Whitepaper - Bitshares With Cover

BITSHARES WHITEPAPER

BITSHARES 2.0: GENERAL OVERVIEW 

Fabian Schuh, Daniel Larimer 

Cryptonomex, Cryptonomex.com ∗ 

Blacksburg (VA), USA 

{ fabian, dan }@cryptonomex.com 

Abstract—BitShares 2.0 is an industrial-grade decentralized 

platform built for high-performance financial smart contracts. 

The decentralized exchange that allows for trading 

of arbitrary pairs without counterparty risk facilitates only 

one out of many available features. Market-pegged assets, 

such as the bitUSD, are crypto tokens that come with all 

the advantages of traditional cryptocurrencies like bitcoin 

but trade for at least the value of their underlying asset, e.g. 

$1. Furthermore, BitShares represents the first decentralized 

autonomous company that lets its shareholders decide on 

its future direction and products. This paper gives a brief 

overview over the whole BitShares platform, recapitulates 

known blockchain technologies and redefines state-of-the-art. 

1 Introduction 

BitShares is a technology supported by next generation entrepreneurs, 

investors, and developers with a common interest in 

finding free market solutions by leveraging the power of globally 

decentralized consensus and decision making. Consensus 

technology has the power to do for economics what the internet 

did for information. It can harness the combined power of all 

humanity to coordinate the discovery and aggregation of realtime 

knowledge, previously unobtainable. This knowledge can 

be used to more effectively coordinate the allocation of resources 

toward their most productive and valuable use. 

Bitcoin is the first fully autonomous system to utilize distributed 

consensus technology to create a more efficient and 

reliable global payment network. The core innovation of Bitcoin 

is the Blockchain, a cryptographically secured public ledger of 

all accounts on the Bitcoin network that facilitates the transfer of 

value from one individual directly to another. For the first time in 

history, financial transactions over the internet no longer require 

a middle man to act as a trustworthy, confidential fiduciary. 

BitShares looks to extend the innovation of the blockchain 

to more industries that rely upon the internet to provide their 

services. Whether its banking, stock exchanges [1], lotteries [2], 

voting [3], music [4], auctions or many others, a digital public 

ledger allows for the creation of distributed autonomous 

companies (or DACs) that provide better quality services at a 

fraction of the cost incurred by their more traditional, centralized 

counterparts. The advent of DACs ushers in a new paradigm in 

organizational structure in which companies can run without any 

human management and under the control of an incorruptible set 

of business rules. These rules are encoded in publicly auditable 

open source software distributed across the computers of the 

companies’ shareholders, who effortlessly secure the company 

from arbitrary control. 

BitShares does for business what bitcoin did for money by 

utilizing distributed consensus technology to create companies 

that are inherently global, transparent, trustworthy, efficient and 

most importantly profitable. Why and how BitShares achieves a 

decentralized but profitable business is described in more detail 

in a distinct paper [?]. 

BitShares has went through many changes and has done its 

best to stay on top of blockchain technology. Towards the end 

of 2014 some of the DACs were merged and the X was dropped 

from ”BitShares X” to become simply BitShares (BTS). 

The next step in the evolution of BitShares was named Bitshares 

2.0, and incorporates all of the feedback and lessons 

learned from the BitShares stakeholders, partners, developers, 

marketers, and other community leaders throughout a full year 

of research and development. 

With the former BitShares 1.0, the core development team has 

closely controlled the development and direction of BitShares. 

With BitShares reaching maturity at version 2.0, the team is 

ready to remove the training wheels, and let the direction of all 

future development be decided completely by stakeholder vote. 

By utilizing a new worker voting system that will be included 

in BitShares 2.0, the development will continue in whatever 

direction is approved by its stakeholders. With this new structure, 

BitShares will be more robust, and sustainable while being agile, 

flexible and adaptive to overcome unforeseen hurdles of the 

future. 

This paper is intended as an introduction to BitShares 2.0 

and presents the basic concepts of the peer-to-peer nature, the 

distributed public ledger in form of a blockchain, and give a 

brief overview of the decentral consensus mechanism applied to 

reach blockchain state consensus. We further discuss the basic 

blockchain tokens (BTS), its distribution and usage in BitShares. 

We also describe the wallet and operations with the network as 

well as outline the functionalities of BitShares accounts. 

∗ This work was supported by Cryptonomex and honorable members of the 

bitsharestalk.org community. 

Release: stress-test/1.0-1-g96f3268 (2017-04-04)

2 

2 Base Token 

In the BitShares network the base token is called a BitShare and 

carries the abbreviation BTS. It is dividable into 10 5 = 100,000 

sub-units. 

In general, all properties of Bitcoin also apply to BTS, 

namely, they have value, can be transfered on the blockchain 

and are secured by an Elliptic Curve Digital Signature Algorithm 

(ECDSA) on the curve secp256k1. 

In contrast to most crypto-currencies, BitShares does not claim 

to be a currency but rather an equity in a decentral autonomous 

company (DAC). As a result, the market valuation of BitShares 

is free floating and may be as volatile as any other equity (e.g. of 

traditional companies). 

Nonetheless, BTS tokens can be used as collateral in financial 

smart contracts [5] such as market pegged assets and thus back 

every existing smartcoin such as the bitUSD. 

The following subsection recapitulate the initial distribution 

and supply of BTS. 

2.1 Distribution of BTS 

BitShares has set an example of a social agreement by establishing 

its own sharedropping standards. The idea behind 

sharedropping is that any future chain will always benefit by 

choosing to align itself with the ones who worked hard at making 

the technology possible. 

The base tokens of BitShares 2.0 will be distributed on a 

1:1 basis fully honoring the BTS tokens in the BitShares 1.0 

network. For the sake of completeness, the following paragraphs 

will describe the initial distribution of BTS tokens in the aforementioned 

BitShares 1.0 network from PTS and AGS. 

2.1.1 Bitshares PTS 

The original grandfather prototype, formerly called proto-shares 

(PTS), BitShares PTS was a simple minable cryptocurrency 

(similar to Bitcoin) that was created to allow people to advertise 

their interest in receiving free token samples in future DACs. 

PTS functions as a high-tech mailing list for distributing free 

sample bitshares from many developers of decentral autonomous 

companies (DACs). The only people who tended to own PTS 

tokens were those who understand DACs, so DAC developers 

prefer to target them with free samples rather than air dropping 

their samples onto a much less interested general population. 

The industry recommendation was that when a DAC is 

launched, at least 10% of the DAC’s total tokens are given 

proportionally to holders of PTS. This was not a contract or 

a guarantee; it was a social consensus of those in the DAC 

community about what percentage of a new DAC’s tokens should 

be distributed to those who have supported the BitShares industry 

by owning its PTS tokens. 

The BitShares DAC honored this social consensus and even 

sharedropped 47% of its ever existing supply onto BitShares PTS 

holders. 

2.1.2 Bitshares AGS 

The original grandmother prototype formerly called angel-shares 

(AGS) in reference to the patron angels who once funded the 

performing arts. That’s why AGS are not liquid. (No one can 

trade the proof that you were the once willing to donate to this 

cause.) 

The donations have been recorded in the public blockchain 

of bitcoin which now acts as a book of honorable donors. The 

bitcoin address used as donation address was 

1ANGELwQwWxMmbdaSWhWLqBEtPTkWb8uDc 

Note, that the donation period for AGS lasting 200 days has 

ended already and that donations to this address never resulted 

nor will result in any obligations whatsoever. 

Since the social consensus includes AGS, the industry recommendation 

again is to give at least 10% to holders of AGS. 

Similar to BitShares PTS, the 47% of the total BTS supply 

have been sharedropped onto members of the AGS mailing-list 

proportionally. 

2.2 Bitshares Genesis Distribution 

We see that the seed allocation (initial distribution) of BitShares, 

which took place over a 1 year period, from November 2013 

to November 2014, was achieved by sharedropping 47% to 

BitShares PTS and another 47% to BitShares AGS. This way, the 

full, fairness was defined by equal opportunity and in the case of 

BTS we have distributed fairly by CPU mining of PTS while, 

alternatively, everyone had an additional equal opportunity by 

contribute to AGS. 

Having attracted two different groups of investors with a 

mined crypto token via PTS and a donation based book of donors 

via AGS, everyone had a chance to participate and be rewarded 

with stake in the genesis block of BitShares 1.0. This genesis 

block solely consisted of AGS and PTS holders on a 50%/50% 

ratio such that the BTS tokens initially issued by this genesis can 

be considered well distributed. 

The other 6% are set aside to secure the future of BitShares and 

funds its development and operational costs. In practice, they are 

put into the so called reserves pool that no one has control over 

except the BitShares protocol. In contrast to many other cryptocurrencies, 

every shareholder has a say as to how these funds are 

spend (see section 4.2). 

3 Business Units 

Let us discuss the organization structure of the BitShares network 

when interpreted as a company. Some of these entities are 

associated with a cost for the business and need to be accounted 

for in profit calculations. 

3.1 BitShares Witnesses 

In BitShares, the witnesses’ job is to collect transactions, bundle 

them into a block, sign the block and broadcast it to the network. 

They essentially are the block producers for the underlying 

consensus mechanism (see section 5.4). 


3.2 BITSHARES COMMITTEE 3 

For each successfully constructed block, a witness is payed in 

shares that are taken from the limited reserves pool at a rate that 

is defined by the shareholders by means of approval voting. 

3.2 BitShares Committee 

Since Bitcoin struggled to reach a consensus about the size of 

their blocks, the people in the cryptocurrency space realized that 

the governance of a DAC should not be ignored. Hence, Bit- 

Shares offers a tools to reach on-chain consensus about business 

management decisions. 

The BitShares blockchain has a set of parameters available 

that are subject of shareholder approval. Shareholders can define 

their preferred set of parameters and thereby create a so called 

committee member or alternatively vote for an existing committee 

member. The BitShares committee consists of C active 

committee members. 

For each business parameter the protocol will calculate the 

difference between up- and down-votes (v pro − v con ) for each 

active committee member and then take the median of the top 

C active members: 

// Derive active C committee members 

for i : active committee members do 

member weight: w[i] ← v pro − v con 

end for 

members ← SORT(w) 

active ← members[0 → C] 

// For each Parameter: derive median of active members 

for parameter : parameters do 

p ← GETPARAMETERS(active, parameter) 

x = { sort(p[i]) 

˜p = 

x[ C+1 

1 

2 

( 

2 ] C odd 

x[ 

C 

2 ] + x[ C 2 + 1]) C even. 

parameter ← ˜p 

end for 

Since, C is a parameter as any other, the shareholders decide for 

the size of the committee. 

The BitShares ecosystem has a set of parameters available that 

are subject of shareholder approval. Initially, BitShares has the 

following blockchain parameters: 

fee structure: 

fess that have to be paid by customers for individual 

transactions 

block interval: 

i.e. block interval, max size of block/transaction 

expiration parameters: 

i.e. maximum expiration interval 

witness parameters: 

i.e. maximum amount of witnesses (block producers) 

committee parameters: 

i.e. maximum amount of committee members 

witness pay: 

payment for each witnesses per signed block 

worker budget: 

available budget available for budget items (e.g. development) 

Please note that the given set of parameters serves as an example 

and that the network’s parameters are subject to change over 

time. 

Additionally to defining the parameters any active witness can 

propose a protocol or business upgrade (i.e. hard fork) which can 

be voted on (or against) by shareholders. When the total votes for 

the hard fork are greater than the median witness weight w then 

the hard fork takes effect. 

3.3 BitShares Budget Items/Workers 

Thanks to the funds stored in the reserve pool, BitShares can 

offer to not only pay for its own development and protocol 

improvement but also support and encourage growth of an 

ecosystem. 

In order to be get paid by BitShares, a proposal containing 

(a) the date of work begin, (b) the date of work end, (c) a daily 

pay (denoted in BTS), (d) the worker’s name, and (e) an internet 

address. has to be publish on the blockchain and approved by 

shareholders. A worker can also choose on of the following 

properties: 

• vesting: pay to the worker’s account 

• refund: return the pay back to the reserve pool to be used for 

future projects 

• burn: destroys the pay thus reducing share supply, equivalent 

to share buy-back of a company stock. 

A blockchain parameter (defined by shareholders through the 

committee) defines the daily available budget. No more than that 

can be paid at any time to all so called workers combined. 

The daily budget is distributed as illustrated in fig. 1: (1) The 

available budget is taken out of reserves pool. (2) The budget 

items are sorted according to their approval rate (v pro − v con ) in 

a descending order. (3) Starting at the worker with the highest 

approval rate, the requested daily pay is payed until the daily 

budget is depleted. (4) The worker with the least approval rate 

that was paid may receive less than the requested pay 

Hence, in order to be successfully funded by the BitShares 

ecosystem, the shareholder approval for your budget item needs 

to be highly ranked. 

Since the payments for workers from the non-liquid reserve 

pool result in an increased supply of BTS, these payments are 

vesting over a period of time defined by shareholders. 

3.4 Proxy Voting 

Proxy Voting denotes the process of handing out ones voting 

power to someone else. This process can be reverted to reclaim 

ones voting power. 

The motivation behind proxy voting is to reduce voting apathy 

and allow active shareholders to react more quickly to business 

and security concerns. That way, misbehaving witnesses can be 

fired more rapidly. 

That is centralizing in some respects, but it’s controlled centralization 

in the sense that nothing can happen too quickly and 


4 

Approval Rate 

Request and Received Funds 

vpro − vcon 

Requested Funds 

Payed Funds 

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 

Budget Item 

Figure 1: Illustration of budget item payments. 

In practice, a SmartCoin always has 100% or more of its value 

backed by means of a contract for difference (CFD) between two 

parties with BTS as collateral. What makes these CFDs unique 

is that they are free from counterparty risk. This is achievable by 

letting the network itself (implemented as a software protocol) be 

responsible for securing the collateral and performing (forced) 

settlements if required as is described in more detail in [5]. 

Applications for SmartCoins are obvious: With the aforementioned 

properties, a bitUSD qualifies for regular and instant 

payments, for example with a smartphone or a modern browser 

application. In contrast, a bitGOLD (with one ounce of gold as 

underlying asset) would fit those people’s needs that see gold as 

long-term store of value. As long as an asset has a unique global 

price, a SmartCoin could track its value. This allows for even 

more sophisticated applications, such as tracking a stock market 

index, or the price of a liter of gasoline. 

if shareholders don’t like which way it is going, still have the 

ability to switch courses. Compared to classical crypto currencies 

(e.g. Bitcoin), this process is somewhat similar to pooled mining 

with the exception that every shareholder can participate and 

only voting power is handed over. Furthermore, this allows for 

independent non-profit oriented decisions because there is no 

profit variance but purely political influence. 

