The BitShares blockchain is designed to be self-funded and self-sustaining where BTS holders vote on and approve funding of development activities in the ecosystem.  See BTS Holder Approved Project Funding for details on how this was designed to work.

Time has exposed some flaws in the original design. These have been eliminated through events that took place in 2020 and core code updates (BitShares versions 4.x May 2020 to 5.x Sept 2020) were applied in 2020.

The flaws and abuses thereof had led to a rapid depletion of the reserve pools used to fund operations – the reserve pool which was supposed to last indefinitely was in danger of being depleted entirelyhad  actions not been undertaken to halt the ‘rot’. In this case permanently by consensus changes long ago proposed and known to be the best action for protecting long-term stakeholder interests.

See the original BitShares Improvement Proposal (BSIP) #83 for detailed description. of the change.

To better protect interests and goals towards all original founding team members who still dedicate themselves to this project, it was necessary and led to the trademark registration and global incorporation of BitShares.org and BitShares Management Group. The goals of incorporating were first of all to find a means to replenish the reserve pool funds. Further to create the means of correctly promoting and expanding the BitShares software platform under a uniform BitShares brand, increasing value for all BTS holders.

The replenishment of reserve pool funds goal is to be accomplished by corporate investments and fund-raising to repurchase 1 billion quantity of the BTS Core utility tokens from Centralized Exchanges where it’s currently being traded as any other Digital Asset without real purpose or value.

BitShares Blockchain provides an important feature known as “user-issued assets” to help facilitate profitable business models for certain types of services. The term refers to a type of custom token registered on the platform, which users can hold and trade within certain restrictions. A creator of a user-issued asset names, describes, and distributes its tokens. They can also specify customized requirements, such as an approved whitelist of accounts permitted to hold the tokens, or the associated trading and transfer fees.

The regulations applied to different kinds of token vary widely and are often different in every jurisdiction. BitShares provides the tools to allow issuers to remain compliant with all applicable regulations when issuing assets. This can prevent potential problems for both issuers and the accounts holding the tokens.

The potential uses for user-issued assets are innumerable. Below are a few sample use cases:

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 than between banks. With BitShares, it is now possible to move these internal databases onto the blockchain where it is possible to use the deposits with other smart contracts such as the internal markets, escrow, or bonds.

By talking to many different banks and exchanges, BitShares learnt what the law requires of those who wish to issue deposit receipts.

First and foremost, the issuer must know every single customer. BitShares supports this by enabling both whitelists and blacklists. 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.

When an asset enables whitelists, no account may send or receive that asset without being on an authorized whitelist. Removing an account from the whitelist will freeze the account’s funds.

From time to time, an issuer may need to seize funds as a result of a court order. While this may be unappealing to cryptocurrency purists, it is an unavoidable reality of trust-based assets. An issuer can determine whether or not they wish to revoke this privilege, but it may be a requirement in some jurisdictions.

An issuer who offers both USD and EUR deposits may need to restrict direct trading between their USD and EUR 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.

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.

The deposit receipt is probably one of the most important, yet most heavily regulated examples of user-issued assets.

Corporate shares are heavily regulated by the SEC, but none of those regulations prevents issuing or trading them on an alternative trading system. The regulations in many jurisdictions require registering all shares (aka held by known identities). BitShares corporate shares can be collateral for a bond or be useful in any number of smart contracts.

Event tickets are a largely unregulated use case for user-issued assets. Issuing tickets to a school play could be a use of digital tokens – by auctioning them off 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.

Merchants around the world offer loyalty programs to reward customers. Accumulating points allows the customer to earn discounts on future purchases. Rewards systems are a prime opportunity to add value by making them available to BitShares smart contracts.

Many businesses raise money by selling bonds. Using BitShares means these bonds can be tradeable and/or fungible, which makes them more compelling to investors.

Whether using tokens as a transferable coupon for a pre-sale or doing an IPO on a small company, issuing an asset is one of the most effective means of raising money for a cause.

Software and music licenses can be 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.

It is also possible to simulate trading cards by creating many limited issue assets. Online games can use these assets to represent game items.

Price-stable cryptocurrencies (aka SmartCoins) were the inspiration for BitShares. Now, users can create their own price-stable assets with custom parameters designed to track the value of any asset they can imagine. The benefit of price-stable cryptocurrencies is that they are fully collateralized, and the issuer only needs to be trustworthy enough to appoint an honest set of independent (non-collusive) feed producers. Unlike deposit receipts, the value of a privatized SmartCoin is stable even if the issuer disappears.

