Coinffeine: first decentralised bitcoin exchange

Tuesday 28 July 2015

Centralised exchanges are a disaster waiting to happen. Coinffeine has a solution.

No one in crypto needs any warning about the dangers of centralised exchanges. They might be getting a lot better, but there have been enough hacks, scams and disasters over the years to make anyone wary of even the most professional-looking outfit. Besides, there’s something ironic about bitcoin, a decentralised and trustless protocol, relying on centralised services for its existence. This is an issue Coinffeine aims to address.

Coinffeine bills itself as the world’s first decentralised bitcoin exchange. Like bitcoin and other cryptocurrencies, it uses a client that users download - no single-point-of-failure website is involved. In that respect, it’s a lot like BitTorrent. In fact, Coinffeine makes that exact comparison.

Read also: Interview with CryptoMate - P2P UK exchange

The problem with buying and selling bitcoin has always been trust. If you’re using a regular exchange, you are trusting them to look after your funds - fiat and crypto - while they are holding them. The money is never really yours until you’ve withdrawn it, either to your bank account or your bitcoin address. That’s a reality that has been underscored time and again, most painfully by MtGox. Even if you’re trading peer-to-peer, there’s still trust: someone has to hand over the money first, and whoever it is has to trust the other party to pay up for their side of the deal. There are various ways of addressing this, such as with trust scores, but it never really solves the problem.


Solving the problem of trust, one slice at a time

Coinffeine has come up with an interesting solution to this. The desktop client connects to both your fiat payment option (currently OKPAY) and your bitcoin wallet. Coinffeine itself never handles any funds. That means 1) they aren’t a potential point of failure and 2) they don’t have to enforce KYC - meaning that the service is far more anonymous that it would otherwise be.

For the trade itself, Coinffeine has developed a ‘zero trust exchange algorithm’. This makes it sound more complicated than it really is. In simple terms, all that happens is that your trade is sliced up into lots of little transactions, and these are made alternately. So if Alice wants to sell 1 BTC and Bob wants to buy one for $280 (the price at the time of writing), the trade could be divided into 100 segments of 0.01 BTC and $2.80 each. These amounts are exchanged one by one, so if either Alice or Bob try to do a runner, they will never be able to scam more than $2.80 or 0.01 BTC respectively. It’s a pretty neat solution.

There are a couple of caveats, of course. Firstly, ‘Coinffeine is still in Beta, so we recommend using moderate amounts of money.’ Fair enough. Secondly, only OKPAY is currently available. Presumably, KYC is still conducted through them, so although the service is anonymous between users, it can’t be said to be as private as an in-person P2P trade.

Coinffeine say they will be adding new payment options soon, including PayPal. That’s an interesting one, because PayPal is generally accepted to be a bad option for crypto sellers. The problem is that buyers can claim they never made the trade, and have the transaction reversed (PayPal have a history of siding with the buyer). And yet the crypto transaction is irreversible. It’s the same with credit cards, as plenty of people have found to their cost. Therefore irreversible fiat payment options are preferred by crypto sellers. Some will accept credit cards, but the only way to mitigate the risks is through far higher levels of KYC. Another issue is the charges associated with PayPal. Some fiat payment processors might work ok, but PayPal generally charges a flat fee + percentage per transaction (bitcoin, of course, is perfectly suited to such a step-by-step approach through its low transaction fees). Conduct 100 transactions and those fees will stack up. It will be interesting to see how Coinffeine deal with these issues. Overall, though it’s a very interesting and promising development.

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