4 BitShares: A profitable DAC 

BitShares is a decentralized autonomous company, and as such 

offers products to to earn their shareholders a profit. As we have 

seen in the previous section, it also offers a way to pay for 

expense, such as development and administration but earns a 

profit by burnning (i.e. reducing supply). Of course, the company 

can only be profitable if the income exceeds the expenses. Thus, 

we will now discuss both in detail. 

4.1 The Products 

The BitShares DAC offers their private customers several products 

and in this paper we would like to briefly highlight some of 

them. Of course, all of these come with with the properties of 

cryptocurrencies, namely (a) global accessibility, (b) customizable 

anonymity, (c) industry-grade security, (d) freedom from 

counterparty-risk, (e) flexible account Control, (f) low transaction 

delays, and (g) world-wide decentralized network. 

Keep in mind that, as BitShares has the technical possibilities 

to upgrade itself with shareholder approval, new products and 

properties can be added in a timely manner. 

4.1.1 Price-stable SmartCoins 

The core product of BitShares is a class of assets referred 

to as Market-Pegged Assets (MPA), BitAssets, or SmartCoins 

and represent a crypto-token that has at least the value of the 

underlying asset. For instance, a bitUSD can always be sold for 

$1, either to a merchant at face-value, or to the network (by 

means of settlement of a contract) in return for BitShares’ core 

currency (BTS) worth $1. 

4.1.2 Customizable Assets 

In addition to market-pegged assets, the BitShares network also 

offers to register customizable assets on the public ledger. For 

instance, a BitShares customer may create the asset FREE and 

distribute them to friends for free. Another customer may want 

his company shares to be traded in the BitShares network. Yet 

another use-case would be event tickets that can be sold at a fixed 

price and allow the holder to enter a concert. 

Since the use-cases of these User-Issued Assets (UIA) are 

manifold and space is limited in this paper, we discuss them in 

depth in [5]. 

4.1.3 Decentralized Exchange 

As we have seen in the previous section, the BitShares network 

offers to register different types of assets. It also allows for 

trading between almost 1 any two pairs in an instant, trust-less 

and secure manner by means of the BitShares Decentralized 

Exchange (DEX). 

In traditional trading, a clearing house is necessary because 

trades are made much faster than the cycle time for completing 

the underlying transaction. Since in BitShares trades between 

two parties are performed on a global scale in a decentralized 

network and no middlemen are required, there is no need for 

settlement or clearing delays. If a trade in the DEX executes, the 

bought asset instantly (T+0 [6]) appears in the customers wallet. 

In combinations with SmartCoins, a startup could easily perform 

a dollar-denominated crowd-funding without legal or tax 

implications due to the velocity of cryptocurrency tokens. Furthermore, 

as all order-books are shared on a global scale, the 

markets will become more efficient because no different prices 

existing on different locations on earth. Of course, the DEX is 

open 24/7 and does not apply any limits to customers. A more 

detailed discussion about the DEX can be found in a distinct 

paper [5]. 

4.1.4 Flexible Identity Management 

In BitShares, each account is separated into 

1 The issuer of an asset may white-/or black-list trading partners. 


4.2 REVENUE AND EXPENSES 5 

• Active Permission which has control over its funds and 

• Owner Permission which controls the account itself. 

Furthermore, BitShares uses authorities consisting of one or 

many entities that authorize an action, such as transfers, trades 

or account modifications. An authority consists of one or several 

pairs of an account name with a weight. In order to obtain a valid 

transaction, the sum of the weights from signing the parties has 

to exceed the threshold as defined in the permissions. 

Let’s discuss some examples to shed some light on the used 

terminology and the use-cases. We assume that a new account is 

created with it’s active permissions set as described below. Note 

that the same scheme also works for the owner permissions! 

A flat multi-signature scheme is composed of M entities of 

which N entities must sign in order for the transaction to be valid. 

Now, in BitShares, we have weights and a threshold instead of M 

and N. Still we can achieve the very same thing with even more 

flexibility as we will see now. 

Let’s assume, Alice, Bob, Charlie and Dennis have common 

funds. We want to be able to construct a valid transaction if only 

two of those agree. Hence a 2-of-4 (N-of-M) scheme can look 

as follows: 

Account 

Weight 

Alice 33% 

Bob 33% 

Charlie 33% 

Dennis 33% 

Threshold: 51% 

All four participants have a weight of 33% but the threshold 

is set to 51%. Hence only two out of the four need to agree 

to validate the transaction. Alternatively, to construct a 3-of-4 

scheme, we can either decrease the weights to 17 or increase the 

threshold to 99%. 

With the threshold and weights, we now have more flexibility 

over our funds, or more precisely, we have more control. For 

instance, we can have separate weights for different people. Let’s 

assume Alice wants to secure here funds against theft by a multisignature 

scheme but she does not want to hand over too much 

control to her friends. Hence, we create an authority similar to: 

Account 

Weight 

Alice 49% 

Bob 25% 

Charlie 25% 

Dennis 10% 


Now the funds can either be accessed by Alice and a single 

friend or by all three friends together. 

Let’s take a look at a simple multi-hierarchical corporate 

account setup. We are looking at a company that has a Chief 

of Financial Officer (CFO) and a some departments working for 

him, such as the Treasurer, Controller, Tax Manager, Accounting, 

etc. The company also has a CEO that wants to have spending 

privileges. Hence we construct an authority for the funds according 

to: 

Account 

Weight 

CEO.COMPANY 51% 

CFO.COMPANY 51% 


whereas CEO.COMPANY and CFO.COMPANY have their 

own authorities. For instance, the CFO.COMPANY account 

could look like: 

This scheme allows: 

CFO.COMPANY Weight 

Chief.COMPANY 51% 

Treasurer.COMPANY 33% 

Controller.COMPANY 33% 

Tax Manager.COMPANY 10% 

Accounting.COMPANY 10% 


• the CEO to spend funds 

• the Chief of Finance Officer to spend funds 

• Treasurer together with Controller to spend funds 

• Controller or Treasurer together with wither the Tax Manager 

or Accounting to spend funds. 

Hence, a try of arbitrary depth can be spanned in order to 

construct a flexible authority to reflect mostly any business usecase. 

4.1.5 Variable and Flexible Fees 

In the BitShares ecosystem every operation is assigned an individual 

fee that has to be payed in the core asset (BTS) the the 

end user. These fees are subject to change and are defined by the 

elected committee members. Thus each and every shareholder 

of the BitShares core asset (BTS) has a say as to what the 

fees should be. If shareholders can be convinced to reduce a 

certain fee and consensus is reached, the fee will be reduced 

automatically by the blockchain. This allows the ecosystem, to 

stay flexible and adept the price for the usage of its products over 

time. 

Since the network expects the fees to be payed on the the 

core asset (BTS) but many users may not want to hold any, the 

protocol allows to trade an arbitrary asset into BTS from the 

asset-specific *fee pool* at the *core exchange rate* which is 

defined by the issuer (or the witnesses in the case of a market 

pegged asset). 

4.2 Revenue and Expenses 

Revenue streams are essentially caused by fees that have to be 

payed when using the DACs products, such as market pegged 

assets, user-issued assets, or the decentralized exchange [5]. 

These fees are variable, can be changed by shareholder approval 

and include (a) transfers, (b) order operations, (c) account operations, 

(d) asset operations, (e) witness creations (f) proposal 

operations (g) withdraw permission operations (h) committee 

member operations, (i) worker creation, and more. 

In contrast to bitcoin, where newly created coins in each block 

are distributed solely among countless miners that immensely 


4.3 MEMBERSHIPS 6 

Figure 2: Cash flow of BitShares 2.0 

overpay for the network security [7], the BitShares ecosystem 

achieves a better security at lower costs by means of an adjustable 

number of approved and trusted witnesses in DPOS. Additionally, 

the BitShares ecosystem has the capability to pay for its 

own development through budget items. Both, the payment for 

witnesses, as well as the budget items are required to be approved 

by the shareholders. 

As an example, an entrepreneur may approach the shareholders 

and offer to launch a business in the BitShares space 

that would greatly benefit the ecosystem. If he succeeds and 

convinces the shareholders to vote for and not against his plan, 

he could get an initial funding by the DAC. 

Another use-case would be the improvement of the 

blockchain’s protocol. A developer could propose a change or 

extension of the existing software implementation and be payed 

by the DAC to do so (after shareholder approval). Hence, as 

long as the average shareholders acts rational, the BitShares 

blockchain can be seen as a self-funded but profitable business 

4.3 Memberships 

Accounts in BitShares are separated into three groups. We decided 

to give users the option to upgrade their accounts into a 

VIP-like status if they desire and profit from reduced fees and 

additional features. 

A regular account is a non-member. 

Lifetime Members get a percentage cashback on every transaction 

fee they pay and qualify to earn referral income (see below) 

from users they register with or refer to the network. A Lifetime 

membership is associated with a certain one-time fee that is 

defined by the committee and qualifies for reduced transaction 

fees. 

If a lifetime membership is too much you can still get the same 

cashback for the next year by becoming an annual subscriber for 

a smaller one-time fee which lasts for only one year and qualifies 

for reduced transactions fee during that time. 

4.4 Referral Program 

Every time an account you referred pays a transaction fee, that 

fee is divided among several different accounts. The network 

takes a cut, and the Lifetime Member who referred the account 

gets a cut. 

The registrar is the account that paid the transaction fee to 

register the account with the network. The registrar gets to decide 

how to divide the remaining fee between themselves and their 

own affiliate. 

Fees paid are only divided among the network, referrers, and 

registrars once every maintenance interval. The paid fees are 

divided among tow or three parties, depending on the parameter 

d that can be set by the registrar: 

total fee = network fee(20%) 

+ registrar(80% · (100% − d%)) (1) 

+ referrer(80% · (d%)) 

Most fees are made available immediately, but fees over the 

vesting threshold (such as those paid to upgrade your membership 

or register a premium account name) must vest for some 

days as defined by the committee. 


7 

5 Architecture of BitShares 

Before describing how BitShares can be used to secure financial 

freedom, we first discuss the technical specifications 

briefly. Among these is the public ledger (also referred to as the 

blockchain), the peer-to-peer network, the distributed consensus 

finding mechanism and the system parameters available to Bit- 

Shares. 

5.1 Public Ledger 

As in other crypto-currencies, the public ledger of BitShares 

is built and stored in a linked series of blocks, known as a 

blockchain. 

The ledger provides a permanent record of transactions that 

have taken place, and also establishes an order in which transactions 

have occurred. Hence, every content of the blockchain 

can be assigned an permanent and unique identifier in form of a 

scalar number. 

Every full node in the BitShares network stores a full copy of 

this blockchain and can verify its validity and the evaluate new 

blocks. 

Every block contains 

• a reference to the previous block, 

• a timestamp, 

• a hash of a secret, 

• the secret of the previous hash, 

• a set of transactions, and 

• a signature by the block producing authority 

As will be discussed in section 5.4, the consensus mechanism 

allows for synchronous block production with constant block 

confirmation times, e.g., one block every 5 s. 

Since the blocks mainly embrace customer transactions but 

has to perform time intensive tasks, or execute rare events from 

time to time, some actions such as reenumeration of blockchainbased 

votes and rare events such as newly registered block 

producers (witnesses) are carried out more rarely but still on a 

frequent so called maintenance interval. 

5.2 Irreversibility of Transactions 

Historically we have stated that a blockchain becomes irreversible 

after one round of block production with greater than 

51% participation. It turns out that this metric is too fuzzy 

because of noise in how witnesses are ordered. In an effort 

to provide stronger/absolute guarantees a new metric has been 

derived that determines the exact point at which a particular 

block becomes irreversible. The algorithm to define the metric 

goes as follows: 

Sort N witnesses by the last block number they signed, then 

take the highest block number that is lower than 66% of all other 

witnesses. This will indicate that said block has been confirmed 

by 66% of all witnesses and is clearly irreversible. 

This particular metric is dynamic and can respond to changes 

in the order of witnesses and is immune to situations where the 

network fragments into more than two pieces. In the event of a 

major disruption users are guaranteed that no block older than 

that number can ever be undone. 

If we had only 17 witnesses and 3 second block confirmation 

interval, then this will take an average of 34 seconds. If we had 

101 witnesses and 3 second blocks then this will take an average 

of 3.3 minutes for block to be irreversible, 

Having this metric is important to give everyone in the network 

peace of mind in the unlikely event that a software bug or 

network issue causes all witnesses to fall out of sync and gives a 

clear measure of when they are considered back in sync. 

Anyone accepting transactions as final prior to the most recent 

irreversible block is choosing to take some extra risk on their 

transaction. 

5.3 Low Latency Peer-to-Peer Network 

The peer-to-peer network distributes the full blockchain database 

across the world. It consists of public and private nodes as well as 

seed nodes that are used for initial connection to the peer-to-peer 

network. Anybody may connect to any known node and download 

the current global and unique state (i.e. the blockchain). 

Once a node is in sync with the peer-to-peer network it received 

and applies newly created blocks, and assists new network 

nodes by further distribution of the blockchain. Additionally, new 

blocks are broadcast to all connected nodes. 

Furthermore, network nodes receive transaction from participants 

and forward them to the rest of the network until they 

reach the witness that is in charge of constructing the next block. 

Hence, new transaction broadcasts do not necessarily need to 

reach all nodes. 

Building a low-latency network requires P2P nodes that have 

low-latency connections and a protocol designed to minimize 

latency. For the purpose of this document we will assume that 

two nodes are located on opposite sides of the globe with a ping 

round-trip time of 250 ms. 

In the Bitcoin network architecture, transactions and blocks 

were broadcast in a following manner: inventory messages notify 

peers of transactions and blocks, then peers fetch the transaction 

or block from one peer. After validating the item a node will 

broadcast an inventory message to its peers. 

Under this model it will take approximately 0.75 s for a peer to 

communicate a transaction or block to another peer even if their 

size was 0 and there was no processing overhead. This level of 

performance is unacceptable for a network attempting to produce 

one block every second. 

This prior protocol also sent every transaction twice: initial 

broadcast, and again as part of a block. 

To minimize latency each node needs to immediately broadcast 

the data it receives to its peers after validating it. Given 

the average transaction size is less than 100 bytes, it is almost 

as efficient to send the transaction as it is to send the notice 

(assuming a 20 byte transaction id). 

5.4 Distributed Consensus Mechanism 

Consensus is the mechanism by which a subset of people decide 

upon unitary rational action. The process of consensus decisionmaking 

allows for all participants to consent upon a resolution of 

action even if not the favored course of action for each individual 

participant. Bitcoin was the first system to integrate a fully 


5.5 OPERATIONS 8 

decentralized consensus method with the modern technology of 

the internet and peer-to-peer networks in order to more efficiently 

facilitate the transfer of value through electronic communication. 

The proof-of-work structure that secures and maintains the Bitcoin 

network is one manner of organizing individuals who do 

not necessarily trust one another to act in the best interest of all 

participants of the network. 

