BitShares, Smart Coins, and the HERO explained for beginners

If you’re new or having trouble understanding BitShares, look no further!

The BitShares ecosystem is vast. Some have called it an onion. If you go to Twitter (@bitshares), you’ll see their cover photo is a BitShares logo-like iceberg, suggesting there’s more functionality than meets the eye.

But what does meet the eye?

The tip of the iceberg is BitShares’ decentralized exchange at https://bitshares.org/. Here, you can create a wallet and trade cryptographic assets in the form of coins and tokens (AKA “cryptos”). You cannot buy cryptos with cash here. Instead, you must buy a “primary” coin first (Bitcoin, Ethereum, Litecoin, and others) and then transfer it to your BitShares wallet.

Aren’t there 100’s of other exchanges out there?
Why should I use Bitshares?

The key is Bitshares’ decentralized exchange (DEX for short). This means there is no central figure holding your (and everybody else’s) cryptos on a centralized server. These centralized exchanges offer an “IOU” token for users to trade with. In a DEX, the cryptos you see in your wallet are actually yours! An elementary background of computer science will warn you of the dangers of valuable assets on centralized servers.

https://coincodex.com/article/51/5-biggest-crypto-hacks-of-all-time/
https://www.coindesk.com/coincheck-confirms-crypto-hack-loss-larger-than-mt-gox/

Yes it’s still possible to hack onto BitShares. But because of its lack of centrality, only individual users can be affected.

Centralized exchanges also threaten the existence of cryptos through government intervention. They represent the proverbial “head of the crypto-snake” in which governments can go after. If you’ve been in this space recently, you’ve heard of threats coming from China and South Korea. If you haven’t, see below.

http://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin-price-china-exchange-ban-cryptocurrency-trading-government-a8161721.html

https://www.reuters.com/article/us-southkorea-bitcoin/south-korea-plans-to-ban-cryptocurrency-trading-rattles-market-idUSKBN1F002B

BitShares’ DEX makes it exponentially more difficult for governments to intervene. Governments can do nothing short of shutting down the Internet to halt BitShares.

Now let’s get our toes wet…

One of BitShares’ exciting value propositions is a solution to the problem of cryptos’ volatility in regards to merchant acceptance. You can imagine the risk of selling something in exchange for cryptos. It could plummet soon after you make the transaction!

Here’s a recent dive.

It could also boom soon after you make the transaction, in which you may feel pretty proud of yourself. Or you may think the whole thing is nuts. In the current climate, the latter prevails.

Meet the Smart Coins

These are referred to as “Smart Coins” that are mathematically (or “mathemagically” as @Stan proclaims) pegged to their corresponding asset. For example, BitUSD always represents (a very close approximation to) the US Dollar. In fact, as of 01/2018, the most heavily traded asset pair in BitShares’ DEX is BitShares & BitCNY (pegged to the Chinese Yuan).

How do these Smart Coins work?

We’ll stick with BitUSD for the following example as this post is written in Tampa, FL.

In all Smart Coins, the underlying value is always represented by BitShares. BitUSD is simply the amount of BitShares it currently takes to equal one US Dollar. The computer automatically adjusts the underlying, fluctuating BitShares to have it always equal a Dollar.

What happens if BitShares crashes?

Let’s say 1 BitShares = $0.50. Therefore, 2 BitShares = $1.00. If BitShares takes a dive to $0.25, you’ll need 4 BitShares to keep that BitUSD legit.

I don’t have an extra 2 BitShares.
I don’t want to buy another 2 BitShares.

To answer these concerns, we’ll need to take a step back and learn how these Smart Coins are created and the rules that govern them.

Every BitUSD created is backed by at least a 1.75x collateral ratio (some Smart Coins require more) in the form of BitShares. To create or “mint” a BitUSD, you must borrow it from the network.

Next, you’re prompted to select the amount of collateral you wish to back it with.

Pay attention to those words in orange: “your collateral ratio is close to 1.75 which means this position is in danger of being margin called if the price drops”. We’ll get to that in a bit.

Now, you’ve clicked the “UPDATE POSITION” button on the bottom left and, in this example, you have borrowed 10 BitUSD. You have a price consistent, liquid, tradable anywhere in the world in 3 seconds, counter-party risk free (you don’t have to rely on the perceived “confidence” of an entity to ensure value), cryptographic token that merchants will accept once we get more mainstream.