BitShares provides many parameters that an issuer may tune. In addition to account whitelists, market restrictions, and transfer restrictions, the issuer of a private SmartCoin has control over:

• Collateral Type
• Initial Collateral Rate
• Maintenance Collateral Rate
• Forced Settlement Fee, Delay, and Daily Volume
• Price Feed Update Rate
• Global Forced Settlement

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 BitShares 1.0 BitAssets by having a 30-day delay on forced settlement.

It is possible to use arbitrary financial indexes for the price feed to mimic all manner of exotic assets.

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. A prediction market has a price between 0 and 1 and the issuer settles all positions after the event occurs and the final price is known. These prediction markets can be very secure if the issuer is a multi-sig account with many independent and trustworthy parties involved.

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 percentage of each trade that is collected as a fee. It is also possible to bound this percentage by a minimum and maximum fee. The combination of these three parameters gives issuers great flexibility in pricing.

Issuers may optionally maintain a Fee Pool. The Fee Pool is a pool of BTS and an exchange rate at which the issued asset may be converted into 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. Collateralizing the asset by BTS means the exchange rate will be automatically set to the settlement price.

BitShares is self-funded and self-sustaining so that BTS holder approved funding directs where to spend blockchain budgets. The budget is a reserve pool of 876 million BTS (June 2019) that grows with the collection of transaction fees. Each day, the blockchain was* authorized to autonomously spend up to 432,000 BTS (hard limit), which at current market rates is enough to hire a small team to maintain the network for years.

*Since 10th September 2020, with the 5.0 core release Bitshares blockchain doesn’t fund work by its reserve pool anymore. This was due to the network being depleted as a result of plutocracy and state-corporate crime between holders and businesses on top of the blockchain. As the previously generous hard-limit on the fundings, blockchain has authorized a limit of 1 BTS per day to prevent further exploitation and extraction of the reserve pool. Since Sept 10th 2020 until today then, is the only period since inception of BitShares that the reserve pool has increased instead of spent funds.See also Sustenance of Blockchain funds.

The network’s ultimate goal is to collect more from transaction fees than it spends through paying witnesses and workers. Delegates (committee) can adjust the transaction fees and referral commission rates to ensure that the network remains sustainable. By charging appropriate fees and distributing the income in an effective manner, BitShares-powered networks can grow, even while others struggle. Normal users pay the current going transaction fees (fixed fees, but adjusted by the committee periodically) while Life Time Members get an 80% vested refund on fees and future referrals.

A worker is a paid position elected by the BTS holders to fund new blockchain infrastructure, features and dApps. A Worker’s “smart contract” specifies a start date, an end date, a daily pay rate ($BTS), and a vesting period for receiving their pay. The daily budget payout is 270,926 BTS (June 2019) and it depends on the current size of the reserve pool (with a hard limit on 432,000 BTS). It is paid to workers sorted by net BTS holder approved, and when the daily budget runs out, all subsequent workers are considered inactive.

Workers typically engage the whole community to campaign BTS holders to vote for their proposal. Once in action, progress is public to the BTS holders and community, possibly along with an escrow service acting in proxy for the funds. This applies an additional layer of reassurance, with professional reviews of work undertaken. All BTS holders have the opportunity to review workers, follow links published to their descriptions, GitHub pages, and accounting, and make decisions whether to vote for them.

Each worker can specify a vesting period for funds received. This optional vesting period assures BTS holder approved projects have a long-term commitment, by preventing the worker from selling the received funds immediately.

BitShares has several different kinds of accounts: Basic Account, Annual Member, and Lifetime Member.

Basic Accounts are free, but do not qualify for the referral program, nor any cash back on transaction fees.

Lifetime Members pay 5,791.31307 BTS and earn 80% cash back on every fee they pay. They also qualify for 80% of the fees paid by Basic Accounts they refer to the network. In the event of a subscription expiration, the referral income falls back to the nearest Lifetime Member in the referral history.

These cashback referral rates, 50% and 80%, can be adjusted by the consensus of the BitShares Stakeholders at any time. Annual Accounts have their rates locked in for one year, while Lifetime Accounts have their rates locked in for life.

We estimate that the average fees paid over the lifetime of each Account will be in excess of the lifetime membership fee, which means that a membership could earn over the cost of the membership per referred user. Of course, it is your own responsibility to estimate how often you, and those you refer, will use the network. Keep in mind that the BitShares stakeholders have the ability to change transaction fees, which could impact future earnings.

When a user pays a $20 annual subscription fee to become an Annual Member, $10 is paid to their Referrer, $6 is paid to the nearest Lifetime Member, and $4 is paid to the Network. The Annual Member becomes its own Referrer for one year. In one year, the renewal fee is divided in a similar manner to the original annual subscription.

