Bits Digit is a FinTech company based in Belize, Singapore, Honduras that has launched the first global
marketplace for all asset classes and instruments, using the Digital Token protocol on blockchain. The
paper explains the architecture of the exchange and first use cases. We discuss how the exchange will
evolve over time. We explore the macroeconomic benefits of the new distributed ledger technology
(DLT). The Bits digit exchange operates similar to JAVA in the sense that it is compatible with any type
of blockchain; marketplace was first developed on blockchain of Bitcoin or Ethereum.
Every financial instrument can become a listed security on the blockchain in the form of a digital token, through the so-called Digital Token protocol. Digital Token follow the idea of ''coloring'' a specific Bitcoin or using an Ethereum blockchain based Assist - the issuer guarantees to hand out the underlying assets to the person, who returns the digital token. For example, the Federal Reserve (FED) can issue a token in the same way as it prints paper money; it would take a fraction of a Bitcoin/Ethereum and then insert the ''I Owe You'' statement of the FED, like a regular bank note. The same mechanism can be used for any other financial claim. Digital Tokens are different in nature than cryptocurrencies, because they have a specific issuer and are backed by a real financial asset.
Reporting of Digital Tokens in traditional banking software systems, such as bookkeeping and risk management is straightforward, because every Digital Token can include an International Securities Identification Number (ISIN), thus can be treated as any other financial instrument, fully compatible with existing back-office systems. Financial institutions can create Digital Tokens for existing financial products and gradually move business processes to blockchain. They can operate the old and the new systems in parallel and switch over to the new system at their own pace. In the new system, interest rate payments are second by second, improving liquidity provision.
Bits Digit has launched the exchange initially for the main currencies, the Bits Digit Token (shares of Bits Digit) and started two innovative projects: Perspective asset classes include futures & options on digital assets, crowdfunded loans for retail and private equity financing for Small and Medium-Sized Enterprises (SME), contracts for difference, zero coupon bonds and other fixed income, natural capital bonds and more.
The paper provides a high level overview of the exchange architecture and reports on initial experiences. The paper concludes with a research agenda and technologicalroadmap.
The financial system architecture has grown organically. Over the past forty years, individual steps of the
workflow of financial transactions have been computerized; the business process remained unchanged, as if
processing continued to be manual. Delivery and settlement of transaction is batch based and occurs with a time
delay of two and more days and does not happen at the time of the trade. The outcome is a convoluted banking
architecture, a pile of spaghetti. Every bank has its own bookkeeping system and is an island from an audit point
of view, where verification of trades is cumbersome and prone to errors. This regime contributes to a high degree
of fragmentation and uncertainty in the market, multiplication of risk factors, high transaction costs for financial
assets and lack of liquidity and transparency in financial markets.
In attempt to rewire the current financial system Bits Digit builds a global Internet exchange, where all financial instruments will be traded and exchanged against each other, whatever their asset class or the size of transaction. Every financial instrument will be a listed security in the form of a digital token and all transactions will be logged in a universally accessible distributed ledger, a decentralized notary service that ensures immediate global consensus about completed transactions and asset ownership. Like the Internet itself, the ledger is not controlled by a single entity, but an emergent phenomenon consisting of its participants. Trades will be settled and validated immediately; processing will be digital and transaction costs will be minuscule. The ledger includes a wallet, so every owner of a digital coin has his own private key protecting his ownership. There will be an intraday interest rate market and yield curve. Market participants will be able to buy and sell Digital Tokens of different issuers and change counterparty risk at any time. The number of traded financial instruments will grow exponentially, transaction volumes will skyrocket and liquidity will be ample.
Bits Digit aims to become the global marketplace and establish itself as the backbone of a new and highly sophisticated banking architecture that is not plagued by the deficiencies of the present system. This paper introduces the architecture of Bits Digit.
2. Distributed ledger technology overview
This chapter provides an overview over what distributed ledger technology can and cannot do in comparison to a traditional software architecture. It also compares different variants of DLT and compares them to Bitcoin, which is the oldest and most popular implementation.
What is DLT?
