Bitshares, or ‘The Developers Must be Crazy!’

By: David Marc
Updated: May 20, 2018


It should be mentioned right at the start that researching BitShares can be likened to running blindfolded through a maze. It is a convoluted labyrinth of broken links, disbanded companies, stutter steps and strategic pivots, and half-cooked businesses that may or may not still be relevant. Founder Daniel Larimer has such massive ambitions for BitShares, the net has been so widely cast, that it has become very difficult to understand the core business. This is not to say that there is not potential in BitShares, and that it could not serve to advance the cryptocurrency market. I really have no idea whether this thing is absolutely genius or just smoke and mirrors. What I do know is that there is a massive communications gap and no truly effective spokesperson has emerged able to break down an extremely complex business into something the wider market can digest. This inability to deliver a straight and simple message will absolutely discourage adoption.

Mr. Larimer is an extremely bright developer who has made fantastic contributions to the crypto market, and he is deserving of respect. However, he has been a bit of disaster on the PR front. He has the tendency to belittle others in a manner that is tone deaf at best, petty and mean-spirited at worst. He makes snickering remarks about bitcoin, as if it is just a matter of time before bitshares leaves it in the dustbin of history. He was quick to tell JR Willet how and why Mastercoin would not work..and that he “should have saved himself the time”. There are numerous other examples. As representative of bitshares, Mr. Larimer must insure he is projecting a good image to the wider cryptocurrency market.

Interested in buying bitshares?  You can filter for the exchanges offering it on the exchange comparison page.


BitShares is a software powering businesses called DACs, or decentralized autonomous companies. DACs are unmanned companies run by computer programs that exist solely to execute a business plan codified at launch. BitShares allows third parties to use its network to launch these DACs for free and also is said to be working on a number of DACs itself. Company tokens can be created through the BitShares software, and offered for sale through the BitShares exchange. These tokens offer companies a crowdfunding mechanism through a type of public coin IPO, as well as a turn-key crypto-coin economy for the buying and selling of the DAC product.

A lofty vision, the brainchild of father and son team Stan and Daniel Larimer, the latter who is CEO (now in all but name) of BitShares. And it will take a massive vision for any bitcoin alternative to have a chance at carving out a sustainable market in the cryptocurrency space. However, there have been many missteps, and BitShares has been slow to deliver products to market. And the products delivered to market so far are not without their problems. It is difficult to avoid the conclusion that 2015 is the make or break year for BitShares. Will they deliver on their promises and potential, or will they be left behind by other projects like Ethereum, Counterparty, or Sidechain development?

Launch methodology

The ProtoShares coin (PTS) was released in February 2013, a full year prior to the tentative launch date of BitShares. It allowed enthusiasts to get a piece of the impending BitShares launch – a sort of crypto IPO – at the same time serving to expand the network and community. The coin launch was a great hype builder and helped contribute to greater “network effect”, or a ready-made market of bitshare enthusiasts for future DACs. PTS holders would be eligible for the first 10% of Bitshares, split according to percentage of ProtoShares held, and 10% of subsequent DACs launched.

There were a few issues with the PTS launch which, while not born of malice, did point to inexperience and mismanagement. First, mining was announced on bitcointalk only an hour prior to the official launch time, which is not best practice. Additionally, it came to light that, apparently due to an insider starting to mine ahead of time, Mr. Larimer himself began mining early. Taken together, this led to a feeling – not without some merit – that ProtoShares was attempting a sneaky “soft” premine, in which insiders, in this case community members and the inner circle, were given a head start to grab coins with minimal competition.

A second issue was mining difficulty misalignment. The ProtoShare’s coin supply was meant to be introduced over a two year period, with blocks mined at five minute intervals. Due to a coding error, over a quarter of the total coins were released in five days, with block intervals coming at 15 seconds. Whether this benefitted big outside miners, as The Larimers have contended, or BitShares insiders is a matter of debate. However, the Larimers do not seem to have benefitted, and apparently had to buy rather than mine most of their ProtoShares. Either way, Daniel Larimer was forced to introduce a “fork” in the blockchain, which represented a large increase in mining difficulty. He again released this information at the last moment, which caused further frustration. There were many miners, both inside and outside the BitShares community, that were left out of pocket for expensive mining equipment that had not been delivered in time, and that when finally unpacked would not prove up to the task of mining at the new difficulty rates.