It is of importance to distinguish a democratic voting process 

in which every citizen of a community has one and only one vote 

from a distributed consensus mechanism in crypto-currencies 

hand over voting power either in relation to hashing power (e.g. 

proof-of-work) or on a per stake basis (e.g. proof-of-stake). In 

both cases, those that invest in the required infrastructure to 

increase their voting percentage (i.e. by buying mining hardware 

or stake) act as shareholder in a distributed community. 

The BitShares community employs Delegated Proof-of-Stake 

(DPOS) in order to find efficient solutions to distributed consensus 

decision making. DPOS attempts to solve the problems of 

both Bitcoin’s traditional proof-of-work system, and the proofof-stake 

system of Peercoin and NXT by implementing a layer 

of technological democracy to offset the negative effects of centralization. 

For historical reasons, the technology is still called 

delegated proof-of-stake even though what have been delegates 

in BitShares 1.0 are now so called witnesses. 

In DPOS set of N witnesses (formerly known as delegates) 

sign the blocks and are voted on by those using the network 

with every transaction that gets made. By using a decentralized 

voting process, DPOS is by design more democratic than comparable 

systems. Rather than eliminating the need for trust all 

together, DPOS has safeguards in place the ensure that those 

trusted with signing blocks on behalf of the network are doing 

so correctly and without bias. A more detailed description about 

the distributed consensus mechanism as well as a discussion 

how blockchain forking is prevented during attacks is given in 

a separate paper [8]. 

Additionally, each block signed must have a verification that 

the block before it was signed by a trusted node. DPOS eliminates 

the need to wait until a certain number of untrusted nodes 

have verified a transaction before it can be confirmed. 

This reduced need for confirmation produces an increase in 

speed of transaction times. By intentionally placing trust with 

the most trustworthy of potential block signers, as decided by 

the network, no artificial encumbrance need be imposed to slow 

down the block signing process. DPOS allows for many more 

transactions to be included in a block than either proof of work 

or proof of stake systems. 

In a delegated proof-of-stake system, centralization still occurs, 

but it is controlled. Unlike other methods of securing 

cryptocurrency networks, every client in a DPOS system has 

the ability to decide who is trusted rather than trust concentrating 

in the hands of those with the most resources. DPOS 

allows the network to reap some of the major advantages of 

centralization, while still maintaining some calculated measure 

of decentralization. Furthermore, once a witness has reached 

approval by shareholders, surpasses the threshold of the most 

N active witnesses, and, hence, is elected to actively participate 

in the block production procedure, its power is equivalent to all 

other active witnesses. This system is enforced by a fair election 

process where anyone could potentially become a delegated 

representative (witness) of the majority of users. 

Please note that DPOS has a recommended 1 − 2 block 

confirmation versus bitcoin’s 6 block recommendation. DPOS is 

much more resistant against forks for the following reasons: 

• When a fork is produced it is very likely that all witnesses 

have seen and processed your transaction and thus no alternative 

transactions can be broadcast and the next witness is 

almost certain to include your transaction. All witnesses are 

much more trusted than miners. 

• The probability of a fork after a block has been produced 

is very low (¡ 0.01%) where as Bitcoin has 25 orphans in 

the last 22 days (about 1 per day in Dec 3,2014) which 

translates into 0.7% of blocks are orphaned. 

• On normal operations, DPOS achieves a 100% witness 

participation rate and when we are less than that it is more 

often because a witness went offline and didn’t produce a 

block than because they produced a fork. 

• In BitShares 1.0 forks have almost always been resolved 

within 30 seconds. 

Assuming a 10 second block interval, Bitshares is mathematically 

over 70x less likely to orphan after 1 block than Bitcoin 

after 1 block (10 minutes). After 3 blocks (30 seconds) any 

random orphan will have been resolved and the probability of 

alternative chains is much lower than the 0.000001% of Bitcoin. 

By the time Bitcoin gets to .7% orphan probability, BitShares has 

60 blocks which would have a probability of being orphaned of 

less than 10 −120 . 

5.5 Operations 

Similar to most crypto-currencies, there is a set of predefined 

operations that can be performed on the blockchain. In contrast 

to Bitcoin, which uses a technique called script to describe operations 

that shall be performed in a programmatic way using OP 

codes, the BitShares network has a predefined (but extensible) 

set of operations that a user may perform. 

All operations end up on the blockchain eventually. Once they 

are validated and confirmed by a witness by being included into 

a block, they are executed and update the state of the blockchain 

accordingly. 

The release version of BitShares 2.0 comes with (a) transfer 

ops, (b) trading order ops, (c) account ops, (d) asset ops, (e) witness 

ops, (f) committee ops, (g) worker ops, and (h) vesting ops, 

However, since BitShares allows for shareholder approved, live 

protocol upgrades, the set of operations can be extended and 

modified. 

On the blockchain level, each operation is assigned an individual 

id with a custom set of parameters for performance and 

latency reasons. 

5.6 Transactions 

Having defined operations, we can now put these into a list 

of operations and construct a transaction. In addition to its 

operations, a transaction also consists of (a) an expiration date, 

(b) a reference block number, (c) a reference block prefix, (d) a 


5.7 PROPOSED TRANSACTIONS 9 

set of extensions, and (e) a set of signatures to authorize each 

operation. 

Each node (including witnesses) verifies that all requires signatures 

to perform the given operations are present and valid 

prior to propagating the transactions to the rest of the network 

and hence to the witness node constructing the next block. If the 

transaction is included into a block it is considered finally valid 

or executed. 

5.7 Proposed Transactions 

Additionally, the Graphene technology allows users to propose a 

transaction which requires approval of multiple accounts in order 

to execute. These transactions are only partially valid and do not 

execute until they are completely valid. 

The user proposes a transaction, then signatory accounts add 

or remove their approvals from this operation. When a sufficient 

number of approvals have been granted, the operations in the 

proposal are used to create a virtual transaction which is subsequently 

evaluated. Even if the transaction fails, the proposal 

will be kept until the expiration time, at which point, if sufficient 

approval is granted, the transaction will be evaluated a final time. 

This allows transactions which will not execute successfully until 

a given time to still be executed through the proposal mechanism. 

The first time the proposed transaction succeeds, the proposal 

will be regarded as resolved, and all future updates will be 

invalid. 

The common use-case would be similar to so called multisignature 

transactions which must be signed by two parties. 

Classical crypto currencies had the issue that such proposed 

transaction had to be communicated on separated channels until 

all required signatures have been collected. With BitShares, it is 

no possible to propose a transaction on the blockchain and have 

the required signatures be added by the respective parties. 

The proposal system in combination with corporate accounts 

allows for arbitrarily complex or recursively nested authorities. If 

a recursive authority (i.e. an authority which requires approval of 

nested authorities on other accounts) is required for a proposal, 

then a second proposal can be used to grant the nested authority’s 

approval. That is, a second proposal can be created which, when 

sufficiently approved, adds the approval of a nested authority to 

the first proposal. This multiple-proposal scheme can be used to 

acquire approval for an arbitrarily deep authority tree. 

6 Discussion 

In general, BitShares has similarities and differences to most 

known crypto-currencies. As many others, BitShares is based 

on a blockchain that stores and propagates transactions, i.e. user 

operations. Since, with DPOS, computational resources are used 

solely for the purpose of transaction propagation and confirmation, 

rather than wasteful computational work, the block production 

interval has been reduced to a few seconds. Eventually, this 

improves the over-all profitability of the DAC. 

Additionally, we make use of named accounts that can be 

registered on the blockchain. Users no longer need to send money 

to an alphanumeric string that can be copied incorrectly. Rather, 

funds can be sent as easily as sending an email, and in the same 

fashion. Name registration allows for the identification of who 

transactions are are originating with with no need to manually 

create a contact account for a given address. Transactions may 

contain a memo field that allow users to describe the nature 

of the transaction or broadcast secure messages about the price 

of the current transaction fee. Since BitShares 2.0 implements 

confidential transaction, there is no longer a need for mixing or 

master nodes. Transactions can be more private iin BitShares 

than in Bitcoin, for example, with no additional work needed 

from the user. 

BitShares is a 100% proof-of-stake system. This means it 

is a lot more efficient (cost per security) than proof-of-work 

and therefore does not have to dilute stakeholders/coinholders 

(there is a 10% yearly dilution of Bitcoin-holders as per 2015 

with Bitcoin and lowering this dilution would mean to lower 

the security). Hence, the cost of securing the BitShares network 

is merely a fraction of all transaction fees accumulated by the 

network. 

The job of the block producers is simple: include as many valid 

transactions in your given block as possible and sign a single 

block. These Block producers compete for the most approval in 

order to be allowed to produce blocks. Shareholder votes are 

proportionate to the relative number of shares they own. The 

BitShares DAC is completely shareholder run. Now people can 

be hired by the blockchain. Where coins like Bitcoin dilute to pay 

for network security, BitShares takes these fees and directs them 

towards continual improvement of the network and community. 

This helps insure BitShares will stay competitive in its feature 

set. More details about the consensus scheme of BitShares will 

be made available in a separated whitepaper. 

Recalling the initial distribution of BTS, it seem convincing 

to assume that most alternative distributions are way more unfair 

and some disproportionately favor their respective core developers. 

Since BitShares is a self-funded DAC, it can pay for its future 

development autonomously by dilution, if shareholders reach an 

on-blockchain consensus by approval voting. 

Furthermore, it becomes clear from the descriptions that Bit- 

Shares is governed by its shareholders and the committee whose 

members have shareholder approval. This allows for flexible 

adjustment of blockchain parameters, such as transaction fees, 

block interval, and more, as well as protocol upgrades to include 

new features. 

Since the BitShares is a self-funded blockchain, that can pay 

its workers by protocol, a healthy competition for new improvements, 

upgrades and additional features can be expected. 

7 Conclusion 

The properties and features mentioned in this paper make it clear 

that the BitShares DAC is well-prepared for its own features. 

It was shown that, due to on-blockchain voting, a decentralized 

development and funding can be achieved. The consensus mechanism 

DPOS reaches a trade-off between efficiency and required 

trust while maintaining better decentralization than almost every 

other blockchain consensus scheme. 


REFERENCES 10 

References 

[1] Daniel Larimer, “Creating a Fiat/Bitcoin Exchange without 

Fiat Deposits.” https://bitcointalk.org/index.php?topic= 

223747.0. 

[2] “DACPlay,” http://dacPLAY.org. 

[3] Adam Ernest, “Follow My Vote,” http://followmyvote.com. 

[4] Cédric Cobban, “Follow My Vote,” http://peertracks.com. 

[5] “BitShares 2.0: Financial Smart Contract Platform,” Bit- 

Shares Whitepapers, 2015. 

[6] “The trade is the settlement,” http://t0.com/. 

[7] Daniel Larimer, “Overpaying for Security,” http: 

//letstalkbitcoin.com/is-bitcoin-overpaying-for-falsesecurity/#.Ui-p9WTFT7s. 

[8] “BitShares 2.0: Distributed Consensus,” BitShares Whitepapers, 

2015. 


BITSHARES 2.0: FINANCIAL SMART CONTRACT PLATFORM 

Fabian Schuh, Daniel Larimer 

Cryptonomex, Cryptonomex.com ∗ 

Blacksburg (VA), USA 

{ fabian, dan }@cryptonomex.com 

Abstract— 

Ever since Satoshi Nakamoto released his whitepaper 

and corresponding software for bitcoin, the cryptocurrency 

ecosystem has continued to grow at a rapid pace. In the 

beginning, Bitcoin created a platform that anyone could use 

to transfer value across the internet without middlemen, 

banks or counterparty risk. However, once bitcoin’s basic 

blockchain consensus technology became established and stable, 

people began to discuss whether blockchain technology 

could also be applied to enable the trade of multiple assets 

without the need for a broker or centralized clearinghouse. 

BitShares has created such a technology, and has coined 

the term ”decentralized exchange” (DEX) to describe our 

Bitcoin 2.0 platform. Currently, it supports trade not only in 

digital assets, but also traditional financial instruments and 

securities on the blockchain. The two main tools we provide 

for the creation of these instruments, market pegged assets 

(MPA) and user-issued assets (UIA), are discussed in detail 

in this paper. 


In today’s world, crypto-currencies are unique because they 

are the only type of digital currency that does not represent a 

corresponding counterparty liability. Instead, they are fungible 

decentralized tokens, whose value is derived from the amount 

of practical utility (or potential future utility) perceived by the 

network of users that support and trade in them. Not surprisingly, 

most cryptocurrencies suffer from high levels of price volatility 

due to many complex factors, such as constantly shifting public 

perception and highly speculative and unregulated markets. Although 

professional traders tend to appreciate this volatility, so 

far it has hindered the widespread adoption of cryptocurrency as 

a practical payment solution. 

One approach to creating a price-stable asset would be for an 

issuer to accept deposits in return for a digital token as a claim 

receipt (an ”I Owe You”). With this approach, the token would 

trade in the market as having the same value as the underlying 

asset, minus any perceived credit risk associated with the issuer. 

While this approach may work well for settlements, it is far 

less secure as an instrument for long term savings. History has 

∗ This work was supported by Cryptonomex and honorable members of the 

bitsharestalk.org community. 

repeatedly proven that many issuers will eventually go bankrupt 

due to incompetence, government intervention or outright fraud. 

BitShares has developed an alternative approach to creating 

price stable digital assets by using a cryptocurrency as collateral 

in a contract for difference (CFD) [1]. With this approach, 

two parties take opposite sides of a trade, where one party is 

guaranteed price stability, and the other party is granted leverage. 

This works as long as sufficient collateral exists, and the contract 

can be settled by an honest 3rd party with a price feed 

BitShares is a counterparty-trust free platform for financial 

smart contracts which operates over the internet, and offers a 

set of financial instruments that includes CFDs. These contracts 

are derivative instruments, and as such they fall under the wider 

definition of financial instruments. Financial instruments can be 

defined as tradable assets of any kind, including cash, proof of 

ownership receipts, or a contractual right to receive or deliver 

an underlying instrument, commodity, option, etc. Additionally, 

several other digital financial instrument tools are currently 

available on BitShares, such as Market Pegged Assets (MPA) 

or “SmartCoins” which represent a derivative with fiat currency, 

gold, or even other cryptocurrencies as the underlying asset. 

These SmartCoins derive their value from contracts based on the 

performance of the BitShares base token (BTS). Smart coins will 

be presented in detail in section 2. 

The BitShares platform also contains an flexible feature called 

“user-issued assets” (UIA) which will help facilitate a wide 

range of profitable business models based around certain types 

of services. A UIA is a type of custom token registered on the 

platform, which users can hold and trade within certain restrictions. 