In abstract terms, distributed ledger is a way to find a consensus among a multitude of servers in the absence of
mutual trust. Most DLT variants follow a proof-of-work protocol, which provides strong economic incentives for
contributing to the network security (mining). The largest distributed ledger currently in operation is the Bitcoin
blockchain. The hardware cost to match the computing power that currently secures the Bitcoin blockchain is
likely in the triple-digit millions, if not higher.
1 Digital Tokens is a software protocol to specify terms and conditions attached to a particular Bitcoin or smaller Bitcoin/Ethereum increment. In analogy to financial securities issued as paper certificates, Bitcoin or a small increment is used as a kind of paper to specify additional terms and conditions.
3 A distributed ledger is fundamentally based on publicly announcing every transaction, thus allowing anyone listening to verify and track the balances of every other network participant. Whenever Alice wants to transfer 3 Bitcoins (or whatever currency that ledger supports) to Bob, she creates an according transaction, signs it and publicly announces it. From now on, everyone knows that Alice has 3 Bitcoins less and Bob has 3 Bitcoins more. This is all there is to it. All other complications such as mining stem from the problem of ensuring the existence of a reliable public transaction archive and that everyone agrees on which transactions have actually happened in what order.
Bitcoin itself and most Bitcoin clones rely on proof-of-work to secure their blockchain. The idea behind proofof-work is to increase the cost of an attack by letting the majority of the computing power in the network build the blockchain. A sustained brute-force attack would require a majority of computing power in the Bitcoin network. As proof-of-work comes with an immense amount of “wasted” computing power, “proof-of-stake” has been proposed as an alternative. However, some argue that this approach is fundamentally flawed and so far, attempts at creating proof-of-stake based ledgers have had mixed success.
When measuring security as the USD-cost of an attack, the most secure distributed ledger currently in existence is the Bitcoin blockchain. There are alternative cryptocurrencies that add security in principle thanks to certain tweaks. Litecoin, for example, uses a hashing algorithm that makes it harder to create specialized mining chips. Ethereum follows a plan to discourage a professionalization in mining and switch to the Proof-of-Stake consensus model. But the sheer amount of computing power securing the Bitcoin blockchain dwarfs the effect of those tweaks. One cannot rule out that other cryptocurrencies succeed at taking the lead security-wise in the medium term future, but for now, the Bitcoin blockchain remains the most secure platform to build on.
DLT vs. Distributed database
Open distributed ledger is a great platform to build other services on top, as it is an independent technology
without any vendor lock-in or other entity behind it that might abuse it one day to further their strategic agenda.
Examples of other such decentralized technologies that serve as a platform for others to build on are Linux,
Email, or the Internet. A distributed ledger should be the technology of choice for projects that benefit from high
inter-operability and versatility in use.
As soon as the involved parties can be trusted, there are usually more efficient solutions than a distributed ledger. When the main issue is unreliable hardware that can otherwise be trusted, the Paxos algorithm is typically used. This is what Google does in order to provide reliable services with commodity hardware. Then, there are a number of database solutions that can be the most efficient in principle but require highly reliable hardware and also complete trust in the operator. Decentralization comes at a cost.
The power of the Bitcoin platform
Open platform technologies can unleash enormous powers, which would not materialize in a centralized setup.
The classic example is the Internet, which thrives thanks to its open architecture and which has quickly outrun
all alternative approaches (e.g. the French Minitel). Another example is Linux, which serves as an operating
system for the majority of servers in the Internet. Its main advantage is the fact that a company can commit to
using it without becoming dependent on a potential competitor. A third example is the email protocol, which is
being used to send billions of messages every day. Email would never have flourished to the same extent if it
was directly controlled by a company. Similarly, Bitcoin is often seen as the open platform for finance.
Originally, Bitcoin was most popular among cypherpunks and cryptoanarchists. To this day, Bitcoin has a significant number of proponents from that background, who love Bitcoin for its libertarian philosophy and who cherish it as digital gold. Driven by a vast inflow of venture capital, Bitcoin is of gaining broader traction among early adopters whose enthusiasm stems more from Bitcoin’s usefulness and versatility than from its technical brilliance.