As a result of the shaky PTS launch, Mr. Larimer announced “Angelshares” (AGS), which was the same concept as PTS, but instead of mining, anyone could simply buy shares. AGS holders would be eligible for 10% of future BitShares and subsequent DACs launched, and offered the network additional liquidity as well as a larger community base.

This represented a novel approach to share distribution. Initial investors, whether through mining or angel investment, were granted 20% in the platform, and all subsequent companies created upon it. A snapshot was taken on February 28th 2014 of Angelshare and Protoshare holders, who would be compensated with a corresponding amount of BitShares (BTS) on the new exchange platform. And when the BitShares platform eventually launched in August of 2014, it came with a built in network effect by virtue of the ProtoShares and AngelShares schemes.

Delegated Proof of Stake mining

The platform utilizes a solution known as Delegated Proof of Stake (DPoS) which means to adjust what the Larimers view as a large flaw in bitcoin mining technology, namely the wastefulness of proof of work based on computational power, and an uncontrolled creep towards centralization. Bitshares views this centralization as an inevitability, and maintains it should be embraced and leveraged rather than fought.

Delegated Proof of Stake (DPS) is a decentralized method of hiring and firing 101 delegates responsible for signing the transactions on the community’s behalf. Delegates earn their reputation based on mining performing, value added to the community, and other measurements, and hold their offices based on a democratic vote of all Bitshare holders. There is quite a competition to claim one of the 101 delegate spots, not only due to the fee compensation but also for the respect earned within the community. Some delegates are elected based on their level of prestige and commitment to bitshares, while others campaign on promises to “burn” a high percentage of their transaction fees, either to be redistributed as interest to shareholders, or to boost the network in one way or another.

Follow-through on campaign promises and faithful execution of mining duties bolster a delegate’s reputation score, while reneging on promises or failing to adequately perform duties has the opposite effect. Should a delegate be inclined to do something harmful to the network – sign a bad block, not show up or some other dereliction of duty – the autonomous system can “fire” the delegate.

Outside of the unique method of transaction signing the bitshares blockchain looks similar to bitcoins. The system, while theoretically secure, eliminates the massive waste inherent in proof of work, manages what is seen as inevitable centralization in a democratic fashion, and reduces greatly the speed of transactions – to a lightening fast 10 seconds.

Decentralized Autonomous Companies (DAC)

As described in the introduction, bitshares raison d’etre is the support and development of DACs, companies run autonomously by a software program. The software exists to execute the business plan and distribute investor dividends. The method for doing both is codified at launch, and the program executes the plan using the bitshares blockchain. In a perfect DAC, no human intervention is ever needed. Not only does this ensure the incorruptibility of the operation, it all but eliminates resource costs, raising the bottom line accordingly.

There are numerous types of businesses that could be run autonomously by computer program, but for simplicity’s sake, we’ll focus on a very simple example – bingo. In a bingo DAC, which is meant to be launched from the BitShares team at some point in 2015, the software program generates and distributes cards to purchasers, displays the numbers called which are determined by a predefined random-number-generating algorithm, and distributes the pool to the bingo winners, the fees to investors. In this example, it is quite easy to see how the program can run without need for any human intervention, simply enacting its codified purpose, generating revenue for investors simultaneously.

The first DAC established on the BitShares network was called BitShares X, and is described below.


In July of 2014, BitShares announced that its Hong Kong-based partner DACs Unlimited launched the first fully-functional DAC on the bitshares software, called BitShares X (BTSX). Thankfully, bitshares X has been rebranded as bitshares, and is now the exchange servicing the entire network. The bitshares exchange offers a number of user issued coins unrelated to financial markets, and a series of different derivative instruments known as bitassets.

Bitassets are bitshares derivatives with value pegged to a real world currency or commodity. Currently there are over 20 bitassets available, including bitUSD, bitEUR, bitGLD, bitWTI (Oil) and bitBTC. Holders of bitassets are paid interest, which is derived from general trading fees.

Bitassets might be thought of as modified futures contracts. A seller guarantees that he will pay the buyer the difference between the current and future value of the pegged asset should it appreciate against BTS. Using bitUSD as an example, the short seller takes on the obligation of buying back the same quantity of the underlying asset – In this case, the US dollar – in the market for its future price expressed in BTS. If BTS falls against the underlying asset, then the seller compensates the holder for the difference; in the case it appreciates, the short seller can buy back the dollar for less, enjoying the difference as profit. The short seller must “insure” his position by maintaining 300% of the position in his exchange account, and a margin call will be forcibly executed should the holdings be reduced to 200% or less.

