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 h

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.