A gateway is a trusted party that facilitates moving value into and out of the BitShares network. To do this they issue redeemable IOUs as fungible divisible assets on the BitShares block chain. If the issuer is trustworthy then those IOUs will trade at face value and therefore be useful in trade. This service is effectively that of a trusted party that facilitates trade among 3rd parties who do not know each other in much the same way that a bank issues cashiers checks so that 3rd parties can accept payment without having to worry about a personal check bouncing. Unlike a cashiers check issued by a bank, the digital IOUs issued by a gateway are far more flexible and therefore useful.
The BitShares network allows anyone to issue digital assets known as User Issued Assets (UIA). These assets can be used to track shares in a company, deposits in a bank, and reward points among other uses. Once an asset has been issued it can be freely traded against all of the other asset types on the network including the fully collateralized market pegged assets known as BitAssets such as (BitUSD, BitBTC, etc.).
This guide will provide a brief overview of the business opportunities available for those who wish to become a BitShares Gateway. A Gateway provides the service of bridging external assets such as fiat dollars, gold, silver, and bitcoin into the BitShares network. This service is critical to the success of BitShares because the vast majority of value must enter or exit the BitShares network through a Gateway or exchange.
Gateway vs Exchange
Most people who have been around the crypto-currency space for a while are familiar with exchanges. Exchanges facilitate trade by accepting deposits in two asset classes and maintaining an order book to facilitate trade among the assets using the deposited funds. A deposit at an exchange is just an IOU that is tracked on an private database maintained by the exchange.
A gateway performs only 1 out of the 3 functions performed by an exchange: accept deposits and issue an IOU. Gateways do not need to maintain an internal database tracking account balances nor do they need to maintain an order book. This greatly simplifies the job of a gateway and minimizes risks to all parties involved.
Today when you want to trade bitcoin for US Dollars you must deposit both your dollars and your bitcoin with a trusted third party. If that third party happened to be Mt.Gox then you know what can happen to your bitcoins held on deposit: they can be stolen, lost, embezzled, or seized. If Mt. Gox were simply a US Dollar gateway then only the dollar deposits would have been at risk because all orders and bitshares would have remained on the block chain under the control of the user’s keys.
As you can see from the Mt. Gox example, a gateway has less than 50% the liability of an Exchange and users benefit from a global order book with no bitshare withdraw limits.
Generating Revenue as a Gateway
The primary reason for becoming a gateway is to earn a profit by providing a valuable service to the BitShares community. Gateways have many ways of generating revenue. The most straightforward method is by charging transaction fees every time someone moves value through your service. You can also make money by charging users a fee every time they move one of your assets on the BitShares network and from market fees on the BitShares network. In addition to transaction fees of various sorts, gateways also have an opportunity to generate revenue on the float they hold for their customers.
How It Works
Every single Bitcoin exchange is already performing a similar role to a gateway. Users transfer funds to the exchange, the exchange tracks how much it owes each user, and when a user asks for a withdraw the exchange sends the funds back. While the funds are on the exchange users can quickly and safely perform trades with other users of the same exchange.
A BitShares gateway does the exact same process, the only difference is that the database that tracks the users’ deposits to the exchange is the BitShares block chain. When a user transfers fiat dollars or bitcoin to a gateway, the gateway responds by transferring an IOU asset issued by the gateway back to the user. When the user returns the IOU to the gateway the gateway sends fiat dollars or bitcoin back to the user.
The IOU asset is tremendously useful to users in the BitShares ecosystem because it serves as a very flexible multi-party escrow asset. Users will use an IOU USD from your gateway to trade against BitUSD and/or IOUs from other gateways. Users will want to store value in BitUSD because it is mostly free of counter party risk, but when it comes time to convert BitUSD back to fiat USD they will do so through a gateway.
Any company that takes deposits from customers and facilitates transfers among customers is heavily regulated in most countries. These regulations include license requirements, bonds, insurance, Know Your Customer (KYC) laws, and anti-money-laundering (AML) compliance among others. The BitShares block chain provides gateways with all of the tools necessary to comply with these regulations.
If you are already in this business then you are maintaining a database tracking user deposits and your database is probably logging every single transaction and balance change. Your database knows exactly who is owed what at any point in time. You also have the power to seize or freeze user balances at the demand of law enforcement. BitShares provides you with all of these features as well including:
1) Ability to white-list public keys that may control a balance of your asset. 2) Ability to freeze all funds and stop all trading of your assets. 3) Ability to transfer any balance of your asset from any user to any other user.
In other words, if you are operating a legally compliant crypto currency exchange, then you can easily expand your business to becoming a BitShares gateway.
As a gateway you are likely very concerned about the safety of the funds you hold on behalf of your customers. Fortunately moving your database from a custom internal system to the BitShares network provides your business with greatly improved security because you gain all of the benefits of a block chain. Every transaction is logged in a public ledger and every balance transfer is signed and verified by 101 elected delegates distributed around the world. The open source code is in use by many different gateways and peer reviewed by the entire industry. You can rest assured that no funds will move without being properly signed by the private key of their owner.
As the creator of a User Issued Asset you have complete freedom to honor funds or to reverse transactions as a result of theft by social engineering or a compromised user key. No one can withdraw real fiat USD without your own review of the transaction history. Any bugs in the BitShares code cannot result in your gateway losing money because you retain the authority over how to honor your asset.
Perhaps the greatest improvement of security you gain by becoming a gateway rather than an exchange is that you only have to deal in a single asset. Rather than having users deposit both dollars and crypto assets to your exchange, you can only allow dollar deposits and issuer dollar IOUs. The BitShares block chain can then allow the user to trade directly with other users without having to transfer the assets to you and thus creating an additional liability of your exchange.
Perhaps the single biggest security liability your exchange faces as a gateway is guarding access to the private keys that control the user issued asset. For this reason all User Issued Assets are controlled by a N of M multi signature system with both cold and hot keys. You can divide access control among many different individuals within your gateway to ensure that no single individual or single compromised machine can compromise control over your User Issued Asset. This is comparable to the need to safe guard the private keys of the crypto currencies an exchange holds for his customers. It is critical that you guard these keys carefully and keep them in cold storage.
Access to your User Issued Asset is divided between the owner keys which maintain absolute control and should be kept in cold storage, and manager keys which can be kept on secure “hot” systems. Every action of the Manager Keys can be undone by the Owner Keys. This arrangement provides your organization multiple levels of control and maximum flexibility.
The BitShares ecosystem is young and growing quickly. Each and every day hundreds of thousands of dollars worth of BitShares are traded and one day that could grow to be millions of dollars. The early gateways that establish trust and provide reliable service will likely become the default go-to gateway and have an opportunity to maximize volume of transactions they can charge fees on. This early adoption will also result in added awareness of your company among our user base. While you may start as a gateway you can also grow to provide other related services to the BitShares ecosystem such as hosted wallets or even becoming a delegate.
Become a Delegate
The BitShares community elects 101 paid delegates to help maintain and support the network. As a gateway you are already maintaining a full node and keeping up with the latest network upgrades. Their is almost no extra overhead to becoming a delegate. Delegates earn over 50 BTS every 17 minutes or about $2500 per month at todays market cap of around $40M. This delegate pay is already enough to pay for a part time position necessary to integrate BitShares with your companies database and website. As the market cap grows it could potentially fund your business to expand the services it provides to the BitShares ecosystem.