The creator of such an asset can publicly name, describe, 

and distribute its tokens, and can specify custom requirements 

such as an approved whitelist of accounts permitted to hold 

the tokens, or the associated trading and transfer fees. These 

tokens allow for diverse use cases such as ownership tracking, 

crowd fundraising, IOUs, coupons, and many more that will be 

discussed in section 3. 

In order to trade financial instruments, BitShares provides a 

high-performance decentralized exchange (DEX), with all the 

features expected of a professional trading platform (see section 

4). Any two assets that are registered on the blockchain 

(MPA or UIA) may be traded against each other at any time. 

Orders can be settled almost instantly at speeds of up to 100,000 

transactions per second. With this kind of performance on a 

decentralized exchange, there is no longer a need for traders to 

expose their funds to the risks of centralized exchanges. 

Release: financial-platform/1.0-rc1-4-g23fc8ea (2015-11-12)

2 

In this paper we will discuss the financial instruments available 

in the BitShares network as well as the DEX. Before continuing, 

we recommend that you read through the basic technological 

components of BitShares in the other white papers [2] (more 

papers to be published shortly). 

2 Market Pegged Assets (MPA) 

A cryptocurrency that has the properties and advantages of Bitcoin, 

but is also capable of maintaining price parity with a globally 

adopted currency (e.g. U.S. dollar), would have incredible 

high utility for convenient and censorship-resistant commerce. 

This has been achieved by BitShares’ market pegged assets 

(MPA), a new type of freely traded digital asset whose function 

has been designed to track the value of a underlying conventional 

asset by means of contracts for difference (CFD). 

A SmartCoin (synonym for MPA) is a cryptocurrency that 

always has 100% or more of its value backed by the BitShares 

core currency (BTS), to which they can be converted at any time, 

as collateral in a CFD. 

What makes MPAs unique is that they are free from counterparty 

risk even though they resemble a CFD backed by collateral. 

This is achieved by allowing the network itself (implemented as 

a software protocol) to be responsible for securing the collateral 

and performing settlements. This will be described in greater 

detail below. 

We will present SmartCoins as a viable open source alternative 

to the slow, restrictive, and expensive “legacy” banking 

system. SmartCoins that have price parity with a commonly 

used currency will enable merchant adoption with ease and 

efficiency. Also, they will reduce the need to calculate capital 

gains and losses on volatile assets to determine tax liability. 

In short, BitShares is bringing publicly auditable open source 

banking to anyone with access to the internet. MPAs allow savers 

and spenders to choose their preferred asset type, which brings 

flexibility and ease of use to the open source banking experience. 

The subsequent paragraphs will explain how market pegged 

assets achieve price parity while minimizing risk to their holders. 

2.1 Price Stability 

Ever since the bitcoin blockchain initiated the age of decentralized 

public ledgers, economists and computer scientists have 

attempted to achieve a stable or price pegged cryptocurrency. 

The following two subsections will discuss our discoveries about 

the true nature of stable or pegged currency and explain how 

BitShares has solved this complex issue. 

2.1.1 Definition of Price Stability 

Before we discuss how BitShares achieves price stability, we first 

need to define what properties make a currency stable. 

In the U.S. for instance, the Federal Reserve (FED) has a 

mandate of stable prices and it is almost universally accepted by 

the market that this is a good mandate. The same holds true for 

the Euro, with its stability being achieved through the European 

Central Bank (ECB). Almost every country applies a similar 

methods to gain control over prices via monetary policies like 

quantitative easing and fixing of the interest rates for commercial 

banks that borrow money from the central bank. 

As a very basic example, imagine that a central bank has 

managed to keep prices stable through their monetary policy with 

0% price inflation for 20 years. Now let’s assume that during this 

same 20 years the advances in robotics and automation resulted 

in a 3x increase in efficiency and thus there are now 3x as much 

food, cars, phones, houses, etc. For the sake of this example 

we will assume the population is the same and everyone has 

the same amount of money in the bank. You would normally 

expect that everything would be 1/3 the price and that everyone 

would be able to afford 3x their prior lifestyle. However, this 

is unfortunately not the case. Because of constant intervention 

by the central banks, they have managed to also increase the 

money supply by 3x. The newly created money is then lent to 

the commercial banks which then lend it again to the people at a 

profit. 

Since this monetary inflation results in a sustained increase 

in the general level of prices, it is equivalent to a decline in 

the purchasing power of money. Hence, a dollar buys less and 

less over time. As a result, we see the dollar hast lost 99% of 

its purchasing power since the FED was founded in 1913 (see 

fig. 1). 

Billions of Dollars 

4,000 

3,000 

2,000 

1,000 

0 

1920 

1930 

1940 

1950 

1960 

Figure 1: St. Louis Adjusted Monetary Base [3] 

Of course, the goal of this paper is not to propose a replacement 

for central banks or their monetary policies, but we do wish 

to clarify some terminology, particularly as it relates to other 

“stable” cryptocurrencies. Other projects in the cryptocurrency 

space have attempted to provide an alternative currency that will 

ultimately achieve a similar mandate as the central banks, leaving 

the profits in the hands of only few institutional entities. Bit- 

Shares market-pegged assets will not result in the centralization 

of power and control in this way. 

Let us discuss the example above. Since the centralized bank 

policies have resulted in a steady decrease in purchasing power 

over time, we notice that price stability does not seem very important 

to them. Eventually, the ideal goal would be to achieve a 

currency with a long term stable purchasing power. However, for 

now we must be content to achieve relative stability by pegging 

SmartCoins to the dollar or euro or gold, etc. To summarize, what 

we want to achieve is: 

Year 

• a predictable price with reduced volatility 

1970 

1980 

1990 

2000 

2010 

2015 


2.2 PRICE FEEDS 3 

• a somewhat reliable ability to predict the future value of a 

token, and 

• a unit of account that doesn’t have any meaningful capital 

gains or losses for tax purposes. 

Hence for us, price “stability” means price predictability 

within some tolerance level. In the case of the U.S. dollar, a willingness 

to accept a yearly loss in purchasing power via monetary 

policies demonstrates that predictability is more important than 

stability [4]. 

Alternatively, BitShares offers a decentralized solution to implement 

the Consumer Price Index (CPI) to peg to the changes in 

the price of a market basket of goods and services purchased by 

regular households. This is another way BitShares users can hold 

and trade a stable crypto token that will help them retain their 

purchasing power. 

2.1.2 BitAssets 1.0: Historical Lessons 

The first iteration of the BitShares bitAsset engine evolved for 

over 9 months as we observed how market participants reacted 

to various rules. We noticed that liquidity is critical to bring 

confidence in the value of the token, and that a system with 

unbalanced rules will tend to bias the price in one direction or 

the other. 

Early on, BitUSD (BitShares SmartCoin pegged to the U.S. 

dollar) was driven down to $0.85 as demand for shorting outstripped 

demand for BitUSD and shorts were not forced to cover. 

Then, after implementing a 30 day forced covering rule, the price 

stabilized around $0.98 to $1.00. Later, as the cryptocurrency 

bear market progressed, BitUSD was trading at $1.05 or more 

because everyone was scared to use leverage and those that had 

open positions looked to cover their position while those who 

held BitUSD were not looking to sell. Over the course of these 

past 9 months, we observed the dynamics of 3 different markets 

and thus had the opportunity to refine our understanding of the 

the behavior of market participants and improve the protocol 

accordingly. 

While we saw that the idea of a market pegged crypto token 

was generally well accepted in the marketplace, we were not 

yet satisfied as that the system had been perfected. For that 

reason, we improved the BitAssets engine for the BitShares 2.0 

protocol. 

2.1.3 BitAssets 2.0: Evolving a Stable 

Crypto Currency 

For BitUSD to be accepted as being equal to $1.00 for the 

purposes of setting prices, it only needs to maintain a floor of 

$1.00. If it can maintain a floor of $1.00, then merchants can 

accept it and know their margins are safe and that they are not 

exposed to currency risk. In order to enable a guaranteed floor, 

all BitUSD can be force liquidated at a trustworthy price feed 1 . 

Since this rule is present, those who create the BitUSD must 

sell it at a price that properly accounts for this risk of forced 

settlement. This means that at almost all times, new BitUSD 

1 Price feeds are published by witnesses that have shareholder approval. See section 

2.2. 

will only enter circulation when there is a buyer willing to pay a 

premium for a guaranteed floor. 

As we will see, since USD holders can initiate settlement, 

there is no need for artificial forced covering every 30 days. This 

relieves shorts of risk, helps increase short demand, and keeps 

the price of BitUSD near the floor. 

2.2 Price Feeds 

The blockchain needs to be aware of the external price of BTS 

in order for settlements to convert SmartCoins into the core asset 

(BTS) at a fair price. 

In BitShares, this is achieved by means of a set of N trusted 

witnesses. These witnesses have to be elected by the corresponding 

BitShares shareholders (e.g. holders of BTS) and can be 

constantly reviewed as all prices are put on the blockchain in a 

public manner by means of transactions of a certain type. Hence, 

misbehaving witnesses can be identified, “fired” and lose their 

reputation of shareholders. 

Additionally, to prevent manipulation of the price feed, N 

witnesses have to be elected that can all produce their prices 

independently. Having a set of N prices p i , 1 

arbitrary MPA on the blockchain, the protocol obtains a single 

price ˜p by the use of the median according to: 

x = sort(p[i]) (1) 

{ 

x[ N+1 

˜p = ( 

2 ] N odd 

1 

2 x[ 

N 

2 ] + x[ N 2 + 1]) (2) 

N even. 

Hence, the price is resistant against misbehaving witnesses in 

that only a majority of price publishers can manipulate the 

outcome of the median. In practice, any unintentional feed error 

is thus balanced around the true price. 

Obviously, the shareholders are required to constantly monitor 

the published prices of their witnesses and should make a public 

note about any discrepancies. This is similar to traditional quality 

management for the Smart Coin products (e.g. bitUSD) and Bit- 

Shares system can offer a paid position to perform this service. 

2.2.1 Price Manipulation 

There is always concern of price manipulation. Someone with 

a large amount of money on both sides of a trade can use their 

funds to manipulate the markets and thus the price feed. If the 

amount of money they lose manipulating the markets is less 

than the amount of money they can gain by manipulating the 

price feed, then it will be profitable to manipulate the market 

at the expense of either the BitUSD longs or the shorts. A low 

collateralized short that sees a large force or global settlement 

order requested can attempt to manipulate the markets and thus 

the feed against the BitUSD holder. 

The risk of price manipulation should be priced into the 

premium on BitUSD charged by the shorts, and thus should 

already be priced into the market. If price manipulation became a 

serious problem that caused very high premiums, then it could be 

addressed by the price feed producers, who can adopt a moving 

average over wider time windows to increase the difficulty of 


2.3 ISSUANCE AND SUPPLY OF COLLATERALIZED SMARTCOINS 4 

short-term manipulation. A variety of algorithms could be used 

to estimate a fair price 2 that keeps BitUSD valued at least $1.00. 

In practice, a feed producer can observe the BitUSD:USD 

market as an indicator on which way to adjust the feed. Generally 

speaking, the strategy that the feed producers adopt for 

controlling the feed should be public knowledge, because the 

shorts will ultimately rely on it. For the feed producers to change 

strategies in unpredictable ways could cause losses to both longs 

and shorts. Fortunately, it is assumed that shareholders primarily 

approve complying feed producers and quickly fire misbehaving 

feed providers. 

2.3 Issuance and Supply of Collateralized 

Smartcoins 

A BitShares MPA can be viewed as a contract between an asset 

buyer seeking price stability and a short seller seeking greater 

exposure to BTS price movement. The open source BitShares 

software protocol implements a decentralized marketplace for 

MPA where all transactions are recorded on the shared block 

chain ledger and the software enforces the market rules. This 

block chain based marketplace is referred to as the decentralized 

exchange or internal market (c.f., section 4) to distinguish from 

external markets such as websites that facilitate the exchange of 

government issued currencies with cryptocurrency. 

SmartCoins are tokens of a particular MPA (e.g. bitUSD). 

They use the concept of a contract for difference, and make the 

long side fungible. For the purpose of this discussion, we will 

assume that the long side of the contract is BitUSD and that the 

backing collateral is BTS (the BitShares core asset). 

In practice, bitUSD are created on the BitShares blockchain 

when a BTS holder asks the network for them by handing over 

collateral to the network, essentially locking them in a contract 

for difference (c.f., 1) in fig. 2). 

external 

exchanges 

BTS/USD 

2. obtain 

bitUSD 

CFD 

short position 

1. put 

collateral 

3. sell 

bitUSD 

long position 

Figure 2: Illustration of external price discovery and a “short 

sell” to seek greater exposure for BTS price 

movements. 

The collateral is only returned to the short seller when the 

corresponding amount of the asset agreed in the contract is 

handed over to the BitShares network again. The protocol will 

then effectively destroy these tokens and fulfill the contract. This 

is referred to as covering a short. At the moment of creation, 

the position of the shorter has not changed at all because he can 

directly cover his own short position using the bitUSD to gain 

back his BTS used as collateral. 

If the short seller has sold the SmartCoins he has created, then 

he would be required to purchase them back from the market 

2 “fair” for honest market participants. 

before closing his short position. Meanwhile, if the value of 

the collateral relative to the current price of the market pegged 

asset falls below a certain margin of safety, the assets can be 

automatically (i.e. initiated by the protocol itself) repurchased 

from the market before the collateral becomes insufficient. 

These rules create systemic demand for market pegged assets 

while allowing them to remain fungible. To protect your contract 

against margin calls (automated, network initiated force 

settlement of your contract at the price feed), you should at least 

maintain the so called maintenance collateral level at all times. 

Hence, the collateral only needs to be high enough to cover any 

slippage as a result of a short squeeze. 

In summary, the following set of market rules apply to all 

market pegged assets (for the sake of simplicity, we here focus 

on the MPA bitUSD): 

• Anyone with BitUSD can settle their position within an 

interval 3 at the settlement price (identical to the feed price). 

• In this case, the least collateralized short positions would be 

margin called and their collateral would be used to settle the 

position. 

• The price feed is the median of many sources that are 

updated at least once per hour. 

• Short positions never expire, except by hitting the maintenance 

collateral limit, or being force-settled as the least 

collateralized at the time of forced settlement (see point 2). 

• In the event that the least-collateralized short position lacks 

enough collateral to cover at the price feed, then all BitUSD 

positions are automatically force settled at the price of the 

least collateralized short (black swan event, see section 2.5). 

These simple rules enable a price floor of $1.00 for 1.00 

BitUSD. A simple metric for testing the validity of our claim 

is to demonstrate that, if you can find someone willing to sell 

1.00 BitUSD for $1.00, that it would be the cheapest option for 

buying BTS. This means that 100% of the buying demand for 

BTS would be available to give liquidity to BitUSD holders as a 

priority over BTS holders. 

2.4 Perspectives of Participants 

While the rules are simple, the consequences are less obvious. 

