LocalEthereum is the most private, secure and intuitive way to swap ether with others for local currency.

This document describes the technical specifications of LocalEthereum and the unique design decisions behind the platform. If you only want to use the platform, click here.

1.1 People use LocalEthereum to exchange ether for fiat money without counter‐party risk by using a trust‐less escrow concept. The peer‐to‐peer platform allows traders to skip the middle‐man and trade on their own terms, whether that be via bank transfer, any online payment service, cash in person, or any other mutual agreement between two people. Trades executed using the LocalEthereum marketplace are confidential via end‐to‐end encryption, and, unlike traditional over‐the‐counter platforms, the escrow mechanism is decentralised. The only time the escrow arbiter can step in and transfer ether is if it receives explicit digital permission to resolve a dispute — but even then the smart contract code only allows the arbiter to transfer escrowed ether to one of the parties.

1.2 While cryptocurrency has succeeded in enabling people to conduct peer‐to‐peer transactions in a trust‐less way, there has been no such solution for entering or exiting the crypto‐economy. Because of the inherently insecure properties of centralised exchanges, billions of dollars have been stolen, lost, and destroyed in the hands of even the most popular services. Although the number of cryptocurrency exchanges has grown, there has been little progress in eliminating trust from cryptocurrency on‐boarding. Instead, blockchain financial innovators are replicating the vulnerable systems of Wall Street stock exchanges and banks — the same systems that provoked the global financial crisis, and the same systems that motivated the genesis of Bitcoin. 1.2.1 The prime advantage of cryptocurrency over fiat is the elimination of the need for an intermediary. Instead of relying on an institution to keep a record of your balance (i.e. a bank), blockchains use a distributed ledger of transactions verified by a large network of computers. The result is that it’s impossible for anybody to access your digital wallet without possession of your secret key, regardless of other circumstances. As long as your wallet’s private key is kept secret, your cryptocurrency is secure — the idea is similar to keeping an ounce of gold in a home safe. Instead of trusting somebody to hold your cryptocurrency for you, you only need to have trust in the laws of mathematics and the thousands of computers auditing the ledger around the clock. But when you deposit or buy cryptocurrency on a centralised exchange, you don’t hold the private key to it. Instead, you need to trust the exchange, in the same way that you trust a bank, to hold on to your money and keep an accurate record of your balance. When you keep Bitcoin or Ether on a centralised exchange, you miss out the advantages of cryptocurrency. Instead, your pseudo‐cryptocurrency now faces a big chance of being lost or stolen because of the compounding risks of centralised exchanges: Centralised exchanges are often the subject of heists. Because of the irreversible nature of cryptocurrency, it’s very attractive to cyber‐criminals. Billions of dollars worth of cryptocurrencies have been stolen from centralised exchanges. Centralised exchanges often cause serious accidents. There is a constant inflow of inexperienced entrepreneurs attempting to cash in on the new technology. Millions have been lost due to fatal, simple mistakes. Centralised exchanges can rarely insure deposits. Most governments insure bank account deposits, however that isn’t the case for cryptocurrency. More, insurers stay afar from the industry because of the previous points. While any of these threats alone should be enough to make users think twice before trusting an exchange, these risks together are a recipe for disaster. Despite this, most of the risk people face still stems from trusting financial institutions, nearly defeating the purpose of decentralisation. Headlines about centralised exchanges making multi‐million‐dollar mistakes appear almost every month. In the very first paragraph of the original Bitcoin whitepaper, Satoshi Nakamoto pondered that cryptocurrency would mean people wouldn’t need to trust a financial intermediary anymore: A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Similarly, Vitalik Buterin, co‐founder of Ethereum, made an observation before the public launch of the decentralised computing platform: I was acutely aware that many of the major problems still plaguing the Bitcoin ecosystem, including fraudulent services, unreliable exchanges, and an often surprising lack of security, were not caused by Bitcoin’s unique property of decentralization; rather, these issues are a result of the fact that there was still great centralization left, in places where it could potentially quite easily be removed. LocalEthereum is a non‐custodial platform, meaning it never asks for your private key(s). We don’t ask you to trust us to hold on to your balance, because we know central reserves have a bad track record, plus the burden of safeguarding a large store of ether poses many other hurdles better avoided. Your LocalEthereum wallet is kept encrypted in your web browser. 