by Dr. Charles Evans
BitShares strives to be to business what Bitcoin is to money. This ambitious goal is made possible by Satoshi Nakamoto's solution in 2008 to a problem in distributed computing that had been declared impossible to solve since the 1970s. However, as is always the case with new technology, the language often lacks words for the new concepts associated with the innovation, as we are forced to use existing words in strange new ways, as our ancestors did when faced with the 'horseless carriage' (automobile), 'talking picture' (movie), or 'information superhighway' (Internet). As noted in the Montague Institute Review article, "IT Neologisms: Necessary but Dangerous" from January 2010:
To make sense of rapid change, we are inclined to make incremental alterations to our existing world view—much like adding a patch to a comfortable shirt. A good example is the phrase "horseless carriage," a kind of neologism that helped people absorb the concept of a self-propelled vehicle. Although they can be expedient in the short term, most neologisms are eventually replaced by other terms that more accurately reflect the new reality. In the meantime, they can confuse both developers and consumers, increase costs, and obscure the true nature of change.Thus, while it is true that words have meanings, it is equally true that a rose by any other name is still a rose. Many words often have several very different meanings simultaneously, or different meanings in different contexts. Some words—like 'cleave', 'sanction', and 'dust'—are even their own antonyms. Sometimes we invoke similes and analogies. At other times, one might resort to sarcasm, which is stating the exact opposite of what means for dramatic effect. If one holds that sarcasm is the lowest form of wit, one might opt for sardonicism, which is stating what one means but in a sarcastic tone, typically as either understatement or hyperbole. Most of us, who are familiar enough with Bitcoin to explain it to others, know that there are no 'coins' to be 'mined', as if coins were mined in the real world. Ore is mined, and coins are minted, which has nothing to do with how they smell or taste. These are similes and analogies. To fixate on their literal meanings is foolish, if not disingenuous. However one describes what a piece of software does, it does what it does; no more and no less, and no matter what natural language words one uses to describe it. If one truly wants to understand what Bitcoin, BitShares, Ethereum, Linux, or any other software does, one must analyze the source code. Nonetheless, some individuals seem to derive perverse delight in taking similes and analogies literally and pretending to find controversy where none exists. Whether this is playing Devil's Advocate, impish trolling, or some form of narcissistic cry for attention, it can lead to economic harm to the party whose words are willfully misinterpreted. For example, a reasonable person recognizes "Invest in a professionally maintained luxury sedan..." to be a call to buy a used car. If someone of ill will reported the used car dealer to financial regulators for soliciting unregistered investments that consistently lose value—"You said 'invest'!"—even if the dealer prevailed, he or she still would have to hire a lawyer, take time out of an already busy workday to rebut the spurious claim, and repair his or her reputation.
In a field as young and dynamic as crypto currency, it is unsurprising that we have faux controversy in abundance. Very few in the general public understand Bitcoin, and those who are working on Crypto currency 2.0 projects like BitShares, colored coins, Ethereum, Mastercoin, or Ripple might as well be engaging in wizardry, as far as all but the insiders are concerned. Still, that does not stop some wags and gadflies from imagining that they witness nefarious skullduggery and declare their dark fantasies and uninformed opinions to be immutable facts. Those on the receiving end of this often pseudonymous misquoting, misinterpretation, and outright lies must choose between ignoring the false claims or engaging in conversation that often just digs one deeper into a pit of falsehoods. (That last bit is a simile.) Neither option is particularly appealing. On an open forum, the choice is unavoidable. This brings us to BitShares, and by extension all crypto currency 2.0 innovations. There are no shares in BitShares. Any references made to 'shares', 'investments', 'dividends', 'banks', etc. by the principals have been and are analogies, intended to help the lay reader form a mental image of what the software does. Such references are invocations of familiar concepts presented as similes, rather than as metaphors. An example of a simile is, "The USA is the 800-pound gorilla of capital markets." Clearly, the USA is not a great ape native to the rainforests of Sub-Saharan Africa. It is a country, just south of Canada and west of the Bahamas. To argue that the authors of the BitShares software should be subject to securities regulation is as nonsensical as arguing that, because it is illegal to own gorillas in most jurisdictions within the USA, the person using the analogy above is advocating animal endangerment. Even if one invoked a metaphor, such as "The USA is like