Let’s analyze this from the perspective of the various players. 

2.4.1 The Short Position 

When deciding a price at which to enter a short order, a trader 

must consider the risk of being force settled. In this case, no 

trader will attempt to short at or below the price feed, because 

they could be forced to settle at the price feed. In fact, a smart 

trader would allow enough of a spread to account for the risk 

of being forced to settle at a feed price that was off by a small 

amount. Since feed errors are equally balanced between being in 

the favor of the short and in the favor of the long (c.f. section 2.2) 

this leaves only the risk of being forced out of their position at an 

inopportune time. 

3 defined by the shareholder approval 


2.5 UNDERCOLLATERALIZATION AND BLACK SWANS EVENTS 5 

A short can minimize their exposure to the feed by providing 

enough collateral to keep far above the least collateralized positions, 

and thus stay very unlikely to be forced to settle at the feed 

or at an inopportune time. 

In practice, the only way new SmartCoins enter circulation 

is if there is someone willing to pay enough of a premium to 

convince a short to provide guaranteed liquidity at the price feed 

on demand, while also covering the cost of exchange rate risk. 

This premium will be higher for the backing cryptocurrency in a 

bear market, and will be lower in a bull market. 

Someone who is short has only one way to exit their position: 

by buying smartcoins off the market. This means that a short 

must also factor in the risk that the premium may change. If a 

short position is entered in a bull market with a 0.1% premium, it 

may be forced to exit during a bear market with a 5% premium. 

In this event a short position is exposed to both exchange rate of 

the dollar vs. BTS and the premium risk. On the other hand, a 

short entered during a bear market with a 5% premium may get 

to cover during a bull market with a 0.1% premium. 

For all intents and purposes, the premium is expected to move 

in the same direction as the price, and thus speculators who only 

care about relative price changes can ignore the premium. 

2.4.2 The Long Position 

The very first buyer of BitUSD will have to pay the lowest 

premium set by the shorters. For the sake of discussion, let’s 

assume the first BitUSD was created in a bear market and cost 

$1.05 to create. The holder of that BitUSD has two options: 

sell it on the market for $1.04, or request forced settlement for 

$1.00. Clearly, the forced settlement option would only be used 

in situations where there was a decrease in total demand for 

BitUSD and there were no offers to buy it above $1.00. 

As a trader only looking to trade back and forth between 

BitUSD and BTS, this premium doesn’t matter. Such a trader 

is exposed to volatility in the premium, but that risk is limited to 

$0.05 in this example. In practice, the premium is expected to be 

relatively stable and predictable. 

2.4.3 The Customer’s Perspective 

Customers use BitUSD because it provides them the convenience 

and freedom of a cryptocurrency, and has lower transfer fees 

compared to most other payment platforms besides being significantly 

more convenient than fiat. 

A customer looking to buy goods and services with BitUSD 

finds himself paying a premium to acquire BitUSD from the 

market. This means that customers will prefer merchants that 

offer a discount equal to the premium paid. On the other hand, 

the premium is a wash for a customer that earned BitUSD at a 

nominal value of $1.00. 

In fact, the only people to whom the premium matters are those 

who are looking to enter or exit the ecosystem. Once a customer 

or merchant is within the ecosystem, it is easy to simply trade 

BitUSD at parity, even if it is theoretically worth slightly more 

outside the ecosystem. 

Of course, merchants and customers are free to negotiate the 

best way to split the premium, and the free market will take care 

of the rest. In the meantime, all participants can rest assured that 

BitUSD is always worth at least $1, and can consider the premium 

for entering the ecosystem as a one-time fee comparable 

to fees required for the exchange of foreign currencies. 

2.4.4 The Merchant’s Perspective 

A merchant wants to be able to price merchandise in BitUSD, 

and obtain real USD in their bank account, in a reasonable time, 

with minimal risk. In this case, a merchant would place BitUSD 

on the market at $1 per BitUSD. As discussed, BTS buyers are 

looking for the opportunity to buy BitUSD at that price. 

A smart merchant might recognize that 1 BitUSD can actually 

fetch $1 plus a variable premium, and start preferring that 

customers pay them in BitUSD at face value. An even smarter 

merchant might offer a discount to customers that pay in BitUSD. 

In any case, merchants have a financial incentive to advertise 

BitUSD as the preferred payment mechanism, because they 

know that $1.00 is the lower bound on what BitUSD is worth. 

2.4.5 BTS Shareholders and Investors 

A buyer with dollars, looking to buy BTS, knows that 1 BitUSD 

can be used to buy $1 worth of BTS (plus the current premium). 

He also knows that this premium can never be negative, because 

of the option to force-settle at the price feed. In this situation, he 

can know with certainty that if he can convince someone with 

BitUSD to sell for $1.00, he can buy more BTS than if he simply 

buys BTS with his dollars directly. The higher the premium, the 

more incentive exists to buy BitUSD for $1.00. 

This means that, in a BTS bear market, the BitUSD price gives 

the highest premium of the BTS price, and BitUSD becomes the 

easiest to sell. In practice, the BitUSD:USD market will reflect 

the premium, and traders will usually be unable to find anyone 

willing to sell for exactly $1.00. 

If a buyer is looking to purchase a large quantity of BTS 

without moving the price, he can start by buying up BitUSD with 

dollars. This will slowly raise the BitUSD:USD price, which is a 

signal to other market participants. A careful buyer might be able 

to avoid signaling the market. Then, after acquiring the position 

in BitUSD, the buyer can request a global settlement and get the 

price feed on the entire purchase. 

Because all positions and trades are visible on the blockchain, 

all of this trading activity can be factored into the price, minimizing 

any potential profits to be made by attempted manipulation. 

2.5 Undercollateralization and Black Swans 

Events 

All guarantees of SmartCoins are subject to the caveat that a 

SmartCoin can never be worth more than the collateral backing 

the least-collateralized short position. All collateral above this 

maintenance collateral limit is effectively meaningless when it 

comes to enforcing the “peg”. In normal market conditions, the 

value of the collateral is always more than sufficient, but, from 

time to time, markets can rapidly revalue the collateral. 

If this revaluation happens faster than the short positions can 

be forced to cover, then all SmartCoins are liquidated at the 


2.6 RISKS 6 

exchange rate of the least collateralized short position. This is 

called a black swan event since the least collateralized position 

is unable to buy enough BitUSD to cover. At this point, all positions 

are automatically force settled and any additional collateral 

maintained by the shorts is returned to them. This is similar to an 

insolvent bank converting its deposits to equity. 

2.6 Risks 

The current implementation of market pegged assets in the Bit- 

Shares system is designed to minimize risk of loss to SmartCoin 

holders. The collateral requirements and margin triggers were 

chosen conservatively to protect the holders of market pegged 

assets from volatility of the underlying collateral. Control over 

the price feed is distributed among N separately elected feed 

producers who compile information from multiple exchange 

sources. 

Despite such precautions, it is important to carefully explore 

risks of using the system. Risks can be broadly categorized as 

value risk, counterparty risk, or systemic risk. 

2.6.1 Collateral Risk 

Market pegged assets maintain their price parity due to being 

backed by collateral that has an established real world value. 

When the value of the collateral falls, the system is designed to 

react by driving the internal asset exchange to match the new real 

world exchange rate and trigger force settlements (also known as 

margin calls) if necessary. 

However, there exists a possibility that the underlying collateral 

(BTS) drops in value so quickly the market pegged assets 

become under-collateralized. Often termed a black swan event 

(c.f., section 2.5), a sudden crash of BTS value could prevent the 

system from adjusting in time. In this event, the full amount of 

collateral is no longer sufficient to purchase the market pegged 

asset back at the new real exchange rate. In such an event, 

assets may settle at the price fees and are converted back into 

the underlying collateral (BTS). This may expose customers at 

the volatility risk of BTS. Under normal conditions, short term 

market movements, spreads, and fees charged by exchanges may 

also affect the potential cost of conversion into and out of market 

pegged assets. 

2.6.2 Counterparty Risk 

Unlike many attempts to create a digital asset that tracks the 

dollar, market pegged asset are not an “I owe you” issued by any 

entity. For this reason, it does not rely on a specific counterparty 

to honor its value (unless you choose to view the software 

protocol itself as an independent “counterparty” entity). 

Although manipulation risk occurs in any market, it is minimized 

by the open source and auditable nature of the BitShares 

system and carefully considered market rules. MPAs stored on 

a centralized exchange become IOUs and are subject to counter 

party risk [5]. This risk is not a property of the MPA themselves. 

We recommend that users never deposit their tokens on an 

exchange and instead only use gateways that issue their IOUs 

onto the BitShares network. This way you can trade your BitUSD 

against gateway IOUs without exposing your BitUSD to counter 

party risk while in the order book (more details in section 4.3.1). 

2.6.3 Systemic Risk 

Systemic risk is a catch-all for other risks required to utilize the 

system. The primary risk lies with individuals being responsible 

for protecting the cryptographic private keys that sign transactions 

proving ownership of assets. These keys must be protected 

from theft or loss. This risk can be greatly reduced and virtually 

eliminated by following best practices. 

Systemic risk also includes the possibility of an overlooked 

fatal flaw in the open source software or the possibility of 

large scale failure of global network infrastructure. While some 

risk components should drastically reduce over time, such as 

implementation bugs and computational bottlenecks, others are 

constant and difficult to predict, such as politics (i.e. legislation, 

regulations, etc.) or natural catastrophes that may result in partial 

or global internet outages. 

2.7 Privatized SmartCoins 

Alternatively to regular MPA like the bitUSD, BitShares also offers 

entrepreneurs an opportunity to create their own SmartCoins 

with custom parameters and a distinct set of price feed producers. 

Privatized SmartCoin managers can experiment with different 

parameters such as collateral requirements, price feeds, force 

settlement delays and forced settlement fees (see section 3.2.7). 

They also earn the trading fees from transactions the issued 

asset is involved in, and therefore have a financial incentive to 

market and promote it on the network. The entrepreneur who 

can discover and market the best set of parameters can earn a 

significant profit. The set of parameters that can be tweaked by 

entrepreneurs is broad enough that SmartCoins can be used to 

implement a fully functional prediction market with a guaranteed 

global settlement at a fair price, and no forced settlement before 

the resolution date. 

Some entrepreneurs may want to experiment with SmartCoins 

that always trade at exactly $1.00 rather than strictly more than 

$1.00. They can do this by manipulating the forced settlement fee 

continuously such that the average trading price stays at about 

$1.00. By default, BitShares prefers fees set by the market, and 

thus opts to let the price float above $1.00, rather than fixing the 

price by directly manipulating the forced settlement fee. 

3 User-Issued Assets (UIA) 

In addition to the aforementioned market pegged assets, Bit- 

Shares allows individuals and companies to create and issue their 

own tokens for anything they can imagine. The potential use 

cases for so called user-issued assets (UIA) are innumerable. One 

example would be for UIAs to be used as simple event tickets 

deposited on the customer’s mobile phone to pass the entrance of 

a concert. On the other hand, they can be used for crowd funding, 

ownership tracking or even to sell equity of a company in form 

of stock. 

Obviously, the regulations that apply to each kind of token 

vary widely and are often different in every jurisdiction. Hence, 


3.1 DEPOSIT RECEIPTS 7 

BitShares comes with tools that allow issuers to remain compliant 

with all applicable regulations when issuing assets, assuming 

regulators allow such assets in the first place. We will discuss the 

tools and optional administrative rights given to the issuers of a 

given UIA and provide a subset of possible use-cases in more 

detail. 

3.1 Deposit Receipts 

In principle, traditional banks are simply companies that maintain 

a database of customer account balances and facilitate the 

transfer of these assets among their depositors. Companies like 

Dwolla and Paypal essentially issue deposit receipts, and then 

offer cheaper transfers among their users compared to banks. The 

deposit receipt example is probably one of the most important, 

and yet most heavily regulated, use cases of UIAs. For that reason 

we will describe the tools available in BitShares that allow for 

compliant deposit receipts on the blockchain. 

With BitShares, it is now possible to move a company’s internal 

databases onto the blockchain where deposits can make use 

of all the features that BitShares offers, such as smart contracts, 

internal markets, escrow, or (later) bonds. 

In order to make traditional banking more profitable (through 

a decentralized account balance database), and enable services 

like Paypal and Dwolla while offering more freedom to the 

customers, we have identified (with extensive help from many 

different banks and exchanges) the relevant laws required to 

comply with when issuing deposit receipts. The following shall 

briefly discuss how BitShares can assist to comply with those 

rules 4 . 

3.1.1 Know Your Customer 

To comply with Know Your Customer (KYC) laws the issuer 

must know every single customer’s real world identity. BitShares 

supports this by enabling both whitelists and blacklists on the 

block chain. 

When an asset enables whitelists, no account may send, receive 

or trade that asset without being on an authorized whitelist. 

Rather than requiring every issuer to whitelist every customer 

separately, an issuer may specify a set of identity verifiers that 

they trust to do this job. This allows issuers to benefit from the 

network effect of validated users without having to do any direct 

identity verification themselves. 

With this feature, account funds can effectively be frozen by 

removing them from the whitelist. Of course this only affects 

those tokens of that particular UIA. Additionally, the issuer may 

take back his assets from any account, if required. 

Note that these kind of administrative powers are available 

only for UIAs and not for MPAs. Additionally an issuer may 

choose to indefinitely give up partial of full control over each 

specific administrative power. 

3.1.2 Asset Seizing 

From time to time, an issuer may be required to seize funds 

as a result of a court order. While this may be unappealing to 

4 This paper should not replace consultation of a lawyer 

cryptocurrency enthusiasts, it is an unavoidable reality of trustbased 

assets. An issuer can determine whether or not they wish 

to revoke this privilege, but it may be a requirement in some 

jurisdictions. Once again, this privilege only affects tokens of a 

particular UIA and does not apply to MPAs like the bitUSD. 

3.1.3 Market Restriction 

An issuer who offers USD, EUR and other fiat deposits may 

need to restrict direct trading between their fiat assets to avoid 

being subject to foreign currency exchange regulations. Some 

cryptocurrency exchanges allow trading between fiat and cryptocurrencies, 

but not between two fiat currencies. Without this 

feature, many exchanges would be unable to issue their assets on 

the BitShares blockchain. Hence, an issuer may choose to also 

white or blacklist trading partners for their user issued assets 

(i.e. IOUs). This way, the issuer can prevent customers from 

trading USD-IOUs for EUR-IOUs without restricting other pairs. 

Fortunately, MPAs, such as the bitUSD are not fiat and hence 

need not be blacklisted. 

3.1.4 Transfer Restrictions 

A transfer-restricted asset allows the holders of the asset to trade 

it in the markets but not transfer it from person to person. Only 

a few cryptocurrency exchanges allow user-to-user transfer of 

funds outside the market, because this particular activity is often 

subject to a different set of money transmission regulations. For 

that reason, known exchanges make use of so called coupon 

codes if there is a customer demand for user-to-user transfers. 

