Today we announce that Bitspark will be switching to the Bitshares Blockchain from Bitcoin because it is better suited for the company’s business. That is not to say it is better for everything, but for remittances we see it has some clear advantages. Yes, even compared to other alternatives like Stellar, Ripple, Bitcoin or others. The new payment method will be rolled out slowly for specific currency pairs so that Bitspark’s remittance users will have the access to all of the worlds 180+ currencies in 12 months. Existing Bitcoin deposits and payment methods will still persist for a time yet while we make the switch. Today we will go into some of the reasoning behind why we are making the switch and why it is our belief that decentralised pegged cryptocurrencies are a major step forward in the remittance world.
How things work currently for Bitcoin remittances
It is often lamented on why there are not more blockchain remittance service providers. The same 5 that were around in 2014 when we started are the same 5 doing volume today. There have been some companies which have come and gone but generally there are some fundamental realities on how Bitcoin remittances work in 2017.
Bitcoin can be slow and expensive so everyone prefunds balances at their liquidity providers in bulk.
With the recent fork, for the last month or so fees have been very low and the mempool has been small resulting in less unforeseen delays, this is great, but the important thing here is predictability. For most of this year the prevailing wisdom for high fees has been “Just pay more fees” which is not reasonable when there is no predictability or when your margins per payments on a $200 transaction can be wiped out on a $3 fee. Using dynamic fees also does not work as a value proposition- when a customer does a remittance, trustworthiness is not gained by telling them “one day your fee might be $1 another day it could be $3 and I’m not sure when”. Given this, for many years all Bitcoin remittance companies have prefunded larger amounts with their liquidity providers which lock in rates and eliminates risk of slow payments. You can then draw down upon those balances as new payments arrive. This is a sound model and will remain so but requires upfront capital to prefund in bulk before you receive the remittance money coming in.
Ideally, remittance companies do not want to use upfront capital in prefunding balances making it important to find an alternative that truly can send $2 across the world for negligible cost without price volatility risk.
Limitations to accessible currencies
Bitcoin remittances make no sense for trading between the major FX pairs (USD, EUR, AUD, GBP etc) the spreads between major pairs are so minute that any cryptocurrency cannot compete- the benefit is for exotic currencies in often developing countries. The reason being spreads on exotic currencies are larger however accessing liquidity via traditional methods is difficult with everyone being channeled through a few gatekeepers. Although Bitcoin is traded in many places around the world, only a few emerging market currencies are viable for remittance payments due to the partners in place or the payout methods, fees and connectivity available.
Liquidity is always a consideration
Although there are many components to cryptocurrency remittances, an important one is liquidity. One needs someone willing to take the other side of a trade in order to transfer money from one location to another via bitcoin (or any other crypto) it’s often not a large problem for most cryptocurrency remittance providers as many of the remittance companies have a good list of reliable liquidity providers with capacity far greater than their current need. However, in markets where there may not be liquidity providers (brokers/exchanges/OTC) then bitcoin based remittances are not possible in the local currency and one either needs to settle in another currency or use traditional methods. Opening in an entirely new market with no bitcoin liquidity? Sorry not possible, join the queue at the bank or with Western Union.
Why Bitshares is Better for Remittances.
As things stand currently, Bitshares offers the greatest benefits to a remittance company looking to utilise cryptocurrency as a means to send money quicker, cheaper and to more locations. Bitspark will be aiming for 180+ currencies, instant payments, no cost and zero counterparty risk.
Pegged Cryptocurrency Creation
The ability to access the worlds 180+ currencies gets hard past about 30 currencies. Often this requires money transfer providers to open accounts all over the world in different jurisdictions, connect to disparate and often unreliable payment mechanisms which are all intricately different in every country. This leads to it being virtually impossible to connect to everything yourself as a payment provider and instead these providers are forced to connect to the few gatekeepers who do have some semblance of a connection to a payout network. The gatekeepers in these jurisdictions then need to manage their own liquidity and often settle balances between themselves and others in a common currency which is typically USD. This works but it also means there is the additional conversion on their end from the local currency to and from USD which can add a significant cost which is why remittance costs to and from African countries are the highest in the world in that these currencies are often very difficult to access liquidity in and there is usually only one company or bank which has the connection to the local payment mechanism.
Africa is a good example whereby several countries may share the same currency like CFA, yet a bank in Mali may not be able to send CFA to a bank in Benin even though it is the same currency as they can lack the interbank connections to make it work. So there are also regional differences to take into account with payment providers needing accounts in both locations to settle appropriately.
The problem to solve is access. Bitshares enables anyone to create a pegged asset and trade it on their decentralised exchange, not only is the asset itself decentralised with no counterparties but also when you trade that asset with others there is no counterparty risk at the exchange level too. This is important for a few reasons:
- No counterparties to create the asset means no risk of bank account closure or bank correspondent account closure - the biggest issue in remittances globally at the moment. This even applies to creating digital tokens backed by companies, same rules apply you are betting on the solvency of some entity, even if theyre large theres no telling if youll receive settlement in the same currency as that token.
- No counterparty risk when trading means you do not need to keep money at a centralised exchange or broker which can go down, get hacked, become insolvent or run away with money.
