AirSwap Makes Decentralized Ethereum Token Exchange

Unique cryptocurrencies are multiplying so fast these days it's hard to keep up. Aram Barnett, CEO of the crypto hedge fund Alluminate, told International Business Times his team has evaluated more than 2,000 tokens. There is a ton of money flowing through these platforms, although online exchange markets get hacked all the time. Unfortunately, exchanges don’t have the same protections as banks. So when hackers steal from an exchange, individual customers can lose millions of dollars worth of bitcoin and blockchain-based assets.

That’s why a startup called AirSwap is looking to raise more than $25 million with an initial coin offering next week, to build up a decentralized cryptocurrency exchange for Ethereum-based tokens. “Decentralized exchange is a much better fit for the blockchain [ecosystem] and decentralized distribution,” AirSwap co-founder Don Mosites told IBT. “We’re not holding any user funds whatsoever.”

Imagine a far more complex version of Craigslist for cryptocurrency, instead of the PayPal-style model bitcoin users have today. In order to trade cryptocurrencies on an exchange, first you need to make an account. Then you add money to the account, usually from your credit card, before you can buy tokens. Many exchanges require multiple forms of identification to activate an account. Even if you already have bitcoin or ether, you still need to put this virtual currency in your exchange account in order to swap. AirSwap takes a completely different approach.

AirSwap will offer software powered by smart contracts, plus an index of tokens. You don’t need an email or password to use AirSwap’s platform. You log on using your ether wallet address. Then you search the index for a token you want, just like you would search Craigslist for used furniture. You can send an order to the seller directly through AirSwap’s platform, who then accepts and initiates the smart contract swap or sends you a counter offer via another digital order. This allows for some degree of anonymous bartering, which is quite unique as far as exchange platforms go.

Once both parties accept an order, the smart contract makes a standardized tunnel any Ethereum-based token can slide through all the way to your digital wallet. “Our Indexer is essentially a search engine for tokens available to trade,” Mosites said. “Our Ethereum smart contract actually facilitates trading between two peers, using token standardization to make that possible.” This makes a lot of sense from a security standpoint. With a decentralized exchange, there’s no central pool of funds for a hacker to infiltrate.

In terms of regulation, it could be compared to dark pool trading in U.S. equity markets. Some bitcoin users speculate people in countries like China, which recently banned ICOs, could use the quasi-anonymous exchange to circumnavigate local restrictions. Even in the U.S., there are still unanswered questions about how a decentralized exchange would account for anti-money laundering rules and “know your customer ” requirements.

Mosites told IBT their legal team is on it. Plus, with an advisory board that includes Ethereum co-founder Joseph Lubin and Blockchain Capital founder Brock Pierce, the startup has access to some of the most experienced experts in the blockchain industry. “Our relationship with ConsenSys allows us to work with their legal team,” Mosites described AirSwap’s partnership with Lubin’s Brooklyn-based startup ConsenSys.

According to the startup’s blog, the ICO pre-sale already sold $20 million worth of AirSwap tokens. There are several reasons why a cryptocurrency user might want AirSwap’s ICO tokens. These tokens grant the holder voting rights related to Oracles, mechanisms that compare and analyze a variety of data sources then spit out price recommendations for new tokens.

All the tokens listed on the index will go through some type of screening process, to weed out malicious tokens and obvious scams. Regardless, it’s still useful for buyers to be able to vote on which Oracles offer the most accurate price estimates. AirSwap users will also need one of the startup’s tokens to post an offer on the index, kind of like a nameless club membership card.

This model could have even wider implications, beyond a smoother and more private trading experience. It’s currently hard for niche tokens to gain enough traction to get listed on a major exchange. With AirSwap’s index, it will be much easier for people to buy and sell niche tokens at competitive prices. It makes the assets themselves far more liquid, which benefits the whole cryptocurrency ecosystem. A few other exchange startups are also tinkering with similar decentralization ideas.

However, since all this trading is peer-to-peer, it’s not clear how exactly this exchange will earn profits for the startup itself. The popular exchange platform Coinbase is estimated to be worth $1 billion. Meanwhile, the AirSwap team plans to use ICO money to pay salaries and keep the lights on for the time being. “We’re exploring multiple [business] models at this point,” Mosites said.

Their uniquely decentralized system will run AirSwap’s upcoming token sale on Oct. 10. From there on out, the smart contract format will be freely available to the public. The index is still in development. They plan to launch the beta version later this year. “We also are building a front end because we believe an integrated user experience will be very powerful,” Mosites said. “I think down the road, we’re seeing a world of tokens and we need these tokens to be liquid.”