3.2 Use-Cases 

Having discussed the administrative possibilities of UIAs, we 

will now list and briefly describe a few use cases. These serve 

as examples and only represent a subset of the possibilities. 

3.2.1 Rewards Points 

A use-case that can be easily implemented and with only minor 

regulatory hurdles are reward points, which Merchants already 

today offer to their loyal customers. These points are accumulated 

to earn discounts on future purchases. 

Rewards systems are a prime opportunity to add value by 

making them available to BitShares smart contracts. With an 

UIA, a merchant no longer needs to maintain a database of 

customers and their rewards. Instead, he simply transfers a crypto 

token to the customer (e.g. via a mobile phone application) and 

the public ledger of BitShares takes over the maintenance leaving 

all administrative power to the merchant (i.e. the issuer of the 

UIA). 

Furthermore, because the issuer may set a trading fee for their 

UIA, merchants can have an additional revenue stream from 

people trading or transferring their rewards points. 

3.2.2 Event Tickets 

Event tickets are a largely unregulated use case for UIAs. Tickets 

to an event could be issued as digital tokens that are auctioned off 


3.3 FEE POOLS 8 

to the highest bidder, who would then resell them. This ensures 

that the ticket issuer raises as much money as possible up front, 

while transferring the risk of ticket sales on to speculators. On 

the day of the event, the issuer can freeze all trading of the asset 

and then allow users to cryptographically check in (e.g. with their 

smart phones). 

Furthermore, the blockchain maintains the database of tickets 

which drastically reduces the organizational overhead. 

3.2.3 Digital Property 

Software and music licenses can be made transferable by issuing 

them as a digital asset. Every copy of a program can check to 

make sure that the user has control of a token before running. 

Software implementing such a licensing scheme can remain 

functional even if the company that produced the license goes 

out of business. 

Trading cards can be simulated by creating many limited issue 

assets. Online games can use these assets to represent game 

items. 

Further related possibilities include, but are not limited to: 

ownership tracking, authorization, membership identifications, 

etc. 

3.2.4 Crowdfunding 

With BitShares, decentralized crowdfunding becomes an easy 

task. Technically the process breaks down to as few as two steps: 

(a) Create and issue a new token that should represent your 

project, and (b) sell your shares on an exchange. The issuer is 

now free to choose to sell them for bitUSD, bitEUR, or any other 

token and is free to define the price for each share. Not only can 

these shares be traded on traditional (centralized) exchanges but 

they can also be traded in the decentralized exchange that will be 

discussed in section 4. 

Whether the UIAs are used as a transferable coupon for a presale, 

or for holding an initial public offering (IPO) for a small 

company, issuing an asset is one of the most effective means of 

raising money for a cause. 

3.2.5 Information/Prediction Markets 

With BitShares and the decentralized exchange described in 

section 4, prediction markets [6] can be quickly implemented. 

A binary prediction market has a “price” between 0 and 1 

representing the two possible outcomes of an event. All that is 

needed is a proper prediction criteria in the description of a newly 

created asset that anybody can issue by putting up collateral. 

Hence, a prediction market is a specialization of SmartCoins 

where there is no need for margin calls or forced settlement 

because all positions are fully collateralized at any price. 

While the event has not occurred, the price of this asset reflects 

the probability of an event to occur. After the event has occurred 

the issuer can settle all positions at final “price” depending on 

the actual outcome. Participants that have voted correctly will be 

able to settle their shares back to the network at a higher price 

and make a profit. 

These prediction markets can be very secure if the issuer is a 

multi-signature account with many independent and trustworthy 

parties involved. 

This feature, in combination with the bitUSD, allows anyone 

to implement most binary prediction and information markets 

currently established in a decentralized and trustless manner. 

3.2.6 Company Shares 

In most countries Corporate shares are heavily regulated by their 

corresponding exchange authority, such as the Securities and 

Exchange Commission (SEC) in the U.S. However, most of those 

regulations do not prevent them from being issued or traded 

on an alternative trading system [7]. The regulations in many 

jurisdictions require all shares to be registered (a.k.a. held by 

known identities). 

Since the BitShares network offers whitelisting for customers 

of UIA according to section 3.1, corporate shares can certainly 

be issued and traded in the BitShares ecosystem (see section 4). 

When issuing a corporate share in BitShares, the company 

can decide who is able to hold, share, or transfer its shares and 

can restrict trading markets freely (e.g. only allow the market 

STOCK:bitUSD but not STOCK:bitGOLD). 

3.2.7 Privatized SmartCoins 

Wit BitShares 2.0, users can create their own derivatives (i.e. 

price-stable assets) with custom parameters designed to track 

the value of any asset they can imagine by means of CFDs. 

The benefit of price-stable crypto-currencies is that they are fully 

collateralized, and the issuer only needs to be trusted to appoint 

an honest set of independent (non-collusive) feed producers. 

Unlike deposit receipts, the value of a privatized SmartCoin is 

secured even if the issuer disappears (in this case, however, the 

asset may be declared non-complying by regulators since white 

and blacklists cannot be updated any longer). 

To create a privatized SmartCoin, Bitshares provides several 

different parameters that an issuer may fine tune. In addition to 

account whitelists, market restrictions, and transfer restrictions, 

the issuer of a private SmartCoin has control over (a) Collateral 

Type, (b) Initial Collateral Rate, (c) Maintenance Collateral Rate, 

(d) Forced Settlement Fee, (e) Price Feed Update Rate, (f) Settlement 

Delay, (g) Global Forced Settlement, and (h) Trading and 

Withdrawal Fees. 

With these tools it is possible to emulate a pure contract for 

difference with periodic global forced settlement (i.e., monthly, 

yearly, etc), or to emulate BitAssets 1.0 by having a 30 day delay 

on forced settlement (c.f. section 2.1.2). 

Hence, any arbitrary financial indexes can be used for the price 

feed to mimic all manner of exotic assets. Also, because accounts 

are publicly auditable, even mixed asset funds can be modeled 

with the advantage of verifiable ownership claims by the fund 

manager. 

3.3 Fee Pools 

Issuers may optionally maintain a so called fee pool. The fee pool 

is a pool of BTS and an exchange rate at which the issued asset 

may be converted into BTS. This allows users to pay transaction 


3.4 PROFITING FROM UIAS 9 

fees in the form of an asset even though the network requires fees 

to be paid in BTS. 

When a user wishes to pay a network fee with the asset, the 

fee pool will step in to convert the asset into BTS at the rate that 

the issuer has specified. This means that issuers may charge a 

premium every time users opt to use their asset to pay network 

fees rather than paying them directly with BTS. 

The purpose of the fee pool is to provide a convenience to users 

that would like to use an asset without concerning themselves 

with the details of acquiring BTS. Anyone may fund the fee 

pool, but only the issuer may specify the exchange rate. This 

exchange rate is automatically set to the settlement price if the 

asset is collateralized by BTS. 

3.4 Profiting from UIAs 

There are many ways to profit from issuing an asset. As the 

issuer you have complete control over market fees and can tune 

parameters such as the percent of each trade that is collected as a 

fee. This percentage can be bound by a minimum and maximum 

fee. The combination of these parameters give issuers flexibility 

in pricing. 

For example, you could easily implement a centralized payment 

solution on top of the decentralized BitShares network and 

mimic the business model of Dwolla and Paypal. In BitShares, 

you simply issue your own IOUs for U.S. dollars or Euro 

and send them to the wallets of your customers. Whenever a 

customers buys a market items from another customer, they may 

choose to pay with your IOU and require a percentage or fixed 

amount as fee for your service. The major advantage for your 

business is that you are not required to maintain your own highly 

reliable database servers that contain your customers’ balances 

since your customers maintain their wallets on their own and 

the public ledger securely stores the balances. This outsourcing 

increases security and profits, and improves competitiveness at 

no extra cost. 

4 Decentralized Exchange 

Throughout recent history, centralized exchanges have repeatedly 

proven unreliable and untrustworthy. Whether it is 

MF Global, Mt. Gox, BitStamp, or Bitfinex [8, 5, 9, 10], many 

people have been cheated because they allowed a 3rd party to 

hold their funds. It doesn’t matter how big they are, or how 

many auditors, regulators or insurers are involved, every kind 

of fraud, abuse, and theft can and has occurred. In the modern 

financial system, these transgressions happen all too frequently 

within centralized banks and exchanges all around the world. 

Hence, in the following paragraphs, we will outline the concept 

of the decentralized exchange (DEX) that powers the Bit- 

Shares network and discuss the many benefits of using it has over 

traditional centralized exchanges. 

4.1 Core Features of the DEX 

A decentralized exchange has a very particular set of advantages 

over traditional centralized exchanges, and we would like to 

address some of them briefly below. Although the BitShares 

DEX comes with all of them, it is up to the reader and customer 

to leverage those features for their particular needs. 

4.1.1 Separation of Powers 

There is no reason why the same entity needs to be responsible 

for issuing IOUs and for processing the order book. In fact, this 

is is actually a disadvantage from a security standpoint. It is 

only because these two roles have been combined that there is 

a tendency toward centralization in the Bitcoin exchange space. 

Since both sides of any order book consist of amount/price pairs, 

it makes more sense to store this data on a public ledger such as 

a blockchain. Therefore, to create a decentralized exchange, the 

first step is to move the order book onto the blockchain so that 

anyone can see and audit it. 

After this is done, gateway services can still be used to enter 

and leave exchange order book through IOUs, just like a traditional 

exchange uses. The blockchain can allow users to trade, 

for example, BitstampUSD against BitfinexUSD, and in order 

to easily move funds from one gateway to another. Users could 

even trade BitstampUSD against BitstampBTC or BitstampUSD 

vs BitfinexBTC. 

With this model, traditional exchanges merely act as gateways 

that receive fiat and issue GatewayFiat as an UIA on the 

blockchain (In reverse, they would receive their own Gateway- 

Fiat token, execute a wire transfer and then burn the token). 

These gateways would make their money entirely on transaction 

fees and from a percentage of the trading fees similar to their 

current model. 

But simply moving the order book to the blockchain is not 

enough, because the market would naturally centralize around a 

few gateway IOUs and the markets for them. Also, BitstampUSD 

is not fungible with BitfinexUSD because they have different 

trust profiles and regulatory considerations. Plus, any IOU carries 

the risk default similar to the the IOUs that currently exist on the 

exchanges’ internal databases. If we only had gateway IOUs, it 

would prevent the possibility of having a single, unified order 

book for USD pairs (or any fiat pair). 

Fortunately, BitShares has solved this issue with marketpegged 

assets. We have bitUSD which is backed by collateral and 

is independent of governments or centralized entities, and trades 

for $1 independent of any gateway. It is also universal because 

users don’t need to register their identity with anyone to use bitUSD 

or any other market pegged asset. So bitUSD pairs can now 

act as the universal order book, where users are safe to keep their 

funds on the books without risking counterparty exposure. This 

core features sets BitShare apart from Ripple, because BitShares 

has this unique “software protocol-based counterparty” that can 

never cheat a user out of their funds. 

4.1.2 Global Unified Order Book 

Because BitShares can be accessed through an internet connection 

and there exists only one source of truth, namely the 

blockchain, there can only exist one global order book for one 

particular market. The impact of such a global unified order book 

would be to improve market efficiencies (reduce all arbitrage op- 


4.1 CORE FEATURES OF THE DEX 10 

portunities), minimize spreads, maximize liquidity and provide 

accountability and auditability. 

By having the trades executed on the BitShares network, it 

would eliminate all high-frequency trading and front running 

because everyone has the same chance of filling an order. High 

frequency trading and front running depend upon centralized 

exchanges with high volume and deep markets. When the vast 

majority of trading activity moves to a decentralized, trustfree 

exchange with open order books, the remaining centralized 

exchanges will become much less appealing to honest traders. 

Furthermore, BitShares does not have restricted open hours, 

and is available for trading 24 hours a day and 7 days a week. 

4.1.3 Trade Almost Anything 

BitShares offers the tools to trade in Gold, Silver, Gas, and Oil 

in addition to several national currencies and cryptocurrencies. 

There are few limits on what can be traded on the BitShares 

exchange, if there are enough people interested to form a market. 

The DEX allows any two pairs to be traded directly. There is 

no need to ask the exchange to open up an additional market. If 

customers prefer to trade Silver:Gold directly, they can simply 

do it. The BitShares exchange can support assets that can track 

stocks, bonds, indexes, or inflation. Companies can issue their 

own stock on the BitShares network and allow easy, low-cost 

trading with complete protection against naked shorting. 

4.1.4 No Limits 

Of course, you can trade any amount, at any time, from anywhere, 

without withdrawal limits 5 . All other legally compliant 

exchanges have daily withdrawal limits. Those who wish to 

exceed standard limits must provide increasingly invasive levels 

of documentation. Some exchanges, such as Coinbase [11], even 

limit what you can do with your money after you have withdrawn 

it [12]. Other exchanges demand documentation of how you 

earned your cryptocurrency. 

With BitShares, no one must approve your account, so you 

have complete financial freedom. 

4.1.5 Decentralized 

Decentralization gives BitShares robustness against failure. 

When a centralized exchange is compromised, millions of dollars 

and thousands of users are impacted all at once. In a decentralized 

system, any attack or failure would impacts only a single 

user and their funds. Users are in control of their own security, 

which is generally preferable to trusting a centralized entity. 

Furthermore, since KYC/AML verification can be outsourced 

via whitelists, a gateway that holds customers funds for fiat 

backed IOU’s would not necessarily need direct access to the 

customers’ identities. This was an issue with Mt.Gox [5], where 

thousands of customers’ identities were stolen. 

Since there is a fixed cost associated with attempting to hack 

an exchange or an individual user, the difference between a 

centralized exchange and the DEX is the size of the reward. 

5 Restricted access may only apply to user issued assets (e.g. IOUs of gateways), 

but not to market pegged assets, such as bitUSD, bitEUR, etc. 

If someone places a multi-million dollar bounty on attacking a 

specific exchange, then you can expect a lot more effort to be 

put into compromising that exchange than would be put into 

attacking your individual account. 

Furthermore, within any centralized company multiple people 

usually have access to customer funds. Likewise, most centralized 

exchanges end up depending upon multiple people who 

share the responsibility of guarding the secret key that controls 

the funds. If any one of them is compromised, everyone’s funds 

are put at risk. Because of this, being individually responsible for 

maintaining your own secrets is a much safer option. 

Access to funds in BitShares can be further secured by means 

of corporate accounts that implement threshold signatures [2, 13] 

and validate only those transactions which signature weights 

(e.g. the CEO has more say than a worker) surpass a pre-defined 

threshold. 