Since 2014 Bitcoin saw unprecedented inflows of venture capital. It is one of a number of growing startups that have each raised venture capital in the double digit millions. While most Bitcoin startups are profit driven with a clear plan for generating revenue, Blockstream which recently raised 21 million is a remarkable exception. Unlike other Bitcoin startups, Blockstream aims at improving the Bitcoin infrastructure itself - without obvious financial benefit. Its investors argue that there is huge value in being able to help shaping the future of the Bitcoin protocol and being at the forefront of Bitcoin development.
The most important metrics for Bitcoin traction is the number of transactions per day, which is currently approaching 400’000, as illustrated in figure 1.2
3. Digital Tokens exchange architecture
In this chapter we present the architecture of an exchange for Digital Tokens. By Digital Tokens we mean
issuer- backed securities on the Bitcoin blockchain. Orders are collected and matched by a semi-trusted
Matched orders are settled on the Bitcoin blockchain, where each successful trade between parties appears as a set atomic Digital Tokens swap transaction. Unfilled and expired orders are discarded. The exchange does not take possession of the traded coins, but needs to be trusted to match trades correctly. Assuming a basic level of trust in the trader - which could for example be established by providing collateral - trading can take place as fast as the communication between a trader and an exchange permits, with a subsequent settlement on theblockchain.
Exchanges for cryptocurrencies can be organized with a different degree of centralization. Typically, centralized exchanges are much more efficient, whereas decentralized exchanges are more secure as they require less trust in the exchange. Due to their higher efficiency and simplicity, most volume is currently traded on centralized exchanges such as BTC China, Bitstamp or Bitfinex.8 A trader on such an exchange must entrust all assets in his trading account to the exchange. History shows that this is not without risk, with the most famous examples being the collapse of MtGox (more than 600’000 Bitcoins disappeared) and the most recent hacking of Bitfinex (120’000 stolen Bitcoins). Exchanges such as Bitcoin.de and LocalBitcoins are more decentralized and restrict themselves to organize trades and offer escrow services, but let the traders execute the actual trade bilaterally, whereas traders on LocalBitcoins often even meet physically. This naturally limits the achievable speed of trading to the speed of the underlying payment system (e.g. SEPA or moving bank notes). These exchanges can achieve a much higher trading frequency without having to resort to client deposits by restricting themselves to cryptocurrencies that can be exchanged instantly. Examples of such exchanges or whole cryptocurrency systems that include built-in decentralized exchanges are Omni, Counterparty, and BitsharesX - none of which achieved the same commercial success yet as the aforementioned centralized exchanges. These exchanges frequently try to even decentralize the matching of trades, which is problematic as it is fundamentally hard to enforce rules in a decentralized system, especially when timing is crucial. For the design of our exchange, we opt for a system with centralized matching of trades, but with direct bilateral exchange of assets, trying to combine the best of both worlds. One should also note that, when trading particular Digital Tokens or any other issuer-backed asset, there is exposure to a centralized point of failure anyway, namely the issuer.
We follow the design principles of simplicity and minimal risk. Thus, we prefer proven systems with known
shortcomings that are good enough for our purposes over theoretically better systems. The best validated
distributed ledger technology is clearly Bitcoin, with a blockchain spanning back more than five years.
Unfortunately, the Bitcoin network only supports one asset, the Bitcoin. One way to overcome this would be to
create an adapted version and to operate a separate blockchain that runs that adapted protocol. With a separate
blockchain, one cannot benefit from all the computing power securing the Bitcoin network, calling for further
adaptions, such as abandoning proof-of-work (majority of computing power says which transactions settle) for
proof-of-stake (majority of coin wealth says which transactions settle) or something entirely different. The path
of building a custom ledger has been chosen by a number of cryptocurrencies, such as Ethereum. This leads to
the risks of over-engineering and stepping into uncharted territories, which are both hard to control.