1.2.2 2008 Since the invention of cryptocurrency, early adopters have been seeking alternatives to on‐exchange trading. Having a central authority like an exchange keep record of customer balances and identities in a database, and facilitate transfers of local currency to cryptocurrency and vice versa, has always been viewed as counter‐intuitive to the peer‐to‐peer nature of Bitcoin. Over the counter trading, which is where two parties exchange with one another directly without the supervision of an exchange, has been an popular in cryptocurrency since Bitcoin’s beginnings. OTC trading grants flexibility, as there are no restrictions on what you can swap for cryptocurrency, and person‐to‐person transactions don’t involve a financial intermediary. However, exchanging cryptocurrency with strangers online and in person carries a major risk: how do we ensure that both parties are going to hold up their end of the bargain, and not vanish as soon as money or cryptocurrency hits their account? This exposure is known as counter‐party risk. 2010 One of the first innovations in early Bitcoin OTC trading was an online “web of trust” platform. The platform known as #bitcoin‐otc is a simple system where traders can leave other traders a public rating, and a website will calculate the cumulative trust received for each user. If a user has a higher rating, they’re more reputable and less likely to run away. This system worked most of the time, but it wasn’t flawless: people with high ratings would “cash in” on their reputation and pull off bigger heists, and scammers would create bogus accounts to manipulate the ratings. 2012 The next evolution was an escrow system by LocalBitcoins in 2012. Instead of exchanging directly with each other, sellers of Bitcoin could now transfer BTC to LocalBitcoins first, then release the Bitcoin from escrow once confirming payment from the buyer. If the buyer didn’t send money, the seller could ask LocalBitcoins to intervene and return the coins. Similarly, if the buyer claimed to have sent money but the seller won’t release the escrow, they could ask LocalBitcoins to review their proof of payment and force the seller to release the Bitcoins. The escrow system combined with a robust reputation system worked well. But there was a huge problem: by offering an escrow service, LocalBitcoins made itself the new intermediary. If LocalBitcoins were hacked, went offline, or its founders decided to run away, all of the Bitcoins in escrow could be lost. There is a tremendous amount of trust placed in this new centralised escrow system. With the escrow system, users no longer held the keys to their Bitcoin; instead, they’re trusting LocalBitcoins to hold Bitcoins for them, like a bank or an exchange. The escrow system didn’t fix counter‐party risk—it only moved it somewhere else. 2017 The launch of Ethereum introduced programmable money, which meant that many ideas not possible on the Bitcoin blockchain could now be achieved with Ethereum smart contracts. Building on the ideas of a web of trust and an escrow system, LocalEthereum has created a peer‐to‐peer OTC trading platform that keeps users in control of their cryptocurrency at all times. With the use of an Ethereum smart contract, LocalEthereum has invented an escrow system that never takes custody of the ether in escrow. The platform’s unusual escrow mechanism doesn’t involve an intermediary, as financial services involving trusted middlemen are antithetical to cryptocurrency. 1.2.3 Revelations about mass communications surveillance have made consumers more aware of their online privacy. In 2013, it was revealed that the U.S. government had been secretly collecting data from internet companies. The NSA’s PRISM program siphoned data from a broad range of companies including Google, Microsoft, Yahoo, Facebook, YouTube, Skype, and numerous consumer upstream providers. In addition to wiretapping, prominent online services have been the subject of intrusions by anonymous hackers. Troves of sensitive information have been stolen from Equifax, Yahoo, eBay, Adobe, Ashley Madison and others in some of the largest data breaches in recent history. Early instant messaging apps provided hardly any protection from these types of breaches. Although messages were sent over encrypted channels, the channel was usually between the client and a service provider. The service provider, such as Facebook, Skype, or Google, was able to read the contents of all messages delivered through the service. If the provider was breached, histories of plain‐text messages could be extracted in mass. In response to the NSA leaks, cypherpunks, developers, and scientists accelerated research into new techniques to provide security in a modern digital world, where internet upstream providers nor service providers can be trusted. Many widespread instant messaging apps now employ advanced cryptographic techniques to achieve end‐to‐end confidentiality, including OTR, Apple’s iMessage, WhatsApp, Signal, and Telegram. LocalEthereum applies the techniques of end‐to‐end encryption and post‐compromise secrecy to create a new type of online marketplace where its users’ financial details and personal information are kept confidential. Messages between users are end‐to‐end encrypted, meaning that even in the event of a compromised host, no sensitive information could be extracted.