4.1.6 Secure 

The traditional banking system has long practiced what is called 

fractional reserve banking, but in many cases the more appropriate 

term is “fictional” reserve banking. In the BitShares 

ecosystem, however, we demand at least 100% reserves. Every 

Dollar, Euro, bitcoin and ounce of gold held as a SmartCoin on 

the BitShares DEX is backed by at least, but often greater than 

100% reserves. In a centralized exchange, a single hack, mistake, 

or theft can quickly turn a 100% reserve system into a fractional 

reserve system, or worse, a ”fictional” reserve system. Without 

any reserves, it is unlikely that an exchange would ever be able 

to pay back the funds it owes to its customers. 

Because the BitShares DEX always maintains a minimum 

of 100% reserves, users can rest assured that BitShares will 

be solvent in almost any market. Since all of the reserves are 

kept as BTS held in collateral on the blockchain, they cannot 

be compromised because there are no private keys that can be 

stolen. 

4.1.7 Fast, but not too fast 

On Wall Street, traders go to great lengths to get as physically 

close to the core computers as possible, because their automated 

trading robots make decisions so quickly that the speed of light is 

a formidable factor. This gives them an unfair advantage against 

other traders, and allows them to engage borderline unethical 

practices such as order frontrunning. They have even spent 

billions of dollars to lay transatlantic fiber optic cables between 

London and New York to shave milliseconds off of their trading 

times. 

On the BitShares DEX, all trades execute in seconds, just like 

with any other centralized website interface. Unlike centralized 

exchanges however, there is no prioritized trading, front running, 

or hidden orders. This puts all traders on a level playing field. 

4.1.8 Decentralization of Privacy 

Crypto-currencies depend upon a public ledger or blockchain, 

which makes privacy challenging, because everyone can see 

every transaction. Bitcoin gives every user one or more account 

numbers, and that gives many people a false sense of security. 


4.2 ORDER MATCHING 11 

People assume that as long as no one knows their account number 

and they use a new account number with every transaction, it is 

impossible to tie their bitcoins to their real life identify. 

This is where the large centralized exchanges become a problem. 

In order to comply with government regulations, exchanges 

must know everyone they do business with. Since many bitcoin 

transactions flow through an exchange, the exchange learns who 

everyone is and can start to track who is doing business with 

whom. Coinbase is already closing accounts [14] based upon 

who you do business with after withdrawing your bitcoins. 

In order to have even the slightest bit of privacy, the exchange 

functionality needs to be divided among hundreds of parties 

who are unlikely to collude to compromise identity. This is not 

economically practical today, because the exchange order book 

creates market incentives that naturally tend toward centralization 

in just a few exchanges with the vast majority of market 

share. 

In BitShares, your identity need only be verified by issuers of 

IOUs (e.g. GateUSD) in order to comply with fiat regulations. 

Once traded for bitUSD your link to the gateway or exchange 

Gate can be removed quickly by means of blinded transactions 

that enables users to publicly move funds without revealing the 

exact amount [2, 15]. If issuers approve, blinded transactions 

may even be performed for UIAs directly. 

4.2 Order Matching 

The old BitShares 1.0 protocol went to great effort to avoid 

market manipulation and eliminate the supposed evil of front 

running. To stop front running, all orders were matched at the 

exact price specified in the order. Any overlap in the market 

was captured as fees. This means that to get the best price, a 

client would have been forced to submit many orders manually 

matching each order. This had the side effect of slowing down 

how quickly someone could walk the book. This slow down 

effect was pitched as protection against market manipulation 

attacks on SmartCoins. 

Experience has taught us that the lack of standard limit orders 

has harmed market liquidity and adoption. BitShares 2.0 matches 

orders on a first-come, first-serve basis and gives the buyer the 

best price possible up to the limit. Rather than charging unpredictable 

fees from market overlap, the network charges a defined 

fee based upon the size of the order matched and the assets 

involved. Each asset issuer gets an opportunity to configure their 

fees as described in section 3.3. 

In contrast to BitShares 1.0, there will also be limit-orders that 

allow to buy on the market up to a predefined price. This allows 

to instantly fill any order below or above your price at the cost of 

a single fee (c.f., section 6). 

4.3 Collateralized Smartcoins 

The heart of BitShares is the SmartCoin system which enables 

the creation of collateralized bitUSD from the BitShares network. 

A BitUSD has all of the properties of traditional cryptocurrencies 

like Bitcoin, with the additional features from BitShares 

combined with the price stability of the US dollar. At any point in 

time you can sell a BitUSD for at least 1 dollar worth of BTS. If 

at any time the value of the collateral falls below a certain point, 

the blockchain will automatically buy back the BitUSD with a 

dollars worth of BTS (forced settlement, see section 2). 

When you hold BitUSD the value of your holdings will 

remain pegged to the dollar so long as BitShares have a value 

greater than 0. This means that BitUSD is secure against just 

about everything but an unfixable software bug in the BitShares 

protocol itself. By the time BitShares matures to the level Bitcoin 

is at today, we expect the probability of that kind of bug to be 

similar to that of Bitcoin having such an event. 

4.3.1 Fiat Gateways 

The roles that traditional exchanges perform today are: 

1. Receiving cryptocurrency and issuing IOUs. 

2. Receiving fiat and issuing IOUs. 

3. Redeeming IOUs. 

4. Processing an order book. 

Each of these stages requires a high degree of trust and 

direct counterparty risk, because they involve an IOU from the 

exchange. To get the best liquidity and lowest spreads requires 

a large and active order book, and this means that most people 

gravitate toward a few core exchanges, leaving everyone exposed 

to the same counterparty risk. 

Moving money into or out of an exchange often incurs a 

significant time delay, which means that active traders must keep 

their funds on the exchange. This magnifies the amount of risk 

to users of the exchange. It also magnifies the risk to all users in 

the cryptocurrency ecosystem. Each large security breach results 

in significant sell pressure, from both the thief looking to cash in 

their loot, and from regular users hoping to sell before the thief 

does. 

With the separation of powers, we only need gateways that 

perform the tasks 1, 2 and 3 of the list above while order book 

processing and storage of account balances are managed by the 

BitShares protocol/network. An entity issuing and redeeming 

IOUs for another asset in BitShares is called a gateway. In 

contrast to central exchanges, the IOUs are sent to the wallet of 

the customer and are under his full control (see section 3.1). 

Many gateways prefer the low-risk approach of one-for-one 

redemption and will simply allow the GatewayUSD to float 

against BitUSD with a small but variable spread in the market. 

Users then pay a small variable conversion cost as they exit from 

BitUSD to fiat USD through GatewayUSD. 

On the other hand, many users will want a direct conversion 

from BitUSD to fiat USD. In this mode of operation, the gateway 

takes care of providing all of the liquidity within a fixed percentage 

transaction fee. The gateways then compete on offering the 

lowest possible spread. 

Once this happens, BitUSD is effectively as good as USD with 

a small fixed conversion fee. This fee will likely be no more than 

the withdraw and deposit fees that current exchanges charge. At 

that point, BitShares will be a fully operational exchange with 

many banking partners and no limits. At no point in time will 

user deposits ever be subject to default or confiscation by an 

exchange or gateway. A truly decentralized exchange will have 

been realized, and the original vision of BitShares completed. 


12 

5 Platform for Further Smart Contracts 

In contrast Bitcoin that offers Script — a stack-based scripting 

language with a reduced set of instructions (called OP codes) — 

to allow for limited smart contracting capabilities, the BitShares 

network allows for arbitrary transactions types, in general. 

However, in contrast to so called Turing-complete blockchain 

projects, such as Ethereum, adding new features or transaction 

types to the protocol requires shareholder consensus. 

Hence, new features must be proposed to the shareholders who 

must reach consensus to approve them. Only after this happens 

is the protocol then upgraded to the next version which includes 

the new feature set. 

6 Fees 

In the BitShares ecosystem every operation is assigned an individual 

fee. These fees are subject to change. However, they 

are defined solely by shareholder approval, thus each and every 

shareholder of the BitShares core asset (BTS) has a say as to what 

the fees should be. If shareholders can be convinced to reduce 

a certain fee and consensus is reached, the fee will be reduced 

automatically by the blockchain 6 . 

7 Conclusion 

In this paper, we have described the foundations of the BitShares 

network, which we hope will soon begin to inspire a paradigm 

shift from classical banking towards peer-to-peer financing. We 

have laid out the many features and benefits of the BitShares 

Decentralized Exchange, which offers financial instruments for 

anyone to utilize with low barriers to entry. 

With SmartCoins, the BitShares ecosystem offers a powerful 

tool for everyone from speculators and savers, to traders and 

entrepreneurs. 

The order-matching algorithm is similar to most central exchanges, 

and allows a user to directly fill an existing order or 

walk-the-books up to a given price by means of a limit order. It 

also allows for trade of any arbitrary pair of assets issued on the 

BitShares blockchain. 

The BitShares platform provides a toolkit with which innovators 

can experiment to discover optimal currency solutions using 

free market trading. 

We also discussed how a price floor of $1.00 USD per bitUSD 

is the most reasonable approach to achieving price predictability. 

Additionally, we have shown that user issued assets (UIA) 

offer countless opportunities to reduce costs. They can be used 

to distribute a token on a decentralized database (the blockchain), 

and can be programmed to comply with government regulations. 

Since the BitShares protocol handles order processing and storage 

of user balances, any implementation of business models 

around UIAs comes at very low cost to the issuer and will make 

expensive central server infrastructure a thing of the past. 

References 

[1] Investopedia, “Contract for Difference,” http://www. 

investopedia.com/terms/c/contractfordifferences.asp. 

[2] “BitShares 2.0: General Documentation,” BitShares 

Whitepapers, 2015. 

[3] Federal Reserve Bank of St. Louis, “Dataset: 

St. Louis Adjusted Monetary Base (AMBSL),” 

https://research.stlouisfed.org/fred2/series/AMBSL/ 

downloaddata?cid=124, Aug. 2015. 

[4] D. Larimer, “Stable currencies are impractical and 

undesirable,” http://bytemaster.github.io/article/2014/12/ 

31/Stable-Crypto-Currencies-are-Impossible/. 

[5] “Mt. Gox,” http://www.wired.com/2014/03/bitcoinexchange/. 

[6] Wikipedia, “Prediction Market,” http://en.wikipedia.org/ 

wiki/Prediction market. 

[7] ——, “Alternative Trading System,” http://en.wikipedia. 

org/wiki/Alternative trading system. 

[8] “MF Global,” http://www.forbes.com/sites/ 

francinemckenna/2012/07/16/auditors-all-fall-downpfgbest-and-mf-global-frauds-reveal-weak-watchdogs/. 

[9] “Bitstamp,” http://www.coindesk.com/bitstamp-claimsroughly-19000-btc-lost-hot-wallet-hack/. 

[10] “Bitcoin Exchange BitFinex’ Hot Wallet Hacked,” 

https://www.cryptocoinsnews.com/breaking-bitcoinexchange-bitfinex-hot-wallet-hacked/. 

[11] “Coinbase,” http://coinbase.com. 

[12] “Coinbase case demonstrates the pitfalls of regulatory compliance,” 

http://cointelegraph.com/news/112319/coinbasecase-demonstrate-the-pitfalls-of-regulatory-compliance. 

[13] Ripple Labs, “Multisig / Transaction Proposal,” https:// 

wiki.ripple.com/Multisign#Transaction Proposal. 

[14] “Is Coinbase Bringing ”Big Brother” to Bitcoin Accounts?” 

https://www.cryptocoinsnews.com/coinbase-bringing-bigbrother-bitcoin-accounts/. 

[15] Oleg Andreev, “Blind signatures for Bitcoin transactions 

(second draft),” http://oleganza.com/blind-ecdsa-draft-v2. 

pdf. 

6 Changes of blockchain parameters are proposed by members of the committee. 

These members are voted by shareholders and improve the flexibility and 

reaction rate. 


BITSHARES TESTNET STRESS-TEST 

Fabian Schuh BitShares Europe, bitshares.eu ∗ 

Erlangen (Bavaria), Germany 

fabian@bitshares.eu 

Abstract—BitShares 2.0 is an industrial-grade decentralized 

platform built for high-performance financial smart contracts. 

In order to show its capabilities in the field, we have 

conducted a stress test on the public testnet. The testnet 

has been deployed with the same code base that is used 

for the BitShares network and has nodes around the globe. 

Only margin changes have been made to distinguish the 

testnet from the productive network, properly. A multi-phase 

stress-test has been proposed and accepted that modifies the 

maximum transaction size, maximum block size and block 

confirmation times in the live network during the stress test. 

Validators have been kept up to date by means of stakeweighted 

voting [1]. 


The Graphene Platform has been developed by Cryptonomex 

specifically for BitShares. It has undergone many changes and 

has been enhanced to stay on top of blockchain technology. One 

of its public forks, BitShares, has been publicly traded for over 

2 years and has yet to show its maximum potential with respect 

to throughput. For this reasons, we have deployed a testnet, that 

uses the very same technology that BitShares is built on, with the 

specific purpose of testing algorithms, implementations, and also 

scalability. 

Here, the term scalability refers to the amount of transactions 

that can be applied to the blockchain at scale. Several factors 

need to be taken into account to correctly interpret any results 

obtained through testing. Among these are the specification 

of the deployed servers (CPU/RAM) that produce the blocks 

(validators), the interconnectivity of the nodes in the Peer-2-Peer 

network, the round-trip times and latency between nodes, as well 

as the geographical distance between nodes. 

The number of validators, furthermore, does not affect the 

throughput as long as all active validators can keep up with the 

requirements of the network. All active validators are treated 

equally and are given a slot to produce their blocks in each 

round [1]. Increasing the number of validators (a.k.a. witnesses) 

comes with an increased robustness against server failures yet 

also results in a longer duration to reach transaction finality [1] 

which describes the absolute irreversibility of transactions after 

∗ This work was supported by ChainSquad GmbH, BitShares-Munich IVS and 

honorable members of the bitsharestalk.org community. 

2/3 of all validators have approved a given block and its transactions. 

The goal of the public stress-test performed on the graphenebased 

testnet was to identify the limiting factors and bottlenecks 

at scale with multiple parties involved. We furthermore wanted 

to demonstrate scalability of current state of the art blockchain 

technologies. 

2 Testnet Setup 

We have deployed a separated blockchain for the public testnet 

that has been launched in January 2016. That blockchain was 

open to the public and every new account has been donated some 

of the core assets called TEST. By the time of the stress-test, 

the blockchain had over 6,800,000 blocks, and over 25,000,000 

operations processed. 

2.1 Software 

The software for the testnet backend has been maintained by 

BitShares Europe and is available for review on github.com. 

It is an almost identical fork of the Graphene code base that 

BitShares is built on with only marginal changes to accommodate 

the separated blockchain. 

The tools that have been developed for the stress-test and the 

analysis are mostly available in separate repositories as well. 