This is the first (of many) problematic issues with bitassets. Traditional futures and margin trading offer leverages as high as 5-10 times, with margin calls as low as 10%. This means traders can hold positions much larger than their actual equity, thus allowing speculative investments with upside much greater than the actual investment. Bitassets offers speculators very poor upside against holdings, coupled with the risk of covering downside up to 300% of the position (should the margin call not be executed properly due to lack of liquidity in a falling market).

On the bitUSD holder side, the only guarantee that the position will stay pegged to a dollar is the massive collateralization of the down side – by holders of BTS. What isn’t guaranteed is that a user will find someone willing to pay a dollar for his bitshare, either due to market forces or lack of liquidity.

Indeed, this market dimension caught up with bitUSD a week after launch, when it was trading at 86 cents. In response, Mr. Larimer temporarily halted trading and assured traders that “one way or another, the peg will be established…we have many tools at our disposal to make this happen”. This was immediately flagged by some as a disaster on a few levels. First, it showed that the market does not entirely buy into the fact that one bitUSD can be efficiently pegged to one dollar. Perhaps this might be due to the difficulty in actually converting bitUSD – it must be done on a third party exchange and cannot be traded directly against the dollar, but through bitcoin as an intermediary. Even that bitcoin/bitshares market is relatively illiquid, and this is most likely factored by the market into the cost of bitUSD.

Mr. Larimer, by assuring traders that everything would be done to guarantee price parity, also undermined confidence that the market itself was setting the rate, and raised a price-fixing red flag. Though the market has generally been at around one-to-one parity since, is it due to manipulation or is the market actually setting the rate naturally?

Regrettably, this episode also represented another red flag as to BitShares DAC management. When unveiling the concept in 2013, Stan and Daniel Larimer had this to say:

“Ultimately, to achieve complete incorruptibility, developers must be willing to let go of their own control. If there remains any centralized human control anywhere, it will eventually be exploited to the detriment of the DAC’s stakeholders. DACs need to be free to be trusted.”

For all the talk of decentralization, when push came to shove, BitShares and Mr. Larimer have demonstrated reflexive centralization impulses. As you might remember from our discussion of the ProtoShares launch, the suspension of bitUSD trading was not the first time such an intervention occurred.

It might be that bitassets, despite the initial hiccups, represents an ingenious “hack”, and will solidify into an innovative method of that holiest of grails, a crypto asset pegged to fiat while maintaining total decentralization. However, one large drop in bitshares could demolish the entire bitassets market. We are taking a “wait and see” position on this one.

One last point. We have a hard time labeling bitshares as a true exchange, because bitshares can only be exchanged against bitshares derivatives. Exchanging BitShares into commodities or currencies that derive their value from something disconnected to BitShares requires transferring BitShares to or from…a third party exchange. And there are currently no fiat to bitshares exchanges. Moving fiat currency to and from bitshares requires bitcoin as an intermediary. This is a serious on-ramp and off-ramp issue, and a massive barrier to wider adoption. We would be curious to know what percentage of those trading on the bitshares exchange are simply the original protoshares/angelshares investors, trading with one another. In any event, the exchange as currently formulated seems a bit half baked.

BitShares future

In December of 2104, the DACs VOTE and DNS were merged onto the BitShares X platform, which was rebranded as BitShares. This was supposedly the last activist management decision made by Dan Larimer, who proceeded to disband his holding company Invictus Innovation Incorporated, and join BitShares as a full-time delegate. He proclaimed BitShares a successfully launched DAC, signaling its coming of age, as well as the ostensible end of his central management.

It will be quite interesting to see how BitShares progresses from here. Will it live up to the massive expectations of the Larimers and their community? Or will it prove to be half cooked and poorly designed, and crash without Dan Larimer’s benign guidance? 2015 is most likely the year in which these questions will be answered.

If one has little faith in bitassets, then the only argument for BitShares over enhancer technologies like Counterparty is Delegated Proof of Stake which, while an innovative concept, has not passed the test of time.

Bottom line

Writing this review was a huge headache. After much digging and research, I still do not entirely understand what is going on with the BitShares business, and even the most dedicated BitSharers at times have a hard time explaining decision making and future strategy. While there are many intriguing bits poking out from within, I think I’ll stick with Warren Buffett on this one: “Never invest in a business you cannot understand”.  If you want to ignore the advice, you can find exchanges offering bitshares here.