- Creating a pegged asset without needing to trust an intermediary who says they have the money backing it and instead, the money and value backing it is in a smart contract on the blockchain transparent to everyone. Stellar, Ripple or MKR cannot do this.
- You can create a trustless pegged asset for anything, for every currency or commodity opening up possibilities for new companies and markets. Stellar, Ripple or MKR cannot do this.
The Bitshares Blockchain can solve the problem of access as there is no need to hedge USD and rely on a single gatekeeper. Once people can settle between one another in their native currency and with new money transmitter providers they can directly trade/access liquidity in various FX pairs that were virtually non-existent previously.
Cheap and Fast
The Bitshares Blockchain itself is built to scale to 100,000 transactions per second (actually live on blockchain with 3300 tx/s years ago) with fees as low as fractions of cents and confirmation times sub 3 seconds. Additionally, the Bitshares Blockchain has been fully functioning for 2+ years and has past its testing stage as a viable Blockchain. It is also tangibly more scalable than other public Blockchains currently in terms of throughput.
While this is not a technical paper regarding proof of work, proof of stake and so on, the fact is that as a remittance provider we need to convey a trustless token of value across the world quickly, in a value pegged to a local fiat and with a predictable fee which is something Bitcoin cannot achieve at this moment. As for other altcoins, many are either too immature (no documentation or robust tools/APIs), function the same as Bitcoin (need access to liquidity in local fiats and gateways), do not solve our problems (settlement ledgers have no big benefit as they are still beholden to liquidity pools and gatekeepers) or just plain don't exist yet.
Being able to send individual transactions for a low cost quickly can reduce capital outlays as instead of sending a bulk amount of bitcoin to a liquidity provider and drawing down on the balance, payments can be made as and when they come, freeing up capital for other things.
Liquidity Can Be Less Of An Issue
In the Bitcoin world, a willing participant is needed on the other side of a trade to fill the equivalent fiat value when conducting a cross border transfer. This usually means the need to integrate with one or several liquidity providers or manually manage your payments incoming and outgoing as well as manage your BTC exposure appropriately. At some stage you need people with fiat to offload incoming BTC with, which in many countries can be quite challenging.
The vital connection to local liquidity is through fiat currency, in order to participate as a market maker in various countries you need fiat currency to deposit and exchange with which often means you need to actually be in country to be a market maker as you will need bank accounts denominated in those currencies. However there are not always market makers in every country. For example it is easy to send someone Bitcoin in Myanmar but harder to find more people with Kyat (the local currency) to exchange for BTC, in order to do that the only way to get Kyat into the system is through some centralised entity or gateway and if that doesn’t exist then you’re out of luck.
With decentralised pegged cryptocurrencies issued on Bitshares, anyone can issue the fiat pegged cryptocurrency so long as they have appropriate BTS to lock up in a smart contract as collateral. This is important as it means anyone around the world can participate as a market maker in various global currencies on the fiat side of the trade without the need to have the local fiat currency on hand via a gateway, it can be entirely automated and done digitally.
This means there is one less hurdle for liquidity in new markets and there is also a natural incentive to create more liquidity- if there is a rising demand for a fiat pegged cryptocurrency then it will be trading higher than its real price so you can make money in creating (locking up BTS collateral) and selling it to the market. While not a silver bullet this improves accessibility to liquidity in any geography or fiat currency in the world.
A Real Decentralised Exchange with Zero Counterparty Risk
As noted, Bitcoin remittance companies and OTC traders rely on a number of intermediaries to ensure they have adequate liquidity to be enter and exit Bitcoin profitably. It doesn't matter how reliable, trustworthy or regulated these intermediaries are, it is still a counterparty risk where trust is needed in the process. If there is any issue with any of your intermediaries it can affect your business severely. For example a money transfer operator can lose their bank account simply because banks foresee risk in remittances, not due to any breaches a money transfer operator has actually done. This is unacceptable as global micropayments grow and a need for a trustless system to exchange value becomes more in demand, Bitspark believes the Bitshares DEX is one step closer to making that happen.
There have been many attempts at decentralised exchanges and many are in operation today like Bitsquare, Openbazaar and other altcoins like Waves but none are as well suited to remittance companies as the Bitshares DEX. The Bitshares DEX has been in operation for 2+ years with professional trading and charting information in addition to the light client being connected to your wallet directly for voting on Blockchain proposals and fiat gateway support. It is by far the most developed DEX which lists hundreds of assets and unlike alternatives it is fast as all users are trading other IOUs or decentralised tokens there is no need to wait for settlement, it can be done almost instantly, on the Blockchain.
Of course another big benefit is that exchange mismanagement like MTGox is eliminated as there is no sole entity in control of your funds- anyone is in complete control of their funds at any given time and they are safeguarded from having to trust various intermediaries.
Bitshares Still Needs Improvements
One of the key areas is governance. Unlike Proof of Work mining, Bitshares uses a delegated proof of stake model whereby 25 ‘Witnesses’ who are elected produce blocks (and get rewarded in BTS), not miners. This has a few benefits like speed and potential decentralisation but there are some key additions Bitshares could update to improve governance in this area.
