How to use Bitsquare - the Decentralized Exchange

Antonio Madeira 24 Oct 2016

 

Part 1 - What is Bitsquare?

Bitsquare is a decentralized open-source exchange that brings back the trustless nature of Bitcoin. It allows users to buy and sell Bitcoin for cryptocurrencies and national currencies without the need to entrust funds to a third party or middleman, meaning that the transactions occur directly between the buyer and seller. This approach makes trading Bitcoin much safer as the exchange is not vulnerable to hacks or thefts and since the software is completely peer-to-peer it is also impervious to DOS attacks.

Using Bitsquare is not only safer than using a centralized exchange, it is also much more private. Centralized exchanges require users to verify their identity, while Bitsquare will only require you to reveal your identity to the person you're selling Bitcoin to, which is anonymous and untraceable like you since the Bisquare network operates using Tor hidden services, and all the private data sent over the wire is end­-to-­end encrypted.

However, not everything in Bitsquare is superior, as advanced trading features are not available and since everything is decentralized, order books are hosted by the user. This means that both parties must be online for the exchange to begin. Furthermore, both the buyer and seller have to signal certain actions within the trade for it to be successful, meaning that not only the computer must be turned on, but the trader must also be online.

The Bitsquare application is available for Windows, Mac, and Linux and can be downloaded here

Part 2 - How does it work?

Unlike centralized exchanges, Bitshares does not store any of your funds. Instead, the software provides you with a wallet that is stored locally on your computer. Altcoins and fiat currencies are stored externally on your local wallet or bank account. 

When someone wants to sell Bitcoin, he deposits it into his Bitshares wallet and creates an offer that is broadcast to all the peers (alternatively he can also take an order that has been previously created by a buyer). Once someone accepts the offer, the trade will begin.

In order to trade, both the buyer and seller are required to make a security deposit of 0.1 btc that is used as collateral if any of the parties misbehaves. The seller and buyer will also be required to pay the transaction fees and arbitrator fees regardless of how the transactions play out.

Now that the transaction has started, both the security deposits and the bitcoins that are going to be sold are allocated to a 2-out-of-3 multsig wallet. The three signature holders are the seller, buyer and a randomly selected arbitrator. These arbitrators are not "staff" per se, but are instead regular users that can participate in the process by making a large security deposit themselves. This ensures that the arbitrators have an economic incentive to behave honestly, other than the fees that are allocated to them by both parties.

The buyer can now make a national or cryptocurrency payment through the regular channels such as a Bank deposit or a SEPA transfer (methods like Paypal and credit cards are not available due to their reversible nature). He then signals the exchange that he has made the transaction, this automatically signs a transaction to the buyer, which needs to be signed by one more person, the seller or the arbitrator.

If the seller receives the payment, he signals the exchange which automatically signs the transaction to the buyer. Since the wallet is a 2-out-of-3 multi-signature address, the transaction will be sent and the trade will be complete. This transaction will also include the security deposits, which will be returned to both the seller and buyer. 

If the seller, however, does not receive payment or claims to have not received it, the arbitrator will step in and act as a mediator based on the evidence that both parties provide. The trade is then settled and the mediator signs off on the transaction that is sent to the person that behaved honestly. The security deposit of the malicious party will be kept by the arbitrator has a punishment to the perpetrator and a reward to the arbitrator for his service. In extreme cases, both the parties can lose half the security deposit.

To learn more you can read the whitepaper, which can be found here.

Part 3 - How to install and use Bitsquare

Step 1: Click here to go to the Bitsquare download page

Step 2: Choose the version that best fits your O.S and download it. We're using Windows 64bit

Step 3: Install the Bitsquare setup

Step 4: Click "I agree" to accept Bitsquare's user agreement

You will be taken to the Bitsquare market. Here, you are able to access offers on various pairs (BTC/USD, BTC/EUR, etc) and you can buy and sell Bitcoin.

In order to change pair, click on the "Currency" field, where you'll be able to choose between multiple national and digital currencies

 

To add relevant information about yourself, you should visit "Account", which will allow you to add fiat and cryptocurrency accounts, change your Bitcoin wallet password, back up your wallet and more.

 

To add funds to your Bitcoin account, you can visit "Funds"

Don't worry, we are going to dive into these in more detail below!

Part 4 - Configure your accounts

It is very important to configure your account properly. This is where you'll be able to protect and back up your account, as well as set the details needed to buy BTC with fiat or digital currencies.