an 800-pound gorilla..." that would be little better than saying that features of BitShares are like shares, like investments, like dividends, like banks, etc. Likewise, calls to regulate Ethereum are as nonsensical as calling for the regulation of C++, Java, Python, or Ruby. Granted, regulation might apply to the use of the software, but that is another matter. The point here is about reading features into a brand name or an analogy used to explain what a piece of software does that simply are not there. The Federal Reserve does not issue Linden Dollars. There is no gold in Reddit Gold or in an American Express gold card. The US Treasury Department does not operate American Express. The US Department of Transportation does not operate Federal Express. The winner of a game of Monopoly is not guilty of violating the Sherman Act of 1890. The House of Windsor does not produce Royal Crown Cola. There is no coca in Coca Cola. There is no anesthetic in Ethereum. When Daniel Larimer coined the term 'Decentralized Autonomous Company' (DAC), and declared Bitcoin to be the first DAC, he was using the term 'company' as an analogy to help the lay public form a mental image. Similarly, when he named his software for creating subsequent DACs 'BitShares', he meant that one could draw a cartoon depicting one's crypto-currency holdings as 'shares', rather than 'coins'. (As a side note, this is analogous to mapping the cash flows of a firm to those of a government, and noting that corporate shares correspond to fiat money, and that USD can be seen as shares in the US federal government.)
In other words, Bitcoin-the-system can be viewed as a DAC, where each bitcoin-the-unit represents one share in the distributed, self-organizing, self-enforcing 'company' that we call Bitcoin. The change of analytical framework from coins to shares makes seeing ways to improve Bitcoin-the-company more straightforward. For example, the primary goal of a firm—more accurately, the firm's shareholders—is to maximize profits. This is not to be confused with minimizing costs or maximizing revenues. If one wants to minimize costs, one can reduce them to zero by shutting down. At the other extreme, if one wants to maximize revenues, one ends up pushing one's equipment and employees to the breaking point. The optimal scale is the one that maximizes the difference between revenues and costs, which is in a kind of 'Goldilocks Zone' between 'too big' and 'too little'. When we think of Bitcoin as an issuer of coins, efficiency is a secondary concern. If the network slows down, just throw more silicon-&-electricity at it. In fact, the Proof-of-Work used to secure the Bitcoin system embraces inefficiency as a core feature. However, when we think of Bitcoin as an issuer of shares, efficiency becomes one of the primary concerns, and more efficient alternatives to Proof-of-Work become more desirable. One alternative is Proof-of-Stake, which secures a system by having the 'shareholders' vote on the valid transaction ledger in proportion to their holdings. In this way, those who own the system secure the system without having to spend huge amounts of resources on doing more work than any attacker can. Of course, Bitcoin developers could replace Proof-of-Work with Proof-of-Stake, but they would need the cooperation of the transaction processors, known metaphorically as 'miners', as they control the majority of the computing power that makes up the Bitcoin system. In other words, seen as a company, the holders of bitcoin-the-unit own non-voting shares. The miners have all of the voting power. As a payment protocol, this obviously is not a devastating problem. Otherwise, Bitcoin would not exist. As a company, on the other hand, this is like having the vast majority of shares in circulation stripped of their voting rights, and all of the voting power concentrated in the hands of a small number of parties who might not even hold the bitcoins longer than it takes to sell them that they receive in payment for their services. This situation is unusual in countries that tend to attract a lot of foreign investment, like Australia, Canada, the UK, and the USA. It is much more like the large, family-owned combines that one sees in the Developing World. Carrying the company analogy a bit further, the goal of maximizing the 'equity-per-share' ratio replaces the goal of maintaining a constant 'backing-per-currency-unit' ratio in a currency system. With a currency, the general tendency is to strive for a stable price-per-stuff ratio. Granted, one can argue in favor of a truly deflationary currency, but this continues to be a minority view, and the default is stable prices for the vast majority of currency users. Shares, on the other hand, are expected to pay dividends, appreciate in value, or both. When we think of a DAC as a company, rather than as a mint, the idea of units that increase in value comes more naturally. What is BitShares? The first BitShares system to be released is called BitShares X, which is—to use a neologism that should be familiar to most readers—an altcoin that serves as the internal currency of the BitShares X system, and simultaneously represents a proportional stake in the system, and thus the use of the term 'share' in casual conversation.