1.3 The experience of buying or selling on the LocalEthereum platform differs from an exchange or an ordinary escrow provider. Unlike an exchange, LocalEthereum doesn’t accept deposits or process withdrawals and there is no automatic matching algorithm. Unlike a normal escrow arrangement, LocalEthereum doesn’t hold any ether or fiat in trust; the ether portion of the trade is put in trust through a decentralised escrow mechanism. Using LocalEthereum.com, an ordinary trade works like this: 0. Alice posts a public offer to buy or sell ether. Offers can be posted publicly for anyone else to find. An offer is an advertisement stating a trader’s intentions to swap a range of ether for local currency (for example, “I am willing to buy up to $800 worth of ETH with GBP.”). 1. Bob responds to the offer to exchange a specific amount of ether. When a trader responds to an offer, a trade is opened between the two parties. The person responding to the offer enters the exact amount of ether they want to buy or sell, and the rate is locked into the trade. Now, Alice and Bob can communicate with each other via an encrypted conversation. 2. Alice and Bob confirm and agree on the terms of the trade. The two parties introduce each other and chat about the exchange. The seller will let the buyer know if they have any non‐standard terms (for example, a maximum limit on the buyer’s first trade or a request to verify their identity), and both parties will come to a mutual agreement on how the exchange is going to take place. 3. The seller places the funds in escrow. Once the parties are ready to continue, the seller will place the ether in escrow. This takes place with a transaction to an Ethereum smart contract (with one click). The escrow provides proof‐of‐funds to the buyer and allows for a much safer trade. As soon as the ether is escrowed, a payment window countdown begins. The buyer is expected to initiate payment within this window, or else the seller will have the ability to cancel the escrow. This prevents the seller’s funds from being locked due to an unresponsive buyer. 4. The buyer makes payment directly to the seller. Payments happen outside of the LocalEthereum platform. Alice and Bob have a direct line of encrypted communication, so they can discuss where the buyer is supposed to send money to. Unless Alice or Bob have a grievance later, the payment will be invisible to LocalEthereum staff. Knowing that the ether is in escrow, the buyer can safely send money to the seller — if the seller doesn’t hold their end of the bargain, a dispute resolution process can assist them. Without the protection of escrow, the seller could simply vanish after the buyer sends money. Once the buyer has initiated payment, they can cancel the payment window by clicking “Mark as paid”. The seller no longer has an opportunity to cancel the escrow. 5 – Scenario A. The seller successfully confirms the payment and releases the escrow. Trade complete! The ether is released from the escrow to the buyer and both parties are happy. Now each party can give each other feedback to contribute to a web of trust, which makes the platform safer. 5 – Scenario B. Somebody raises a dispute. Either party can raise a dispute to call in a third‐party arbitrator (currently LocalEthereum staff) to make a resolution. The arbitrator is given two keys: one to decrypt the messages, and another to resolve the escrow. The arbitrator may ask for evidence, such as proof of payment from the buyer, to help determine which party is the rightful owner of the ether. It might take minutes, hours, days or even weeks for them to reach a decision depending on the complexity of the dispute. Once the arbitrator is satisfied one way or another, they can direct the ether in escrow to be released to one of the parties. The smart contract code doesn’t allow them to send the ether anywhere else.

