Complete replacement for centralized exchanges: BTC+Bisq+Stablecoin+Atomic Swap

[d5000]

Centralized exchanges are one of the main single points of failure of the cryptocurrency ecosystem. There are alternatives, but they are cumbersome (OTC cash-to-BTC trading) or risky (trading on this forum, for example).

Current cross-chain DEX based on atomic swaps do not include the possibility to purchase Bitcoin with fiat, for obvious reasons (there simply is no such a thing like a "fiat blockchain").

Now, there is a decentralized exchange tool that allows fiat-to-crypto trades, Bisq. Bisq has, however, one problem: A fiat-to-BTC trade has always some volatility risk. Both traders must deposit Bitcoins and the price could go down, and as a Bisq trade can take some time, the risk for losses is relatively high, specifically in price downtrends. "Hodlers" and crypto veterans may have no problem with this, but for the general public it may be too risky. At the other hand, there is a certain risk that the trade is cancelled by the "fiat party" when price goes down sharply and the security deposit is too low.

Both effects are, in my opinion, reasons why Bisq's volume is very low at this moment.

Now what if the cryptocurrency you want to trade your fiat to is a stablecoin and isn't volatile, or even pegged to your fiat currency? For example, you could trade 1 USD to 1 Dai (Makerdao's USD-pegged stablecoin) or 1 EUR to 1 BitEUR, without having to even negotiate a price. You could be (almost) sure that you'll get the "correct" price.

Current Stablecoins (look here for a list) are not perfect, because there could be black swan events where they lose value rapidly, but the probability for this to occur in the typical timeframe you carry out a trade is extremely low.

Now you could "extend" a Bisq-like "fiat-to-stablecoin exchange" to an atomic swap-based DEX like BarterDEX. So after you purchased a Stablecoin in Bisq-like fashion, you could then carry out an atomic swap, buying Bitcoins or your desired cryptocurrency for the stablecoin. As Bisq and BarterDEX, for example, are open source, all could happen in one single client (using code from both projects) and with few clicks.

So in this case we'd have a complete decentralized replacement for centralized exchanges. A trade would need some hours to complete, but not more then a typical trade on a centralized exchange including the time for the bank wire.

The stablecoin integration in the exchange tool would also be useful if you want to simply escape cryptocurrency volatility for some time - like many people do now on centralized exchanges, risking the owner to get hacked or running away with the money. One problem less ...

What do you think? Discuss!

(Edit: Edited - only the fiat party can really cancel trades, and it's a breach of the contract. But nevertheless there is always volatility risk because Bisq involves Bitcoin deposits by both parties.)

[amishmanish]

This is exciting to know. The problem with all decentralized exchanges is of course the initial funding. It looks like BISQ works by directly connecting peers. One of them may have some BTC/ crypto and other has some cash. That cash can be sent over using any of the methods they listed and a transfer of crypto can follow.

The idea for using a stablecoin instead of a BTC trade is good. What I would be interested in knowing is at any given time, how much of a premium in terms of fees etc. do you have to pay to these intermediate services? This would be of interest to smaller investors who are looking to ensure anonymity in comparison with directly buying from a centralized exchange (that needs KYC).

[pinkflower]

I like the idea! Why dont you make a suggestion in the Bisq announcement thread!

They also have Burst trading! I like it already lol.

[d5000]

What I would be interested in knowing is at any given time, how much of a premium in terms of fees etc. do you have to pay to these intermediate services? This would be of interest to smaller investors who are looking to ensure anonymity in comparison with directly buying from a centralized exchange (that needs KYC).

Bisq's fees are detailed here. The default fee is 0.002 BTC per Bitcoin (minimum 0.00005 BTC) or roughly 0,2 %. This is not very different to centralized exchanges (without bulk discount). Additionally there is a transaction fee of 4 times the current high priority amount shared by "maker" and "taker". The good thing is that stablecoins "live" mostly on chains with much lower transaction fees than Bitcoin.

The fee for the subsequent atomic swap is: Transaction Fee Stablecoin Chain + Transaction fee chain B (e.g. Bitcoin Chain) / 2 - both parties share the fee.

So depending on the amount, I estimate at most a 0,5% fee.

I like the idea! Why dont you make a suggestion in the Bisq announcement thread!

They also have Burst trading! I like it already lol.

Good idea! I'll wait for some feedback here and then post it to the Bisq thread. The reason why I started a new thread is mainly that the technique involves not only Bisq but also atomic swaps, so maybe a "plugin" or a custom Bisq client would be needed.

