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Coinffeine to Challenge Centralized Bitcoin Exchanges with Distributed Alternative

(@mpmcsweeney) | Published on May 29, 2014 at 23:00 GMT

Bitcoin and other digital currencies are well known as decentralized technologies, meaning that processing power is spread out across multiple points that reduce the chance of failure and network disruption.

Other elements of the digital currency ecosystem, most notably bitcoin exchanges, are centralized islands in a sea of decentralization. Concepts of decentralized bitcoin exchanges have been put forward in the past, but none have moved far in terms of development.

A team based in Spain is hoping to change that by creating an open-source, decentralized exchange algorithm called Coinffeine.

CoinDesk spoke with co-founder and Chief Technology Officer Ximo Guanter, who stated that the goal is to create a trustless, truly peer-to-peer exchange platform similar to BitTorrent, adding:

"Our approach is to have zero trust on the actual exchange. Users are always in control of their money, both the bitcoins and the local currencies, dollars, euros or whatever. We are completely decentralized."

Additionally, Coinffeine plans to charge no transaction fees and offer faster transfer times compared to centralized exchanges.

No central authority

Nearly all digital currency exchanges are centralized, browser-based destinations that facilitate transactions and are responsible for safeguarding customer funds. This approach has been criticized as being too vulnerable, especially in the wake of the fall of Mt. Gox.

Coinffeine seeks to circumvent this issue by using downloadable applications that act as points within the decentralized exchange network. When the exchange client is open, each computer effectively becomes a node within the network. The system does not require the use of any central server or host to organize transactions.

"Even if some government thought this was a really bad project and shut us down, the network would still work. It doesn’t depend on us existing as a company," Guanter explained.

How it works

Currently, anyone seeking to engage in a pure peer-to-peer bitcoin transaction will need to have faith that the other party is going to hold up their end of the bargain. This arrangement is a source of fraud within bitcoin.

To combat this problem, Coinffeine’s exchange algorithm employs a distributed contract concept known as a micropayment channel. It leverages deposits between the two parties involved in the transaction to ensure that both sides play fair.

In a micropayment channel setting, both parties engage in a multi-step transaction that incentivizes completion, according to the Coinffeine’s Github breakdown:

"Once the deposits have been set up, which proves that both parties are serious about the exchange since they have committed funds, the actual exchange begins. A micropayment channel is a series of transactions in which the deposits and the bitcoins to exchange are split between Sam and Bob."

After the steps are completed, both sides receive their initial deposit as well as the final bitcoin amount that was exchanged. Then, the transaction is broadcast to the mining network for confirmation.

Development speeding up

Guanter told CoinDesk that to date, most of the coding has been done on the side, while those involved have worked full-time on separate projects. He said that soon the team would be devoting their full attention to Coinffeine.

The project is currently in the pre-alpha phase, but the company claims to have received an undisclosed amount of seed funding to support development of the exchange algorithm, as well as additional features that are currently being coded.

Guanter suggested that Coinffeine is poised to become the first operational decentralized bitcoin exchange owing to the progress made so far and the commitment by the development team, saying:

"I think we have an advantage over other decentralized exchanges just because we’re in a different phase. We’re far along in our coding process."

It remains to be seen what the final product will look like, but Coinffeine holds the promise of a decentralized solution to a problem that has cost countless investors millions of dollars worldwide due to the vulnerability inherent in centralized exchanges.

Business diagram image via Shutterstock

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