When a Basic Account pays $100 to become a Lifetime Member, $50 is paid to their Referrer, $30 is paid to the nearest Lifetime Member, and $20 is paid to the Network. After this point the Lifetime Member becomes its own referrer and nearest Lifetime Member and its prior Referrers no longer get any revenue from this user.

If an account’s Referrer is an Annual Member whose subscription has expired, then the Referrer fee goes to the nearest Lifetime Member.

If an Annual Member decides to upgrade to a Lifetime Member then $50 goes to his Referrer, $30 to the nearest Lifetime Member and $20 goes to the Network. Annual Members do not qualify for a 50% Cashback Referral on the upgrade fee.

BitShares is the first smart contract platform with built-in support for recurring payments and subscription payments. This feature allows users to set permissions for third parties to make withdrawals from their accounts within certain limits. For example, this feature is a convenient way to “set it and forget it” for monthly payments and subscriptions.

As stated above, the withdrawal permission system does not automatically make payments. However, BitShares has another feature which enables scheduled payments: proposed transactions. At any time, a user can propose a transaction to execute at a specific date and time in the future. If the transaction has sufficient authorization (i.e. is properly signed by authorities) at the specified time, then it is automatically executed.

A merchant can use this feature, combined with withdrawal permissions, to implement automatic payments after a one-time setup fee. In practice, it may be cheaper for merchants to maintain their own scheduler to automate billing, since the blockchain charges a fee to propose a transaction separately from the transaction’s own fees.

For security purposes, many banks place daily withdrawal limits on user accounts. Limiting a thief in the amount of damage they can do if an account is compromised. Withdrawal permissions enable users to protect their BitShares funds in the same manner. To do so, a user creates two accounts: savings and checking.

The savings account has keys kept offline where they are unlikely to become compromised. Before placing the keys in cold storage, the savings account can authorize the checking account to make a daily withdrawal of up to $1000, for example.

The checking account can then pull money out of savings up to this limit, per day, and use those funds as needed. This gives the user confidence that their losses are limited if their account is ever compromised.

Recurring Payments are used for implementing a set of withdrawal permissions. Each account can grant any number of withdrawal permissions to other accounts. Withdrawal permission includes the following properties:

1. Start Date
2. End Date
3. Withdrawal Limit per Period
4. Period Length (i.e. 1 month)

Any asset type can be used in the withdrawal limit.

After a user grants the withdrawal permissions, the authorized account can make one transfer per period of an amount up to the limit. If there are insufficient funds then the withdrawal will fail. Withdrawal permissions aim to be a convenience for merchants and users, as they do not represent a commitment to pay.

It is up to each merchant to initiate each withdrawal. The BitShares platform does not automatically authorize the transfer of funds unless sufficient signing authority is reached.

A SmartCoin is a cryptocurrency whose value pegs to that of another asset, such as the US Dollar or gold. SmartCoins always have 100% or more of their value backed by the BitShares core currency, BTS. Converting them back to BTS is possible at any time at an exchange rate set by a trustworthy price feed. In all but the most extreme market conditions, SmartCoins are guaranteed to be worth at least their face value (and perhaps more, in some circumstances). Like any other cryptocurrency, SmartCoins are fungible, divisible, and free from any restrictions.

Cryptocurrencies are unique in that they are the only digital currency that is not someone else’s liability. They are fungible, decentralized, and as valuable as the network of users that support them. Unfortunately, they suffer from very high volatility, because their perception of value constantly changes as users enter and leave the ecosystem.

The traditional approach to creating a stable asset is to accept deposits and issue a digital token as a claim receipt. Under this approach, the token has the market value of a dollar, discounted by any credit risk associated with the issuer. This can work well for transactions, but less well as a form of savings. History has repeatedly proven that issuers eventually go bankrupt due to fraud, incompetence, or government intervention.

More recent approaches have used a cryptocurrency as collateral in a contract for difference. Under this approach, two parties take opposite sides of a trade, guaranteeing one party price stability and the other party leverage. This approach works as long as sufficient collateral exists and settling the contract with an honest 3rd party, with a price feed, is possible. Unfortunately, a contract for difference is not fungible and has an explicit settlement date, which means it is not useful as a currency.

SmartCoins take 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). To achieve this, SmartCoins use the following set of market rules:

1. Anyone with BitUSD can settle their position within 24 hours at settlement price.
2. The least collateralized short positions are used to settle the position.
3. The price feed is the median of many sources, updating at least once per hour.
4. 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).
5. 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.

