The exchange sector is one of the corners of the digital currency economy that has seen the most radical change and developments in recent years.
The evolution in the exchange industry can be traced by the rise and fall of major platforms. From the much-publicized collapse of Mt Gox to the launch of websites like Bitfinex and others that enable advanced trading activities, the exchange ecosystem has pushed new innovations and offerings and, as some might argue, will continue to do so moving forward.
But how the landscape will look even months from now is a tough question to answer. Many elements of the crypto 2.0 cluster of projects point to a new breed of exchanges wherein assets of all kinds, including digital currencies, can be transferred person to person.
On the other end of the spectrum, the market is beginning to see non-centralized services that users can take advantage of without even creating a unique account.
ShapeShift.io is one of these services. Conceived in the winter of 2013 and launched last month, the service is, as described by creator and CEO Beorn Gonthier, like a cryptocurrency vending machine.
He told CoinDesk:
“ShapeShift is the seller or buyer of coins, so when you come to the site and you have bitcoins, and want litecoins, we sell you our litecoins. This is different than a traditional exchange which pairs you with other buyers and sellers. We are kind of like a vending machine.”
The website displays how much coin liquidity is available at a given time, which Gonthier said is restocked based on demand. In addition to bitcoin and litecoin, ShapeShift began offering support for dogecoin, peercoin and darkcoin yesterday.
How it works
CoinDesk tested the system by trying to buy 0.007 BTC ($2.64 at today’s exchange rates) worth of litecoins. The process begins with the user selecting the coin pair they wish to trade.
Once the user enters their payment address, the service generates a bitcoin deposit address, as well as a working exchange rate for the currency pair. It also confirms the deposit address – a feature no doubt welcome for those concerned about irreversibly sending their bitcoins to the wrong address.
After the transaction has been processed, ShapeShift offers both a link to a receipt-generation tool and access to the block chain for the cryptocurrency the user has purchased. Transaction broadcasting happens automatically and, in our case, within a few minutes the newly purchased litecoins had arrived.
The service places dynamic limits on the amount of coins in a given denomination that can be deposited. According to Gonthier, one of the company’s primary goals is to increase liquidity in conjunction with any rise in volume and demand.
He told CoinDesk that the service is a reflection of the fundamentals underlying bitcoin itself, saying that the project team wanted something unlike the order book-based systems.
“Bitcoin changes how money works on a very fundamental level. So, its real benefits are felt when systems utilize it to do something that wasn’t possible with legacy systems. A normal order book exchange is old news – nothing really innovative about that.”
Security a priority
When asked about security, Gonthier acknowledged the realities of the exchange landscape and how it remains a primary target for would-be cryptocurrency thieves. A key weakness is that any centralized exchange holds the private keys to customer funds, meaning any event that results in compromised security can result in the loss of coins held.
Gonthier said that ShapeShift sidesteps this problem, by minimizing the transaction process to the point where the service never holds any customer funds for longer than needed:
“A user only needs to trust us for about 10 seconds. One of the most beautiful things about cryptocurrency is that you control your own coins (via your keys), so we believe that the more that can be preserved [and] encouraged, the better. Thus we never hold customer funds.”
Gonthier noted that ShapeShift only stocks its hot wallets with enough coins to meet the demands of an average day of volume, adding that these amounts could grow in the future.
Ultimately, ShapeShift hopes to position itself as a viable alternative in the exchange sector for buyers and sellers that don’t want to worry about securing a centralized account.
Feedback has been positive thus far, including from figures like litecoin creator Charlie Lee who noted in a published testimonial that he had “been waiting for” this type of solution.
Gonthier told CoinDesk that among the company’s flagships products is its API, which he hopes will be used more broadly in the future to enable cross-digital currency acceptance. He said that even big players like BitPay could increase the scope of their services by adding de-facto altcoin support via ShapeShift’s API.
Gonthier explained that in this scenario, BitPay’s integration of alternative currencies would be virtually seamless, saying:
“This way, BitPay wouldn’t need to change the core of their system to support new coins because they’d just be receiving bitcoin like normal.”
Images via ShapeShift, Shutterstock