Bitcoin-Over The Counter is an IRC (Internet Relay Chat) channel on the Freenode server, a meeting place for traders who exchange Bitcoin for fiat, goods and occasionally services. Trader's identities are cryptographically verified and reputation-rated via a bot-link to an extensive Web of Trust system.
Disillusionment with centralised exchanges has set in for many in the wake of the Mt. Gox fiasco. The standard online exchange model must be adapted to unleash cryptocurrency's full potential.
Some believe major financial sector involvement, with associated governmental regulatory oversight, may lead to "respectable" exchanges. That seems rather like setting the sleepy dog to monitor the fox's management of the hen-house, but your mileage may vary.
Others trust multi-sig cold exchange wallets with publicly-verifiable balances to improve exchange security. While certainly an improvement, this is likely not the solution entire.
A decentralised exchange is the "holy grail" sought by many. None seem quite certain what ultimate form it'll assume, but efforts are underway to deliver various takes on the theme.
In the meantime, many are unfamiliar with an existing nexus of peer to peer trade which could be classified as a decentralised exchange... Depending on your definition and expectations of "an exchange."
Bitcoin-OTC provides a venue for traders to meet and confirm identities or trade history, but all trading occurs off-channel through whichever elected means. As such, Bitcoin-OTC exists well beyond the remit of any regulatory agency.
Wikipedia defines over-the-counter within finance as:
Finding OTC trade partners is reliant on competence with IRC, a text-only, legacy communications platform. IRC has minimal social media integration, graphical polish or other trendy features but offers vast potential for customisation and automation.
It's worth noting that IRC chat with the right people on Freenode's Bitcoin channels, where many developers are present, frequently offers a higher signal-to-noise ratio than Reddit, Twitter or BitcoinTalk.
Further to IRC familiarity, relatively secure transactions depend on competence with either GNU Privacy Guard (GPG) encryption or Bitcoin address-signing, plus some experience with the Web of Trust system.
In my opinion, this combination of required competencies makes Bitcoin-OTC a rabbit hole too deep for mainstream accessibility.
Benefits of Bitcoin-OTC
Barriers to entry aside, Bitcoin-OTC offers an unregulated, voluntarily-anonymous method to facilitate online Bitcoin trading, the security of which is largely dependent on individual due diligence. For informed traders, assuming personal responsibility for transaction security may be preferable to trusting funds to a centralised exchange's competence and honesty.
The Web of Trust is a deep system for assessing trustworthiness, and likely to be maintained as a public record for the foreseeable future. For those whose valuable buyer or seller ratings vanished along with shuttered marketplaces, Bitcoin-OTC's long operating history since late 2010 will be reassuring.
OTC also stands as a method well-alligned with Bitcoin's open source, decentralised principles.
To prevent identity fraud, users link their alias to a public key or address. Gribble, the channel bot, presents an encryption challenge before listing a user as "currently authenticated." This method, well-documented and easily-learnt, greatly simplifies identity verification, especially for users unfamiliar with public key encryption.
The associated Web of Trust (WoT) system allows an authenticated identity to rate another based on trustworthiness. Provided a user is currently authenticated through Gribble, you can rely on their feedback history when deciding whether or not to trust them.
How to Use Bitcoin-OTC
Bitcoin-OTC is rather like an online-only LocalBitcoins, with the WoT reputation system replacing trust in LB's built-in escrow. The broad strokes to getting started are as follows:
Next, as an optional step, you may register your alias on Freenode. An email address is required for this step, the benefit is that your chosen alias will become password-protected. This guide will help. A cloak, to disguise your IP address, is available for registered nicks by request of the #freenode channel staff. Freenode can be accessed via Tor (and certain channels are relayed onto I2P), but the initial nick registration is complicated to achieve via Tor.
It will then be necessary to authenticate your identity with Gribble. Sending the authentication command to Gribble will cause "him" to respond with a one-time encryption challenge. Signing this challenge with your Bitcoin Wallet and replying with the signed message is the simplest way to do things. Using GPG, you'll decrypt an OTP string and relay the result back to Gribble. This method of course requires you to have created and publicised a GPG certificate (with associated revocation certificate advised).
Your alias will then be authenticated. By confirming with Gribble that other users are similarly authenticated, you protect yourself from identity fraud.
Once authenticated, you'll be able to place trades in the order book and rate other users on their fulfillment of your trades.
The Web of Trust
All trust ratings are public. Users may assign a rating to each other and alter these ratings to reflect their interaction history. The cumulative value of all such ratings produces a user's total ratings.
Via the gettrust command, Gribble will show you ratings from the perspective of other users, capped by how highly you've rated said other users.
Drawbacks to Bitcoin-OTC
Nothing (besides escrow) prevents an authenticated user with a great trust record from scamming you. Of course, the higher their reputation and the longer it's taken to build, the more it'll be worth to them. You'll need to exercise your judgement as to the cost a potential down-rating represents to your counter-party, balancing that against the value of your intended trade.
Similarly, nothing prevents multiple alias authentication for the purpose of artificially inflating or deflating ratings. Experience with the Web of Trust will teach you to consider ratings in multiple dimensions, as a rating is only as good as the reputation of the rater... In other words, ratings from new, neutral or negatively-rated users are less significant than ratings from users with good scores from established, reputable users. Pick your trade partners accordingly.
"Bitcoin beers" photo by Cameron Spencer / Getty Images.