8 Market Overview, bitcoincharts.com
Thus, instead of creating yet another distributed ledger, we decided to make use of the Digital Tokens approach, which builds on top of the Bitcoin/Ethereum blockchain. As the name suggests, Digital Tokens follow the idea of “Token” a specific Bitcoin or Issuing an asset on Ehereum blackachin , with an issuers guaranteeing to hand out the underlying assets to whoever returns that Tokened Bitcoins (or a fraction thereof). Thus, such Digital Tokens are always linked to Bitcoins/Ethereum - like physical coins being bound to a few grams of a metal that also has a value in itself and is independent of the currency value. Further limitations are discussed in the scalability section. Current implementation of Bits Digit Exchange operates with Open Asset Digital Tokens protocol9
. The proposed exchange is positioned in between completely decentralized proposals (such as Counterparty) and completely centralized ones (such as Bitstamp). Decentralized approaches tend to come with significant overhead, for example by creating an entry on the blockchain for every issued order. Centralized exchanges are much more efficient, but require the exchange to take possession over the assets of the traders as deposits, which in many jurisdictions comes with certain regulatory duties (e.g. requiring a banking license). Our approach finds a middle ground between those two. Only completed trades enter the blockchain, while unfilled orders are discarded. At the same time, assets can be traded ad hoc and are directly transferred between the trading parties, thereby letting the exchange act as a mere broker without clients’ deposits.
There are three involved parties:
● Issuers issue IOUs as Digital Tokens. These coins can represent currencies, stocks, or any other transferable asset. An exchange can demand from the issuer to file a formal application for his Token to be listed, but there is no technical necessity to do so. In principle, any Digital Tokens could be traded on an exchange - even without the consent of the issuer. The role of the issuers is passive, all they can dois to observe completed trades as they settle on the blockchain.
● Traders possess Bitcoins or Digital Tokens and desire to trade them for other assets. Traders typically need to be registered with the exchange in order to establish a basic level of trust (e.g. legally or by providing a collateral). To initiate trades, they send orders to an exchange of their choice. The traded assets must reside on a Bitcoin address associated with the trader’s account on the exchange. Traders primarily communicate directly with the exchange, but should also observe the blockchain to verify the correct settlement of their trades.
● Exchanges wait for traders to send them orders and collect them in an order book. The usual order types are supported (bid, ask, limit, etc). Matched trades are settled on the blockchain. In principle, any asset pair can be traded, but in practice market forces will probably let a dominating currency emerge (similar to the USD in a classical foreign exchange). There could be various competing exchanges.
Traders create an order by creating and signing a collateral transaction to send x coins to the exchange, whereas x is the amount and type of tokens they intend to sell. Unlike usual transactions, this collateral transaction is not sent to the Bitcoin network, but to the exchange instead, along with additional information about the order (type, asset to buy, limit, etc.). The collateral transaction guarantees settlement for the matched trade in case if traderis offline.
Most of the time, one of the involved orders will only be partially filled. The user can cancel the remaining order which will immediately returned to the user for resubmission of the remaining trade. For example, if trader Toni issues an order to sell 100 USD for EUR and his order is immediately matched with 80 USD worth of counterorders, the remaining 20 USD Toni can cancel to send back rest 20 USD to his holding.
Bits Digit Exchange implements a new type of queuing system for the limit orders. The queuing system is pricespread-time dependent, because it rewards market participants for quoting two-way prices and revealing information about their price expectation. Market participants who are confident that the price level will remain unchanged, will offer low spreads, they will get preferential treatment and will move ahead in the queue. Highfrequency traders will not be able to extract an unfair advantage from the pending limit orders as is the case today with price-time queuing systems that are standard. The innovation translates into improved price discovery with lower price volatility and improved market efficiency. The price-spread-time queuing system is a major innovation for the industry of electronic market places, which use queuing systems that are only price-time dependent.
To be able to trade, traders should deposit coins into exchange. Depositing coins is not equal to trusting coins. The exchange uses 2-of-2 multisignature address wallets to deposit trader’s coins. 2-of-2 multisignature address requires two signatures to spend coins from it - both trader’s and exchange’s signatures.
Malicious traders could prevent the settlement of a trade by issuing a competing transaction that sends the
offered coins elsewhere. Doing this is trivial as long as the order is pending and thus no transaction published -
but assuming that the exchange provides an option to cancel pending orders, there is no motivation to do so as it
results in the same, namely the cancellation of the order.