There is a simple metric for testing the validity of our claim that 1.00 BitUSD is always worth at least $1.00 USD. if you can find someone willing to sell 1.00 BitUSD for $1.00, it would be the cheapest option for buying BTS, which demonstrates the value 1.00 BitUSD. 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. Proving these conditions are met will be done in the following sections.

While the rules are simple, the consequences are less obvious. Let’s analyze this from the perspective of the various players.

When deciding a price at which to enter a short order, a trader must consider the risk of forced settlement. In this case, no trader will attempt to short at or below the price feed, to avoid settling 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. In practice, the risk posed by the feed error balances equally between being in the favour of the short and in the favour of the long, leaving only the risk of forcing them out of their position at an inopportune time.

A short can minimize their exposure to the feed by providing enough collateral to keep far above the least collateralized positions, therefore, they’re very unlikely to face forced settlement at the feed or at an inopportune time.

In practice, the only way new BitUSD enters 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 BitUSD off the market. This means that a short must also factor in the risk that the premium may change. If a short position enters 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 faces exposure 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 .1% premium.

For all intents and purposes, the premium should move in the same direction as the price, and thus speculators who only care about relative price changes can ignore the premium.

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 creating the first BitUSD was 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 the case 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 exposes themselves to volatility in the premium, but that risk is limited to $0.05 in this example. In practice, the premium should be relatively stable and predictable.

A buyer with dollars, looking to buy BTS, knows that they can buy $1 worth of BTS (plus the current premium) with 1 BitUSD. 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 forced-settlement all at once and get the price feed on the entire purchase.

Therefore, because all positions and trades are visible on the blockchain, all of this trading activity factors into the price, minimizing any potential profits by attempted manipulation.

A merchant wants to be able to price merchandise in BitUSD, and obtain real USD in the 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 fight 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.

Any way you slice it, 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.

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.

Customers use BitUSD because it provides them the convenience and freedom of a cryptocurrency, and has the lowest transfer fees of any other payment platform.

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.

There is always the 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-settlement order requested can attempt to manipulate the markets and thus the feed against the BitUSD holder.

Pricing the risk of price manipulation factors into the premium on BitUSD charged by the shorts and therefore is already a part of the market. If price manipulation became a serious problem by causing very high premiums, then it could be dealt with by the price feed producers. They can adopt a moving average over wider time windows to increase the difficulty of short-term manipulation. A variety of algorithms would work to estimate a “fair price” that keeps BitUSD valued at least $1.00.

In practice, a feed producer can observe the BitUSD-to-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.

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. 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, the result is liquidation of all SmartCoins at the exchange rate of the least collateralized short position. This is similar to an insolvent bank converting its deposits to equity.

BitShares offers entrepreneurs an opportunity to create their own SmartCoins with custom parameters and price feeds.

User-issued SmartCoin managers can experiment with different parameters such as collateral requirements, price feeds, force settlement delays and forced settlement fees. They also earn the trading fees from transactions involving the issued asset 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 which entrepreneurs can tweak is broad enough that SmartCoins can 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.

SmartCoins are a powerful tool for everyone from speculators and savers to traders and entrepreneurs. The BitShares platform provides a toolset with which innovators can experiment to find optimal currency solutions using free market discovery.

Background

Named accounts allow you to easily remember and communicate your account information with security. We don’t use IP addresses to browse the internet or numbers to identify our email, so why shouldn’t we have human-friendly account names for our blockchain transactions?

Every BitShares blockchain account is assigned a globally unique name that can be selected by its creator. There are many uses for named accounts beyond security and simply being an alias to a set of dynamic account permissions. They can be used as user logins or even mapped to your domain name. Named accounts are also transferable, which means a name can become valuable in its own right.

BitShares blockchain defines a simple algorithm to determine the fee it charges to reserve a new account name. Names that contain a number or dash ‘-‘, are longer than 8 characters, or contain no vowels are essentially free. Otherwise the name is priced according to its length. BitShares has the power to adapt to market demands by allowing delegates to propose a different fee for each length.

Transferring Names

BitShares blockchain ensures security for named account transfers by updating the permissions used to control them. In the context of a web-of-trust however, the semantics of transferring an account are slightly different. Named account holders need a means to update their keys for security purposes while maintaining their standing in the web-of-trust. Users must be given a way to explicitly transfer a BitShares account name to a new user while breaking any liability for how the account is used in the future.

When a BitShares blockchain user transfers an account name, they use a special transaction that clears all of the links in the web-of-trust. This protects both the buyer and the seller, because simply updating the key that controls a named account does not signify a legal change in ownership.