Coinpit takes first step toward trustless Bitcoin futures exchange

Coinpit is making innovative moves to provide a more secure alternative to Bitcoin futures trading. Thanks to Bitcoin's multi-signature technology, users have control over their funds stored on Coinpit. Even if the exchange is hacked, goes bankrupt, or disappears, customers can still get their money back in most cases.

Bharath Rao, founder and CEO of Coinpit, explained to Bitcoin Magazine why he believes trustless exchanges are the next step in the evolution of the Bitcoin industry. Rao said:

“Why is one Bitcoin worth 600 times the world’s reserve currency (the U.S. dollar)? Because society is hungry for trustless money. We want to bring this property from the monetary layer into the financial system. Because a financial system with Bitcoin’s properties will eliminate many financial crises.”

Coinpit doesn’t have regular trading, where users convert bitcoin and fiat currencies back and forth. Coinpit is a bitcoin futures exchange where users trade what are called “quanto-USD/BTC contracts.” In simple terms, this means that Coinpit users are betting against each other, which allows them to speculate on the direction of bitcoin’s price.

Rao, a Wall Street veteran, explained to us:

“The Bitcoin price we use comes from the aforementioned quanto USD/BTC contract. Our funding index is arbitrable, which means that with enough volume, the arbitrage gains ensure that the Bitcoin prices on Coinpit stay in sync and influence each other. Since one of the functions of this contract is to keep the price stable, Coinpit can effectively leverage the wider Bitcoin ecosystem.”

Of course, futures trading is not new in the Bitcoin world. OKCoin and BitMEX are two popular platforms for this type of trading. But last month, the Bitfinex hack reminded the Bitcoin community that exchanges storing customer funds are at risk of a single point of failure.

Coinpit aims to address this problem.

Who has control?

Coinpit uses Bitcoin's multi-signature technology to build a new type of transaction application for users. When users create a Coinpit fund account, they do not send Bitcoin to an address controlled solely by Coinpit. Instead, the user and the exchange system create a new multi-signature address that requires two keys to open: one generated by the user and the other generated by Coinpit. Under this setup, Bitcoin deposited to an address can only be moved if both the user and Coinpit sign a transaction to that address.

Additionally, when Coinpit and a customer sign a transaction, Bitcoin is instantly sent to a Bitcoin address controlled by the customer. However, this transaction is not published on the Bitcoin network, but instead is stored locally by the customer. In the event of a website shutdown, the customer can always publish the transaction to the Bitcoin network and recover the funds. The user has full control.

Because Coinpit monitors the Bitcoin network with potential double spends, the risk of user transactions is greatly reduced, and users can withdraw funds in a timely manner. From now on, users can ensure that transactions can be transferred at any time by providing funds to the transaction account. When Bitcoin is sent to a Bitcoin address controlled exclusively by Coinpit, during this period, as long as the transaction is still in progress, customers can still maintain their control.

Rao explained:

“Right now it’s the only way to provide a great customer experience, as transaction latency and associated fees make off-chain transactions impractical. We are looking for ways to make the entire transaction process more secure. To achieve this, we will eventually create a derivatives trading platform for altcoins that will have the required performance speed. Or we will build a sidechain for Bitcoin. Or when it’s ready, we will start using Lightning Network.”

Privacy Protection

Coinpit specializes in Bitcoin and no other fiat currencies. Since the service is not available to customers in the United States, the KYC rules and anti-money laundering regulations imposed by the New York BitLicense do not apply. So at least for now, Coinpit is able to offer better privacy protection than any other trading platform. Rao explained:

“When we say we are trustless, it means that we can protect customer privacy very well. We have found that privacy vulnerabilities will lead to security vulnerabilities, and vice versa. In order to reduce security vulnerabilities and privacy vulnerabilities, we will try to save as little user information as possible.”

Looking ahead, Rao described:

“If there is a strict cryptocurrency regulation policy outside the United States, we have the option to cooperate with regular exchanges or cancel cooperation. We are currently exploring both options.”