A Proof-of-Stake system needs stake holders; i.e., parties who hold (own) stakes (fractions of the whole system). However, to call them 'stakeholders' would be confusing, as that term often is used to mean parties who are affected by a firm's success or failure, but who do not own any shares in the firm. This usually includes, vendors, customers, employees, tax collectors, spouses of employees, etc. (As with 'cleave', 'dust', and 'sanction', the term 'stakeholder' in this context thus becomes its own antonym.) For this reason, the holders of BitShares X (BTS) are referred to as 'shareholders', but typing all those quotation marks become tedious very quickly. In addition to this altcoin/share/stake/whatever, BitShares has a additional layer for the creation of BitAssets, which—once again—do not represent claims on underlying assets, either in the present (spot) or in the future (option, forward, future). However, their values are expected to track the prices of assets or even bundles of different assets. BitShares achieves this by lending BitAssets into existence against (BTS) held as collateral. In this way, for example, a BitUSD would be a meta-altcoin that represented an amount of BTS that were worth one US dollar (USD). An analogy here—meta-analogy?—might be plastic bags, each filled with $1 worth of pencils, that people agreed to use in lieu of USD notes and coins for hand-to-hand transactions. Of course, these transactions would be subject to all of the taxes, regulations, and statutes that transactions facilitated by USD would be subject to. There is no avoiding that. If the USD/BTS ratio (price) moves more than some threshold set by the system, the system uses enough of the BTS held as collateral to buy the number of units of BitUSD that had been issued against it from the market, removes the BitUSD from circulation, and returns any remaining collateral to the BTS accounts from which the collateral original was paid. (This process is generally referred to in the BitShares literature using the conventional term, 'margin call'.) It is as if the Fed lent new USD into circulation only against collateral that bank executives placed with the Fed; perhaps gold, silver, corporate shares, foreign currencies, or whatever. If the price of any of the collateral moved more than some predetermined amount, then the Fed would use the out-of-sync collateral to buy the number of USD on the open market that it had issued against that collateral, and return the remainder to the bank from which it had been sent. Anyone who wants new BitUSD can have it issued against new BTS collateral, this time at the current USD/BTS rate. At any moment, though, BitUSD is not a claim on a USD. It is an altcoin that one expects to be able to buy $1 worth of BTS. Of course, as we have seen with Bitcoin, even an empty token can become virtual currency once it becomes convertible. Should BitUSD be used for any purposes outside the BitShares system, users might find that they become subject to regulations and other restrictions, in the same way that Bitcoin users now must comply with Money Service Business regulations, tax statutes, 'BitLicenses', etc. Similarly, while a BitUSD can be used to trade for $1 worth of something else, but it is $1 worth of BTS, and not a claim on a USD. It is as far removed from the USD as using a deck of playing cards to trade for $5 worth of goods would be. Depending upon when a user buys or sells BitUSD the user will get a different number of shares, but the purchasing power should be approximately equal to $1.
Like Bitcoin, where there are no issuers backing the value of a bitcoin, there are no issuers of BTS shares or of BitUSD. The entire system operates on a great chain of numbers following a predefined set of rules enforced by the consensus of the network. Although beyond the scope of this article, it bears noting in conclusion that BTS is just one of many potential business models that could be defined entirely in software. Other business models include everything from insurance, to domain names, to gaming, to auctions, to voting, and many more. The biggest challenges faced by entrepreneurs is finding developers with a deep understanding of economics and consensus. We are at the same stage of the development of the 21st Century as our ancestors were in 1913, with regard to the 20th Century. In that year, the income tax was declared Constitutional for the first time in US history, the Federal Reserve System was established, and WWI was ushering in the fall of the Austro-Hungarian, German, Ottoman, and Russian Empires. Where we go from here is anyone's guess, and our starting point is a deeply entrenched regulatory state. While it is true that one cannot hold back progress and the market eventually wins, unless one is prepared to 'go Galt', one must contend with the status quo. Words have meanings, and we must take great care to emphasize when we use them as analogies, and when we use them as legal terms.