2.2 Validators 

The validators’ job is to collect unconfirmed and pending transactions 

as received through a Peer-2-Peer network, verify and 

validate them and publish your approval over those transactions 

in form of a signed block that carries those transactions. 

Given that the Graphene testnet also uses Delegated Proof of 

Stake (DPOS) as its consensus mechanism, the validators (a.k.a. 

block producers) can be voted in and out by means of the stakebased 

governance system [1]. This allowed us to 1. modify the 

number of validators 2. replace failing validators by standby 

validators 3. pick validators that are closer geographically (if 

location is known) every maintenance interval. This interval is 

used to tally all votes made since the previous maintenance block 

and is set to 5 min on the test-network. 

At the beginning of the stress-test, we will have these validators 

active: 

blckchnd-x Intel Xeon E3, 32GB RAM, bare bone, Germany 


2.3 REFERENCE FULL NODE AND SEED NODE 2 

blckchnd-test Intel Xeon E3, 32GB RAM, bare bone, Germany 

jim.witness1 Intel XeonÂ R○ E5, 28-56GB RAM, Azure, 

South Korea 

smailer-5 Intel Xeon E3, 32GB RAM, Germany 

init0 Intel Core i7, 32GB RAM, bare bone, Germany 

init2 Intel Core i7, 32GB RAM, bare bone, Germany 

lafona2 Intel Avoton, 32GB RAM, France 

delegate.ihashfury Intel Atom C2750, 32GB RAM, bare 

bone, France 

f0x Intel Xeon E5, 56GB RAM, Azure, USA 

alpha-jpn Intel Xeon E5, 56GB RAM, Azure, Japan 

bravo-bra Intel Xeon E5, 56GB RAM, Azure, Brasil 

charlie-usa Intel Xeon E5, 56GB RAM, Azure, USA 

delta-gbr Intel Xeon E5, 56GB RAM, Azure, UK 

rngl4b Intel Xeon E5, 32GB RAM, bare bone, Luxembourg 

taconator-witness Intel Xeon E5, 24GB RAM, Switzerland 

arthur-devling Intel Xeon E5, 39GB RAM, France 

fr-blockpay Intel Xeon E5, 256GB RAM, Germany 

de-blockpay Intel Xeon E5, 128GB RAM, France 

2.3 Reference Full Node and Seed Node 

A bare bone reference node is provided by BitShares Europe 

that allows participants to interface with the Peer-2-Peer network 

without running their own full-nodes. The endpoint is available 

at wss://node.testnet.bitshares.eu and is powered 

by an Intel Core i7 with 64GB of RAM which carries two fully 

balanced full nodes to deal with the traffic. 

A frontend-wallet is provided under 

https://testnet.bitshares.eu. 

3 Limiting Factors 

In this section we briefly discuss the limiting factors we have 

identified prior to the stress-test. For the sake of proper description, 

we first need to look into the distinction of blocks, 

transactions, and operations. 

Transactions and Operations In contrast to other 

blockchains, Graphene-based blockchain explicitly allow to 

bundle multiple operations into a single transaction. Similar 

to Bitcoin allowing to bundle multiple outputs, but with the 

option to execute different smart contracts offered by the 

blockchain sequentially. The easiest application is similar 

to Bitcoin’s multi-send feature where a single user sends 

bitcoins to many addresses. In the case of Graphene/BitShares, 

the user would also sign a single transaction with a single 

signature but the transaction would carry many transfer 

operations. Additionally, a user may put a combination of 

trade/transfer/borrow operations (or any other) into a 

single transaction to ensure that they are executed sequentially. 

As can be seen, the main difference between bundling many 

transactions into a block and bundling many operations into a 

transactions is that in the latter case, the operations are guaranteed 

to be executed sequentially and that only a single authorization 

(e.g. signature) needs to be validated and verified. 

This distinction is important as our test results will clearly distinguish 

between the throughput of operations and the throughput 

of transactions. 

Signature Verification Similar to other blockchain technologies 

(i.e. Bitcoin), a single block may contain multiple transactions. 

Each transaction is signed by one or multiple entities and 

thus requires the validators to perform elliptic curve signature 

verification as well as public key recovery for authorization. 

From a scalability point of view, the limiting factors are the 

time and resources that are required to validate a signature for 

a given transaction and the time and resources that are required 

to append a transactions to the blockchain and execute its corresponding 

smart contract/operation. 

Since the Graphene technology is built such that the signature 

validation can be done independent of the blockchain’s current 

database state, the signature verification and key recovery can be 

trivially parallelized by means of a cluster or the use of a graphics 

processing unit (GPU). However, as the required software for this 

parallel verification was not available at the time of the stresstest, 

we expect the throughput to be significantly higher once we 

can be validated on a GPU. 

For this reason, and because we want to see the limiting factors 

when applying validated transactions to the blockchain, parts of 

our test scenario are focused around producing transactions that 

carry hundreds of transfer operations with just a single signature 

to be verified. 

Connectivity Obviously, a globally distributed network represents 

the worst case scenario when it comes to latency between 

nodes limited mostly by the speed of light and the size of the 

planet. A network that is hosted locally can result in better 

overall performance but does not offer the same robustness and 

redundancy as a global network. 

Memory Requirements In previous tests, we have identified 

a significantly increasing need for memory by the blockchain 

providing back-end software. This was mostly caused by so 

called plugins that take care of historic events, such as account 

transactions history or the trading histories. Those plugins kept 

their data in memory for performance reasons. Once we disabled 

these plugins, the validating software only required a few hundred 

Megabytes of memory. 

Transaction Production In order to stress-test a network, 

we need to produce actual stress which is not easy to achieve at 

the scale that we needed for our tests. Furthermore, we wanted 

to simulate a more or less realistic scenario in which multiple independent 

parties distributed on the globe produce transactions, 

each transaction trying to make it into the next block. 

For this reasons, we have asked the BitSharesTalk community 

to participate in the stress-testing not only by means of providng 

validation nodes across the planet, but also to produce the required 

stress. 

Peer-2-Peer Networking The original codebase of 

Graphene has a hard-coded limit in its Peer-2-Peer networking 


3 

code (not part of the blockchain consensus protocol), that 

prevented us from reaching more than 1000 tps due to restriction 

in the amount of transactions being obtained through the Peer-2- 

Peer network. After increasing this limit way beyond what we 

wanted to achieve in our stress-test, we allowed the validating 

nodes to obtain up to thousands of transactions per second from 

the Peer-2-Peer network. 

However, the Peer-2-Peer networking code has been optimized 

for a block interval of about 10 s and thus leaves a lot of room 

for optimizations when talking about high-throughput at low 

latencies. 

4 Phases of the Stress-Test 

Since we use Graphene as our underlying technology, most 

blockchain parameters can be changed in real-time with no need 

for protocol upgrades or hard forks. 

In contrast to the public BitShares network, the majority of 

the stake in the public testnet is owned by BitShares Europe 

which allowed us to change the parameters without the need to 

coordinate with other stakeholders. 

This allowed us to setup a multiple phase stress-test that went 

through a set of different blockchain parameters to gradually increase 

the amount of processed transactions on the blockchain. 

4.1 Modifying Blockchain Parameters 

For our stress-test, we decided to focus on three blockchain 

parameters only: 

Max. block size This limit allowed us to modify the size 

of the blocks that are considered valid by the network. For our 

test, the size will be between 1 MB and 10 MB. The limiting 

factor is the supported data rate and connectivity of the validating 

nodes since blocks need to be produced and broadcasted within a 

certain time interval. A broadcast block needs to be received by 

the subsequent validator in time, otherwise the subsequent block 

cannot be linked to the expected previous block properly. 

Max. transaction size Each block can carry multiple transaction 

and, in contrast to many other blockchain technologies, 

transactions on Graphene-based blockchains can carry multiple 

operations. In our test, we assume that most of the operations 

are simple transfers of size 22 bytes. Together with the transaction 

header, a simple single-transfer (unsigned) transaction is 

36 bytes large. During the stress-test, we allowed between 50 and 

1000 transfer operations to be bundled into a single transaction. 

Block confirmation time The block confirmation time is the 

expected time between blocks. At the beginning we started with 

a 3 s block interval and reduced it down to 1 s at which point we 

expected the network to lose its robustness because of its global 

distribution, and because round-trip durations together with the 

need to transmit non-empty blocks might require more time. 

These parameters can be changed by a committee decision that 

is manifested through a dynamic multi-signature account. The 

members of the committee are voted on by the shareholders and 

collectively (with 50%+1), the committee can modify blockchain 

parameters by a single transaction. The procedure requires sufficient 

committee members to approve/co-sign a transaction that 

proposes to change parameters. After approval, the parameters 

are changed during the next maintenance block. 

4.2 Tested Parameter Sets 

The stress-test contained seven phases. As can be seen, the last 

two phases changed the block confirmation time and drastically 

reduce the maximum block size to ensure that blocks can at least 

be transferred in a timely manner. Whether blocks are propagated 

to the witnesses in time is is outside of direct control of the testers 

since we are running on a public and globally distributed Peer-2- 

Peer network. 

phase max. tx size max. block size block interval 

1 1 kb 1 MB 3 s 

2 1 kb 5 MB 3 s 

3 10 kb 5 MB 3 s 

4 100 kb 5 MB 3 s 

5 100 kb 1 MB 2 s 

6 100 kb 1 MB 10 s 

7 100 kb 1 MB 1 s 

5 Results 

5.1 Processed Transactions/Operations 

During our 4h-stress-test between 2pm and 6pm, the blockchain 

processed 4,011,110 transactions and 16,398,274 operations in 

4233 blocks. We varied three blockchain parameters including 

block confirmation times between 1 and 10 s. 

5.2 Transaction/Operation Throughput 

After the stress-test, when the transactions and operations had 

been added to the blockchain, we reviewed the blockchain offline. 

Given that the transactions and operations are recorded on 

the blockchain, we started by investigatng the overall results first. 

As can be seen from fig. 1 (top), there are multiple periods of 

activity. Clearly, most of the transactions started being broadcast 

from 15:00 going forward with an average of approximately 

1000 transactionsperblock afterwards. We also notice that the 

throughput was not constant during the stress-test which can be 

explained by the transactions requiring some time to propagate 

through the Peer-2-Peer network. 

We can further see in fig. 1 (bottom), that the participants 

have been constantly trying to modify their spam production 

method (increaseing number of transactions vs. bundling more 

operations per transaction) until a maximum of processed operations 

per block was reached at about 16:40. Afterwards, 

the participants were asked to increase the number of created 

transactions instead which is why the processed operations per 

block decreased later on. 

Most interestingly, we observed several short peaks of processed 

transactions and operations during the whole stress-test. 

As it turned out, the reasons of those peaks can be explained by 

a single participant who decided to use his block validating node 


5.3 BLOCK CONFIRMATION TIMES 4 

Figure 4: Max ops/s during the stress-test 

Figure 1: Overview of the throughput ops/s and txs/s during the 

whole stress-test 

to produce transactions. By this, he skipped the propagation of 

transactions through the Peer-2-Peer network which confirms to 

us that the networking code represents one of the bottlenecks. 

5.3 Block Confirmation Times 

After investigating the throughput of the blockchain, we also 

tested the Peer-2-Peer network and capability to deal with different 

block confirmation times. As a reminder, the technology 

tested here is capable of changing different blockchain parameters 

on the fly. One of these parameters is the block confirmation 

time which represents the time between the blocks in 

the synchronous consensus mechanism delegated proof-of-stake 

(DPOS). 


In fig. 2, we have zoomed into a period of rather high throughput 

(i.e. 2500 transactionsperblock). Here, we still see the peaks 

produced by skipping the networking. 



Finally, the results in fig. 3 show that the blockchain was able 

to process an average of over 8000 operationsperblock with 

quite high peaks and an irregular throughput per block. 

The irregularity can be resolved by deploying similar hardware 

that can all process the same amount of transactions/operations. 

We were able to confirm this behavior later on by replacing all 

validators except for one, which greatly reduces the variance of 

the throughput as can be seen in fig. 4. Here, the stress has been 

produce by a single node connected directly to the validating 

node while another single validator was only connected through 

the Peer-2-Peer network. 

In fig. 5, we can see the actual block confirmation time as 

tracked by the blockchain. These values have been obtained 

from each block header which also contains the time stamp. 

Little variations are to be expected due to slightly inaccurate 

synchronization of the local time, while large deviations indicate 

one or multiple validators to have missed their blocks. The graphs 

shown in the figure are averaged over 100 blocks to reduce the 

noise. 

We can see that, during the stress-test, multiple different block 

confirmation times were tested, starting with 5 s, going down 

to 2 s, then up to 10 s until we decided to also test 1 s block 

confirmation time. Unfortunately, we observed some witnesses 

not producing during large parts of the stress-test which is why 

the averages are above the target rates most of the time. For our 

next stress-test we plan to be more strict in replacing witnesses 

when they miss block production blocks. 

In ?? highlights the period when the block confirmation time 

was reduced to 1 s. We can see that most of the blocks were produced 

in time with only up to 3 validators not having produced 

in time (i.e. the black peaks going up to at most 4 s). This came 


5 

each and everyone that has been running a machine for the stresstest 

and BitShares-Munich for providing the major API node on 

bitshares.eu. 

References 

[1] “BitShares 2.0: General Documentation,” BitShares 

Whitepapers, 2015. 


as a big surprise to us as we had expected a higher block-miss 

rate all together. 

6 Conclusions 

With our testing, we have seen that the code base is much 

more robust than we had expected. The block creation and block 

validation is sufficiently fast so that we can run a blockchain with 

synchronous block confirmations times of 1 s without validators 

dropping out too much. 

The Peer-2-Peer code seems to be working nicely but results 

show that it could be one of the bottlenecks currently preventing 

us from going further. The computational resources of our validators 

have more than enough back-off for higher throughputs 

but the networking code was not able to provide sufficient data 

(e.g. transactions) to raise it during our stress-test. 

We have further identified another bottleneck with respect 

to transaction production. Signing transactions takes more resources 

and we will prepare properly for our next stress-test. This 

result was confirmed in a later private testnet where 36 cores have 

been activated during the test sequentially. The result was that 

the blockchain easily dealt with all of the produced transactions 

and the throughput increasesed accordingly, each time additional 

cores have been added to transaction production. 

To conclude, the current software stack still has a few limitations 

and edges that need to be optimized in order to improve 

scalability further, but the foundation has been designed in such 

a way that it allows for even higher throughput. Our current 

limitations are purely in the implementation and networking 

aspects than in the software and protocol architecture. 

7 Acknowledgements 

We would like to thank every one that has participated in the 

stress-test for block validation, transaction generation and setup 

of a robust Peer-2-Peer network. We would like to further acknowledge 

the assistance during the preparations of the stresstest 

and the feedback we have received while writing this paper. 

Last but not least we appreciate the financial support given by

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