The Problem with Crypto Exchanges

To understand Bisq it is helpful to look at three problems with standard cryptocurrency exchanges.

First, exchanges have a security problem. Exchanges act as custodian to a large number of customers’ funds making an obvious and public target for hacking. Exchange security has improved thanks to a painful culling of the least secure exchanges and the strengthening of the best, but the problem will never fully go away.

Second, exchanges are an intrusive element in a market fiercely protective of privacy.  Because exchanges hold customer cash, they require extensive know-your-customer checks to comply with bank and government regulations.  While there are some good reasons for KYC, it is also a danger. A database of cryptocurrency users, details of their holdings, their physical address, telephone number, and identifying information, is a weapon in the wrong hands, governmental or otherwise.  

And last, exchanges are centralized companies bound by the laws of their governmental jurisdiction. They have an address, servers, and employees.  They may be coerced into providing information on their customers. They can and do freeze accounts, forbid access, or shut down. They might take issue with where you send your money or to whom. And when we speak of bitcoin as a global currency, one must remember that it is used by a global audience, with all sorts of governments with different views on the importance of individual freedoms and the use of cryptocurrencies.

How Bisq is Different

In the most prominent position on their homepage Bisq quotes famed visionary Buckminster Fuller: “To change something, build a model that makes the existing model obsolete.”  Bisq is quite direct in their ambition to fundamentally change the crypto exchange market, which it means to do by solving the three problems just discussed.

In order to do so, Bisq must overcome for exchanges the same fundamental issue that bitcoin overcame for currency – trust, or lack thereof.  More specifically, how can a decentralized exchange handle counter party risk?

Before we answer that question, let’s define how exactly Bisq is decentralized.  

1. It is an open source. There is no single entity which is responsible for or holds the code.  The source code is available on github, and to date 86 different developers have contributed to the project.  
2. It is peer to peer. Bisq is a platform hosted on users computers, and trades are made directly between these users, facilitated by the platform.  We will explain this in more detail later.
3. Major decisions are made by the vote of users and contributors using BSQ tokens.
4. Your crypto is never held by Bisq.  Funds are held in either client-side HD wallets or a third-party multisig escrow wallet.

In other words, there is no central fault point which can be exploited to close down the exchange.  The source code is published on the internet, and users who download the platform may trade directly with one another.  

How Bisq Handles Counterparty Risk

A traditional exchange displays orders in an order book, and automatically fills market orders accordingly.  An accounting of the trade is made and reflected in both users’ accounts. The orders in Bisq are from buyers who have input their payment details in the system (encrypted) and placed a buy order, and sellers who have funded their client-side, HD Bisq wallet with enough crypto to support a sell order.  

Orders are set not for a specific price, but rather as a percentage above or below a transparent blended price index.

Only orders with a payment type that is set up in the buyer’s account will be available.  

Orders require an additional amount for mining fees, trading fees, and a security deposit.

When a buyer and seller are matched, the crypto is transferred into a 2 of 3 multisig escrow wallet, one key which is held by the buyer, one by the seller, and a third by a “bonded arbiter”.  Once the bitcoin has been transferred into this escrow wallet, the seller’s bank or payment details be shown to the buyer who must then release funds directly to the seller. When these funds have hit, the seller will, in most cases, confirm the release of crypto to the seller.  If the seller disputes that the buyer sent the money, or the buyer claims that the money was sent and the seller is not releasing the crypto, a “bonded arbiter” steps in.

Bisq Arbitration       

An arbiter is a trusted contributor to Bisq, perhaps a developer, a founding member, or other long-term user.  Arbiters are randomly selected for each and every transaction to assist in the event of a dispute.

If there is a dispute, the buyer would be required to send evidence that currency was sent, and/or the seller would send evidence that the amount was never received.  Evidence must be digitally signed bank statements, but if for whatever reason these are insufficient, other methods may be utilized.

These arbiters are required to post what is known as a bond, a large and valuable amount of BSQ tokens used as a guarantee against gross negligence or conspiracy between buyer/seller and the Arbiter.  BSQ tokens are backed up by bitcoin and are in limited supply.

In the event of malpractice, an arbiter’s bond tokens would be confiscated and their position as arbiter revoked.

Bisq and User Privacy

Never at any point does a user need to enter biographical information.  Accounts are opened with just an email.  Buyers and Sellers do have to input payment details, but these are seen only by the trading partner and the arbiter if called upon.  The platform is built on top of Tor which delivers a high level of user anonymity. Fiat currency payments come from other individuals rather than from Bisq, so tying a transaction to cryptocurrency would be extremely difficult for banks.

Bottom Line

Bisq is a very good product.  The UI is sound, the system works, and it fills a need in the market.  The platform is easily scalable to suit any market, altcoin, and local payment option, provided the payment option does not allow for chargebacks. So no paypal or credit cards here.

The one thing missing is liquidity.  For the moment, you’ll find a much greater volume of trading partners at localbitcoins. However, it is growing, and unlike other p2p exchanges, the sell orders are quite reasonable – usually around market price.  UK bitcoin users accustomed to local p2p exchanges will likely be quite pleased with the pricing.