A malicious trader might also regret an order after it was matched and sent to the network, thus wanting to disrupt settlement. As transactions spread quickly through the Bitcoin/Ethereum network, successfully issuing a competing transaction to prevent that regretted trade would require collusion with the miner who happens to mine the next block - something a large mining pool probably would not want to risk its reputation for as such cheating attempts are perfectly detectable. The easy detectability also allows to automatically trigger countermeasures such as freezing the collateral of the trader or banning the trader.
A related attack is based on transaction malleability. Transaction malleability is a weakness in the Bitcoin protocol that allows anyone to slightly alter a transaction in ways that cause the transaction to change its id (hash). Should the altered transaction enter the blockchain instead of the original one, already issued follow-up transactions will be orphaned and fail as they use the original id to refer to their predecessor. The necessary adaptations to the Bitcoin protocol to fix this are known, and implemented.
Another attack on the system could be performed by the exchange itself. If hacked or run by a malicious operator, whoever controls the exchange could potentially take possession of all assets in all currently pending orders. This is already much better than the risk of traditional exchanges like MtGox to misappropriate all their clients’ accounts, but is still a significant risk that needs to be addressed through according security and regulatory measures.
All the aforementioned risks pale in comparison to the counterparty risk inherent in Digital Tokens. Regardless of how securely the exchange is organized, an issuer of Digital Tokens could default or misappropriate the underlying assets. An exchange can help to alleviate this risk by only allowing the trade of coins from verified issuers with quantifiable counterparty risk. This risk can be mitigated by diversifying coins across multiple issuers and by swapping to coins that are deemed less risky if necessary.
In order to provide leveraged trading, an intermediary service such as a bank willing to provide credit is necessary. This is basically the same as traditional leveraged trading. Instead of directly trading on the exchange with their own wallets, traders will transfer their assets to a managed wallet. Such a managed wallet resembles a bank account, with the bank managing the wallet having full control over the contained assets. Like in classical banking, orders issued by the traders go to the bank first, where they are verified, and then sent to the exchange. The bank can then offer credit to the trader, which is added to the managed account. But as soon as the account is not sufficiently covered any more, the margin call is issued, the assets liquidated, and outstanding credit returned to the bank.
Bits Digit is raising funds to support the establishment of the Exchange Platform and to deliver the respective
technologies. For that reason, Bits Digit is issuing BITSD Tokens (BITSD) through the smart contract system
operated by Ethereum. The funds raised by the sale of tokens will be retained by the Bits Digit until for future
Token name: BITSD Token – BITS DIGIT Profit-Share Smart Contract The Tokens will be assigned pro-rata to the funds provided to the Bits Digit during the ICO. Payout Structure:
According to the Bylaws, at the end of every month, 50% of exchange profit of Bits Digit will be transferred to the specific Ethereum (ETH) wallet. The ETH is then redistributed to all holders of BITSD Tokens according to smart contract conditions (i.e. the stake of profit is received pro-rata the share of tokens owned).
The token sold during the token launch is known as the BITSD Token (BITSD). The total supply of BITSD is fixed to 7,000,000.
The supply of BITSD will be limited to the pool of tokens created during crowd funding period.
● Maximum number of tokens created during crowd funding period:
○ Total: 7,000,000 (100%)
○ Crowd funding participants: Smart Contract 6,300,000 (Bonus added) (90%)
○ BITSD development Team/Bonus & Bounties: 7, 00,000 (10%)
● Sending 1 Ether or same value of other currency to the BITSD account will create 300 BITSD (minimum 1 ETH)
● Tokens will be transferable as transaction successfully completed.
First week Days 10%
Second week Days 5%
Social / Translations 5%
The money transmission protocols will evolve and in future there will be many blockchain-based digital assets. The important component that is missing is a global market place that enables exchange of digital assets directly without going through fiat or crypto currencies. Bits Digit building a global Internet exchange, where all financial instruments will be traded and exchanged against each other, whatever their asset class or the size of transaction.