit Square itself maybe I create a company for myself as a software developer to have better protection from from the legal system

that I have to figure out but that's just me as a person it's not bit Square itself so bit Square stays open source and will be represented by this synergetic Corporation and everybody who uh yeah who want to contribute becomes shareholder and they can sell the shares and other people who don't have the time to time or skills they can buy and the shares on the market so it's basically then like investors and there will be Market Force will decide what's the value of the share and the price and the value of the project so people who are contributing can indirectly earn money as they're selling their shares on the market and then get the Euro or Bitcoin first and then so where can people Lear more about bit Square where where where

would you send people off uh to learn more or perhaps contribute to the project yeah uh just go to bits square. as our main web page there you find a lot of information like the white paper video and all kind of uh levels a very high level introduction and done a lot of detail videos also about the trade process and arbitration system and all kind and then we have a forum which is already quite active or so when you have any question or want to contribute help to contribute pass by to The Forum we have a lot of other Communication channel like ISC or on Twitter of course and yeah all the usual stuff so just pass by at bits square. and you will

find your way to get in touch with that okay and we'll have links to all the and the white paper and everything in the show notes yeah well my friend thanks very much for coming on it was interesting discussion about a topic which uh I think I mean we've talked a lot about decentralized systems but decentralized exchanges is not something that uh We've cover very much and so uh good luck with the project yes thanks a lot and was a pleasure to be on your show well thank you and thanks to our listeners for tuning in uh we release new episodes of eper Bitcoin every Monday recently you may have noticed that we've been releasing on Tuesday that's because we've had a few organizational changes in the company and uh and uh and often times sometimes it's just scheduling and it's hard to get them out uh all the time on Monday

so uh hopefully we can get better at that and we can keep get keep getting them out on on Mondays but uh if if they're on your podcast feed on Monday just you know wait a couple more hours and we'll have that on Tuesday usually that's about the latest that they do come out uh you can find us on on the LTB Network we at letop bitcoin.com where you can also find other great shows about Bitcoin blockchains decentralized Technologies ethereum and all that stuff uh of course you can leave us a review on iTunes and if you do so you send us an email at show upcenter bitcoin.com and we will send you a free t-shirt and also uh if you would like you can send us a tip and the Tipping address will be in the show description so thanks so much and look

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