Firstly, for a Witness to be active it needs to get voted in, however once in the top 25 there is no easy method to track performance of that Witness. Potentially a Witness could miss blocks and perform poorly and because votes do not decay (and if some accounts are lost or abandoned their votes still count like dead people from the past voting in elections), they will remain in getting paid and doing a bad job. A proposal in the short term could be that votes should decay at some rate forcing users to review a Witnesses performance (perhaps a worker proposal should be to display this performance to everyone within the light wallet) and vote again for the best for and the pool of active Witnesses should be expanded beyond 25.
Another area shared by newer members of the community is the steep learning curve of the UI, out of date docs on bitshares.org and lack of gateways. These are not issues of the protocol but moreso opportunities for someone to improve via a worker proposal or for a business to setup a new resource hub for information and a new trading interface.
Keeping in mind inbuilt voting and decentralised exchanged as part of a trustless network is something that seldom few if any other cryptocurrencies have so there is bound to be areas of improvement.
In time, more viable alternatives will arise and Bitspark will endeavour to integrate these options aswell into our product offering, but at the moment they are not ready. MakerDAO and Waves are nowhere as developed/documented and cannot do half of the described above, EOS and OpenANX do not exist yet and other alternatives like Tether are centralised with counterparty risk and don't fulfil our requirements. Other settlement layers like Ripple, Stellar or the defunct Falcon Protocol don't actually move value and are no different than using a MySQL database or they are cryptocurrencies which may be better than bitcoin for payments but have no liquidity and address none of the above about creating decentralised fiat pegged cryptocurrencies, great for banks but not for remittance providers.
What About Stellar's DEX for money transfers?
Stellar is a platform that has less liquidity, no trustless pegged fiat creation, a very simplistic trading UX and a mostly robust backend. Its not really comparable to Bitshares at this time. Most providers using Stellar are swapping tokens backed by themselves to each other, consider the example below:
Company_A issues a token in USD called Company_A_USD. Company_B issues a token in PHP called Company_B_PHP. Company_A wants to prefund a large amount at one rate so he buys 100 000 USD worth of PHP tokens with his Company_A_USD. When a transaciton happens company A draws down upon his balance of Company_B_PHP tokens and company_B pays the end recipient in cash. At the end of the day settlement has not yet occured. Company_B has a bunch of Company_A_USD tokens but he has paid out PHP in cash to the customer- he now has an FX risk. He needs to redeem the USD tokens immediately in order to settle accounts at todays rate, if he waits a week the rate could change and wipeout his margin. How will he redeem the USD tokens? Via requesting company_A do a bank wire to his account. Thats the only way for the transaction to settle. If we still need to settle via a Swift transfer what is actually being gained here in efficiency? The same can be done with a database. Maybe Compnay_B can offload his USD tokens by selling them to someone else but then someone else is on the hook for it and eventually it will all come back to why does company_A tokens even have value and whos buying them? Stellar has a market maker purchasing these tokens with Stellars' own money which while sizeable is not sustainable. Eventually the market maker has bought a bunch of these IOUs from different companys and will need to redeem them, a Silicon Valley bank doesnt have a PHP account so taking delivery of a PHP IOU or any other strange currency will not be possible which will affect the value these tokens actually have.
The difference in Bitshares is the trade actually is the settlement because its not an IOU, it is a token of value. It can be redeemed instantly for the underlying token of value (BTS) which has a real market price and no counterparty risk. Unlike the above, you can never be stuck with a bunch of IOUs, you have zero counterparty risk on Bitshares and the native currency can always be redeemed for the equivalent value or be traded out for something else. The entire Stellar system could be replicated on Bitshares easily, but BTS also has the added value of having actual trustless pegged cryptocurrencies, not IOUs.
Maybe these alternatives will change over time and address the needs of remittance providers, we absolutely do hope this is the case and are willing to support them when they can address simple remittance use cases: Pegged fiat currency creation, decentralised exchange, fast and cheap Blockchain and inbuilt market making incentives. But until that stage we will be pursuing integration with Bitshares in addition to our existing Bitcoin services
Bitspark Next Steps
Our focus is on the transition to the Bitshares Blockchain for the rest 2017 and will be fully operating in time for Bitspark’s most recent project with the United Nations in Tajikistan where Bitspark will be facilitating domestic and international transfers. We believe that the Bitshares Blockchain will eliminate current hurdles with the Bitcoin Blockchain and will be able to apply some of its benefits to the context of Tajikistan whereby previously inaccessiblity to exoitc currencies such as the Tajik Somoni can be revolutionised with Bitshares technology and lead to a cheaper, more secure, faster and trustless system of payment. We look forward to working with local stakeholders and payment providers for the end to end process and believe that great developments will be brought around by this change.
While our first market of Central Asia will be Tajikistan, our aim is to make Bitspark accessible for existing and new partners anywhere in the world. Bitspark’s priority is to enable access to a complete set of currencies with focus on developing countries and we believe giving access to trade into and out of any currency within seconds for no cost will bring great benefit to local people via economic activity and financial inclusion.