What is a Bitasset?

Bitassets are derivatives built through smart contracts. To understand them: two parties lock cryptocurrency into a contract. After a set time, the blockchain releases their funds based on information from the outside world. That information might be Bitcoin's price in dollars on a specific date, a football game's final score, whether Hillary Clinton wins the 2016 presidential election, or countless other possibilities.

A football bet settles without complication. The person who backed the winning team receives all locked funds. The loser receives nothing. When the contract depends on real-world asset prices, the mechanics become more complex.

Suppose two parties bet on Bitcoin's dollar exchange rate. One takes the long position, wagering the price increases. The other takes the short position, wagering the price falls. The short position holder has created something novel: an asset pegged to the dollar's value. When settlement arrives, the short holder receives Bitcoin worth whatever dollars they put in. The short position is a contractual right, not a bank account. The created asset maintains stability equivalent to the dollar while trading with Bitcoin's fluidity, a significant advantage for those concerned about price swings.

The blockchain needs access to real-world information to settle contracts. One option: a trusted party publishes the data onchain. Reality Keys works in this space, publishing data for smart contract settlement. Gavin Andresen, a Bitcoin core developer, advocates for distributing that authority across multiple data publishers to prevent risks from depending on a single source. Other projects like Truthcoin pursue an alternative approach, gathering data from many incentivized participants within a prediction market that requires minimal trust.