[pinkflower]

Atomic swaps? Cant a stablecoin be accepted straight by Bisq to avoid any further complications in trading them with BTC and other coins?

[audaciousbeing]

Reading through, I think the focus of the write up was focused on stable coin (feel free to enlighten me further) but the issue is that coins are not always stable and those ones that are stable to me won't get the amount of patronage that the more volatile enjoys because that is what guaranteed either losses or gains and how you play it, decides which part you will fall into.

Also, I don't subscribe that the centralized exchanges are one of the single main failure of crypto currency ecosystem simply because the market is so big for everyone to feature depending on how you want to operate, as we have the centralized serving some amount of customers based on their needs, we have the decentralized you rooting for and also the peer to peer which is my favorite and all are contributing their qouta to the development of the entire ecosystem.

[buwaytress]

Reading through, I think the focus of the write up was focused on stable coin (feel free to enlighten me further) but the issue is that coins are not always stable and those ones that are stable to me won't get the amount of patronage that the more volatile enjoys because that is what guaranteed either losses or gains and how you play it, decides which part you will fall into.

Also, I don't subscribe that the centralized exchanges are one of the single main failure of crypto currency ecosystem simply because the market is so big for everyone to feature depending on how you want to operate, as we have the centralized serving some amount of customers based on their needs, we have the decentralized you rooting for and also the peer to peer which is my favorite and all are contributing their qouta to the development of the entire ecosystem.

That's what I got out of this too... and that's the premise of a lot of new platforms/exchanges out there. They're creating all kinds of "stablecoins" or implementing algorithms to control volatility, some based on a basket of assets, some on a basket of currencies, some using self-governance to help maintain but the ones I've followed haven't achieved even a fraction of the adoption they're fighting for, despite the huge amount of marketing poured into these projects.

I'd agree that it is precisely the stability that hasn't helped - mainstream traders actually want a coin that appreciates (whether they admit it or not).

I don't blame centralised exchanges either for the market. Like you, I'm actually very P2P supportive (and I still believe a significant amount of that is missing from volume tracking generally), but can't ignore the roles of exchanges in easing newcomers into the process of obtaining their first crypto.

[d5000]

Atomic swaps? Cant a stablecoin be accepted straight by Bisq to avoid any further complications in trading them with BTC and other coins?

In my proposal, the stablecoin should be the main coin traded against fiat at Bisq. That ensures lower counterparty risk as I detailed in the first thread (no incentive at all to cancel trades, etc.). The requirement for the stablecoin is, obviously, that a multisig feature compatible with Bisq exists.

The idea is that the stablecoin becomes the "entry gate" for the crypto world.

Atomic swaps would be the second "phase" of every trade: Inside the crypto ecosystem they would be used as a trading tool (stablecoin<->BTC, BTC<->ETH, stablecoin<->ETH for example).

The "attractiveness" of volatility, as mentioned by @audaciousmeaning and @buwaytress, is not touched, as inside this "second phase" (trading of stablecoin to other cryptos via atomic swaps) trading is much more straightforward than at Bisq. And there is, in fact, a popular (unfortunately, centralized) stablecoin: Tether. It's used by Bitfinex, Bittrex et al. in the same way like the stablecoin in this proposal. The difference is that in this proposal you never have to use a centralized exchange - nor for the "gateway to fiat" nor for crypto-to-crypto trading.

[pinkflower]

Okay, I now get it. The problem now lies on what stablecoin is best to use. I saw your thread but I dont trust any of them to be frank. But which one of them would you use if you were Bisq?

[d5000]

Okay, I now get it. The problem now lies on what stablecoin is best to use. I saw your thread but I dont trust any of them to be frank. But which one of them would you use if you were Bisq?

From the released stablecoins, the Ethereum-based Dai is the stablecoin with the most "elaborated" (and in my opinion, the best) stability mechanism. But it hasn't been tested thoroughly because it's on the market since the end of 2017 only. "Basecoin" (Basis) may be even better as it involves burning of coins in the case of a long bear market, but it hasn't been released so far.

Another alternative would be BitUSD, which is the stablecoin with the longest "record" of stability.

Anyway, one could allow several alternatives, there is no need to chose one and only one. The only requirement is that the stablecoin must be compatible with the multisig model used in Bisq. I must investigate for which one(s) this is the case. (Nubits, for example, would have worked, but it looks like it has failed.)