A decentralized Bitcoin exchange

still not a bad alternative to localbitcoins.com, you could arrange to exchange cash in person or mail money orders around which could still be cancelled if the escrow fails.

It may have changed since the last time I used this, but here's how it works:

  1. There are two sides to a trade, Alice and Bob.

  2. Alice has USD and Bob has Bitcoins.

  3. Both sides wish to trade money but they don't trust each other.

  4. To do this, they deposit collateral in the form of Bitcoins into a escrow
  account (multiple mediators need to sign to give back the collateral to their owners.)
  This is a bond separate from the money they are already trading.

  5. Alice sends her USD to Bob.

  6. Bob sends his Bitcoins to Alice.

  7. If either side cheated the mediators won't sign
  the "check" to release funds from the Escrow account.
  Therefore, so long as the value of the collateral is
  worth more than their potential profit from scamming
  -- there is no incentive to scam.

In BitSquare step 4 I think is done with third-party mediators and the mediators make decisions based on evidence. So first, how do you prove that a user sent Bitcoin: easy, its on the blockchain. Second, how do you prove that a user sent USD? Well, I believe BitSquare uses something called "TLS Notaries" -- this allows a person to cryptographically prove that an SSL website was in their browser, potentially enabling a person to prove that they sent funds.

As you can see this scheme has a few problems:

  1. Users are required to have Bitcoins for collateral.
  So if you don't already have Bitcoins you can't buy
  any (strange scenario.)

  2. It relies on collateral, period, so you can never
  buy and sell the full amount of funds that you have.

  3. Liquidity is poor. BitSquare could be improved if
  they had more investors and structured the exchange
  to provide liquidity themselves at a premium.

  4. It's unclear how secure the notaries are and whether
  or not it can be cheated.

  5. Reputation isn't that secure and the model
  doesn't account for attackers, though I think
  BitSquare solves this with multiple mediators.

Another option to solve the same problem is to use micro-payment channels. A service would have credit that represented a USD balance and micro-amounts of this balance would be sent to the recipient as the sender receives micro-amounts of Bitcoin. This is a better model, IMO, but still can potentially be reversed.

It's good to see that BitSquare is still around though. Decentralized exchanges haven't had much adoption so far and I haven't seen anyone who nailed every usability problem that these exchanges have. Even assets on Ethereum where you can literally write simple code that says "a transfer occurs if two users agree to it" are traded on "decentralized exchanges" with multiple vulnerabilities and bad UX for traders.

My mothers neighbour is working part time and averaging $9000 a month. I'm a single mum and just got my first paycheck for $6546! I still can't believe it. I tried it out cause I got really desperate and now I couldn't be happier. Heres what I do, •••••••••>> http://www.joinmate2.com

I found their proposed mechanism for handling settlement finality, outlined in their faq, https://bitsquare.io/faq/. The escrow for bitcoin is a 2 of 3 multi-party contract.

    What happens if the person buying bitcoin does a 
    chargeback on their national currency after the bitcoin
    has been released from the multisig escrow?

    We only support payment methods in which chargebacks
    are not easy (i.e. we don’t support Paypal). But there
    is still certain chargeback risk with banks. If a bank
    executes a chargeback after the cryptocurrency escrow
    has released, there is nothing the arbitrator can do.

    Bisq’s goal is to make this scenario as unattractive 
    as possible, using three primary mechanisms:

    1. There is a trade limit of one bitcoin, which is
    generally too small to attract criminals (though this
    limit may be lifted in the future).

    2. We will remove national currency payment methods
    which are found to be used for chargebacks.

    3. Bisq has support for delayed payouts using the 
    “locktime” feature, which might help if the chargeback
    is done quickly after the transfer.

This is the same problem that BitHalo has (in my opinion.) But the escrow step for Bitsquare is done with multiple third-party mediators instead of between the users. This has problems of its own because now you have to trust that the mediators are going to act honestly (and pseudo-anonymous reputation systems don't reveal what prior relationships might exist between actors.)

I guess the assumption here is that reputation is good enough.

Edit: I edited the explanation for clarity.