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Bitcoin QA Decentralised exchanges and counterparty risk

pBitcoin QA: Decentralised exchanges and counterparty riskp p Jen asks, How do you envision markets transitioning from centralized to decentralized exchanges? .

Bitcoin QA Decentralised exchanges and counterparty risk

What are the implications you see, at large? Decentralized exchanges are a fantastic idea. I think its an idea that can be applied fairly directly to trading between open, digital cryptocurrencies. But trading cryptocurrencies to fiat currencies, trading between the U.S. dollar and bitcoin, is a lot harder to decentralize. The reason for that is the dollar system is centralized.

You have some examples of decentralization and recently they havent been growing as fast, like LocalBitcoins various types of cash markets. ATM machines, those are fiat to bitcoin exchanges. They are decentralized, but they cant really generate a lot of volume of transactions. Theyre not very convenient.

Whereas doing things like atomic swaps, crosschain atomic swaps where you can swap currencies from two blockchains, with two transactions, that are trustless and neither participant can cheat means that we could see many more decentralized cryptocurrency to cryptocurrency exchanges. Well see how that happens. I think that will be really interesting Another possibility that were seeing and I think a lot of different people are now exploring is the possibility of having fiat currencies expressed as some kind of pegged cryptocurrency. An example of that would be Tether.

There are proposals for some other forms like that, where you have fiat currency in reserve and then you have a cryptocurrency asset issued in equal proportion. You can trade that on a blockchain. It allows you to do arbitrage and decentralized exchanges for fiat currencies too, although of course the bank deposits that contain the actual asset ex.

U.S. dollar, those are still centralized. Will a Tether collapse lead to such a fierce bear market that it kills off Bitcoin? Will decentralized atomic swaps and Bisq be too late and weak to save the day?

I have not really studied whats happening with Tether, but I do know that it is a centralized centrally managed system. That represents custodial risks, counterparty risks, like any other centralized centrally controlled system. Having lived through a few very big crises in Bitcoin, Im really not fearful of a fierce bear market that could kill off Bitcoin.

I really dont think that can happen, for a variety of reasons. One reason: most people who get into Bitcoin today dont realize how big a deal the collapse of MtGox was.

Bitcoin QA Decentralised exchanges and counterparty risk

a time when there was only one exchange, when that exchange was responsible for price setting, and when that exchange was responsible for the vast majority of all of the exchange volume. When it collapsed, it collapsed suddenly and catastrophically, with a loss that was a staggering amount of money as a percentage of the total amount of Bitcoin in circulation. And Bitcoin didnt die. It was the first and only time I was afraid that this might really knock Bitcoin back by a long time. Or even potentially stop it in its tracks, force us to reboot the currency, and start something new.

When it didnt happen, I realized that Bitcoin is more resilient than I thought. Then I started thinking about what my reaction would have been if bitcoin had dropped precipitously back to double digits, or even single digits, in value against the dollar. I realized that what I would probably do is buy all of them, with whatever cash I had. Then I realized that everybody else would be thinking the same, or at least a very large number of people who had seen that this experiment was working and believed in it, would think the same.

This idea of buy the dip isnt always investment advice or good investment advice. In fact in some cases, its terrible investment advice. It is like catching a falling knife, as they say in investment circles. But there are some people who believe in this project so strongly that if they see an opportunity to get back in at a much lower cost basis, they will. Some of these people have a lot of money now.

What they consider a buying opportunity is much higher than what I would. In fact I recently saw a tweet that was kind of funny, which said: What would you do if bitcoin dropped to zero? Someone responded, It wouldnt, because if it dropped to one penny, I could buy all of them for 168, 000. And I would. That kind of attitude, at different price points, means that I dont see that scenario.

Could a collapse of something like Tether set us back for a significant period of time? Yes. We keep seeing these things happen. Theyre the result of centrally controlled, centrally managed, custodial systems.

Tether is one of those. The same thing could be said for the recent massive theft at CoinCheck, which was half a billion dollars worth of NEM and a significant amount of Ripples . We will continue to see these centralized systems introduce counterparty risk Every now and then, that counterparty risk is going to turn into an actualized loss.p

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