1.4 LocalEthereum is easy for anybody to use, no matter their background. The platform is built to work on all web browsers without any extra software, and it’s not necessary to read this document to understand how to use the platform. LocalEthereum is immune to surveillance. The LocalEthereum platform leverages an end‐to‐end encryption scheme to protect messages in transit from eavesdropping by hackers and oppressive regimes. LocalEthereum doesn’t involve counter‐party risk. While billions of dollars have been stolen from centralised exchanges, users are in safe hands on LocalEthereum because the platform never holds any ether. LocalEthereum enables super‐fast exchanges. Enabling person‐to‐person payment methods allows super‐fast settlements — often less than three minutes. LocalEthereum lets people trade on their own terms. Fiat currency transfers are external and invisible to LocalEthereum — you can exchange using your bank account, physical cash, PayPal or something else. LocalEthereum connects the unbanked population. The LocalEthereum platform allows people to exchange with cash, giving improvised communities access to cryptocurrency as a financial alternative. LocalEthereum earns people a living. LocalEthereum allows you to become your own exchange2. Many of the top traders earn a daily income on the difference between the buying and selling price. LocalEthereum has no painstaking approval process. Users can exchange immediately after signing up. We’re not an exchange and we have no legal obligation to collect the identities of users.1 LocalEthereum is where everyone else is. Since the platform launched in late 2017, it’s already seen more than 100,000 people in more than 100 countries. There is no other peer‐to‐peer Ethereum marketplace with more users than LocalEthereum. LocalEthereum accelerates worldwide adoption of cryptocurrency, for the aforementioned reasons.

1.5 Before stepping into the technical specification, we should understand why some decisions were made over others. As will be better explained later, LocalEthereum isn’t completely decentralised, however, this fact doesn’t mean the platform isn’t safe from hacking, surveillance, and censorship. Long before the development of LocalEthereum began, its creators laid out a set of rules that the platform must follow. These are the principles we decided must be characteristics of the finished product to ensure a frictionless experience. Each design requirement below has been met: Extreme portability. LocalEthereum must work in all modern web browsers without extra software. Needing to install a browser extension is a big hurdle for users who aren’t tech‐savvy, or who don’t trust third‐party software on their device. Also, relying on external software creates device‐compatibility issues and could pose security threats outside of LocalEthereum’s control. Multi‐device synchronicity. LocalEthereum should work seamlessly across many devices. People trade on the go, especially when dealing with physical cash. The platform needs to work on desktops, laptops, tablets, and phones at the same time. Asynchronous. Users must not need to be online to accept a new trade or receive an encrypted message. This means that secure information must be able to be exchanged entirely asynchronously. To accomplish this, it’s necessary to have somewhere to reliably store encrypted data and allow users to retrieve it later. Expectancy of crypto‐bankruptcy. Users must not need any ether in their wallet to use any part of LocalEthereum. This requires some trickery because every interaction with the blockchain costs ether as payment for computational work. The platform will be many people’s first interaction with cryptocurrency, so we expect many buyers to lack any ether at all, which means they won’t be able to interact with smart contracts at their own expense. Because of this, LocalEthereum has a system allowing users to interact with the blockchain at no up‐front cost via a proxy mechanism. Self‐explanatory UX. Users shouldn’t need to read this document to understand how to use LocalEthereum. While every decentralised service has a duty to educate users on the basics of distributed ledger technology, we recognise that the majority of the general public is probably not going to understand every detail, and that shouldn’t matter. Lots of effort is going towards making sure the user‐interface is friendly for all users, no matter their background. No ICO. We don’t need or want a LocalEthereum ERC20 token. The LocalEthereum platform is designed using only Ethereum’s intrinsic currency (ether). There are no plans to create an ERC20 token. Our decision to not have a token sale was published on our blog. Think twice if you see an offer to invest in LocalEthereum: it’s definitely a scam.