Step 1: Click "Account"

You'll be taken to your account page. The first step is to add one or more national currency accounts (If you are not planning to use fiat, you can skip Step 2 to 4)

Step 2: Click "Add new account"

 

Step 3: Select your payment method

Step 4: and enter your personal details and preferred settings and click "Save new account"

Your fiat account will be added

 

If you are planning to trade your altcoins, it's time add one or more cryptocurrency accounts (If you are not planning to use altcoins, you can skip Step 5 to 7)

Step 5: Click "Altcoin accounts"

Step 6: Click "Add new account"

Step 7: Select the altcoin you want to add (1), enter the wallet address (2), and "Save new account" (3)

Your altcoin account will be added

Now, it's time to add an extra layer of security to your Bitsquare wallet

Part 5 - Protect and Backup your wallet

Step 1: While still in the Account section, click "Wallet password"

Step 2: Enter a strong password, repeat it, and click "Set password"

Your wallet will be encrypted and password protected. Keep your password safe

Now, it's time to backup your wallet. This is very important. You can backup both the Wallet seed (a 12 word passphrase) and the wallet file. You can later restore your wallet on Bitsquare with the seed and in a different wallet provider with the .dat file backup. Let's start with the seed

Step 3: Click "Wallet seed"

Step 4: If you followed the first and second step correctly, you will be prompted for the wallet password. Enter it and click "Unlock"

 

Step 5: You will now be shown your seed words for the Bitsquare wallet and the date. Write them down on a piece of paper or back them up on a file and keep it safe! Remember to save both the seed AND the date

 

You can also restore your wallet here.

Step 7: To backup your wallet file, click "Backup"

Step 8: Click "Select backup location" and select the directory where you want to save the backup

Step 9: Click "Backup now"

Part 6 - Fund your bitcoin wallet

Whether you're buying or selling Bitcoin, you'll need to have bitcoin to use Bitsquare. Like we explained in the "How does it work?" section, you'll need to deposit 0.0112btc to fund the security deposit (0.01), the trading fee (0.001) and the transaction fee (0.0002). This sum can be funded from an external wallet or from the Bitsquare wallet. in order to make this process easier and cheaper, we can transfer some BTC to this wallets.

Step 1: Click "Funds" 

Step 2: and send BTC to the address shown.

You can always create a new wallet by clicking "Generate a new address" at the bottom of the page

Part 7 - How to sell Bitcoin

Now it's time for the good stuff. Buying and selling Bitcoin isn't as easy in Bitsquare as it is on a centralized exchange but it's well worth the effort to remain in retain control of your funds at all times.

Step 1: Go to "Market"

Step 2: Choose the currency you want to trade with. We're going to choose an altcoin, Ether

Step 3: Now click "I want to sell x (buy BTC)" to sell your currency (fiat or crypto) for bitcoin.

Step 4: You can either take the one of the offers currently available (1) or you can create a new offer (2)

 

Taking an offer

Step 5: If you choose to take one of the offers available, you'll be taken to the "take offer" room. Set the specifics of the trade and click "Next step". (This step is the same for both altcoins and national currencies)

Step 6: You can now fund your security deposit from your Bitsquare wallet or from an external wallet. We're going to choose the latter.

Step 7: Once the deposit is funded the trade will begin. You'll have to transfer the funds to the user. 

 

Creating an offer

Step 8: If you choose to create an offer, you'll be taken to the "create offer" room. Set the specifics for the trade and click "Next step"

Step 9: Once again, you will have to fund the security deposit either from an external wallet.

Step 10: Now, you'll have to wait for someone to take your offer. Once someone does, you'll have to transfer them the funds.

Part 8 - How to buy Bitcoin

Step 1: Go to "Market"

Step 2: Choose the currency you want to trade with. We're going to choose an altcoin, Ether

Step 3: Now click "I want to buy x (sell BTC)" to buy Bitcoin for your favorite currency (fiat or crypto).

Step 4: You can either take the one of the offers currently available (1) or you can create a new offer (2)

 

Taking an offer

Step 5: If you choose to take one of the offers available, you'll be taken to the "take offer" room. Set the specifics of the trade and click "Next step". (This step is the same for both altcoins and national currencies)

Step 6: You can now fund your security deposit from your Bitsquare wallet or from an external wallet. We're going to choose the latter.

Step 7: Once the deposit is funded the trade will begin. You'll have to transfer the funds to the user. 

 

Creating an offer

Step 8: If you choose to create an offer, you'll be taken to the "create offer" room. Set the specifics for the trade and click "Next step"

Step 9: Once again, you will have to fund the security deposit either from an external wallet.

Step 10: Now, you'll have to wait for someone to take your offer. Once someone does, you'll have to transfer them the funds.

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