You, the person who borrows the BitUSD into existence, is responsible for maintaining the collateral when you sell it to a trader, some merchant in exchange for goods and services, and/or send to a friend.

Back to those words in orange…

Anyone who possesses a BitUSD (or any other Smart Coin) has the option to settle their position (i.e. liquidate the BitUSD into BitShares) at anytime.

The rule is, for those who borrowed BitUSD and maintain its collateral, those with the LEAST collateralized positions will be forced to sell the underlying BitShares (thus destroying the BitUSD that those BitShares created) to a BitUSD holder who requested a settlement. This is in exchange for the settlement-requester’s BitUSD. This now sufficiently-collateralized BitUSD then goes to replace whoever currently held that BitUSD originally “minted” with insufficient collateral, and thus got force settled.

A borrower can also be force settled by failing to maintain the minimum maintenance collateral limit (in BitUSD’s case 1.75x) even if no settlement was requested by a BitUSD holder.

Settlement is done at the BTS:BitUSD median price 24 hours after the settlement was requested.

Note that if you are someone not interested in the borrower’s responsibility described above, you can simply buy an already minted BitUSD on the open market.

Why would someone want the borrower’s responsibility?

The answer is leverage. Borrowers essentially take a double exposed position to an asset they are bullish about. Jack is very bullish on BitShares. Say he borrows BitUSD at a minimum collateral and sells it for more BitShares. The result he has is 1. the collateral in the form of BitShares that back the BitUSD he borrowed and 2. the BitShares he received from selling the borrowed BitUSD. Say in 3 months BitShares goes up, and Jack continually adjusts his collateral position down to keep it at the minimum. Now, when BitUSD holders request settlement, the amount of BitShares Jack must give to match the value of the BitUSD is less than what he originally put in. In other words, he got to redeem more of his collateral than had the settlement been requested 3 months prior, before BitShares went up.

The implications of this design mean holders of Smart Coins have a stable, reliable, and sufficiently backed cryptographic asset that keeps its value in both sides of market conditions. If BitShares is plummeting, it’ll require more collateral to maintain the minimum limit. A borrower must increase collateral. Or allow it to be force settled, essentially taking a loss and leaving it to the next borrower to maintain the holder’s Smart Coins.

This is a clever way to incentivize sufficient backing of a currency, and represents a superior approach to current governmental monetary systems. This is the type of stuff that can prevent economic depressions!

The HERO

Now let’s talk about the HERO. One of the newest Smart Coins, the HERO is designed to get the attention of the everyday Jill. Being a Smart Coin, the HERO works and is designed by the same properties and rules described above. What makes the HERO different is the fact that its value is mathematically pegged to what the dollar would be worth if it appreciated by 5% every year since 1913.

This image is from the blog of @Stan, the Godfather of BitShares. Go to his blog for details on everything BitShares. Here would be a good place to start: https://steemit.com/bitshares/@stan/the-godfather-of-bitshares

Taking what you’ve learned so far, you’ll be able to follow the Godfather’s plan in utilizing the HERO to grow BitShares.

In this world of easy money and low interest rates, a de facto 5% year-over-year certificate of deposit that is liquid and tradable seems too good to be true (hopefully after reading this post and others, naysayers will come around). Once the public realizes the HERO’s truthiness, and recognizes (as you’ve seen described above) its no-need-for-trusting-anyone attributes, demand will boom.

As you’ve learned, there needs to be someone to borrow HEROs into existence. What if that someone is a large company, charity, university or any other “whale” who is looking to grow an expenditure or an endowment-like fund? This whale can borrow millions of HEROs into existence and sell them on the open market for BitShares. The demand for HERO for someone like you and me looking for a safe and profitable place to park cash will drive the price of BitShares up, thus satisfying the desires of the whales’ funds.

In fact, the Godfather recently posted a claim that he got ten such whales to agree to participate.

https://steemit.com/bitshares/@stan/bitshares-enterprise-alliance-part-1-alice-s-hero-hub

If you go to http://billionherocampaign.com/campaigns_list/ you’ll see the charities that are planning to participate.

BitShares seems to have all its ducks in a row to make a real run up the crypto rankings.

Thank you @dan and @stan for this wonderful platform.

I’m on BitShares at jessethan-1990.

The preceding information is not investment advice.