Erik Voorhees on freeing ShapeShift and outmaneuvering regulations

ShapeShift has always lived on the edge. Founded in 2014, the exchange only started requiring users to provide identification in 2018 — and even then, it made the change “under duress.”

ShapeShift CEO Erik Voorhees estimates that continued regulatory pressure has cost the exchange between $7 million and $10 million in legal fees. Now he says the exchange has finally found a way to find relief from that pressure.

Last week, the company announced that it intends to go fully decentralized, a plan that will see it dissolve its legal entity and become a decentralized autonomous organization (DAO).

“If there is no company to regulate, then it doesn't make us immune from regulation, but it certainly removes some of the ability of regulations to apply,” Voorhees tells The Block.

The grand idea behind the newly decentralized ShapeShift, Voorhees explains, is to create an easy way for anyone in the world to swap cryptocurrencies, especially across different blockchains — essentially what it set out to do originally. 

He hopes that ShapeShift — which in its new form will be less of an exchange and more of a portal to other decentralized exchanges — can reach one billion people within the next decade. 

If all goes as planned, it will also sidestep the pesky regulatory issues that the exchange has been grappling with for years.

Escaping the reach of regulators

A staunch libertarian, Voorhees has long believed that people should be able to move money how they wish and that businesses should have greater freedoms than they have today. He decries heavy handed oversight. He half-jokes that the phrase “harmful regulations” could be shortened to just “regulations.” 

All financial regulations corrupt the businesses they apply to, contends the ShapeShift CEO.  Voorhees describes the current banking system as a “systematic debasement of global finance and complete Orwellian surveillance of all people's activities.” (Although he acknowledges there may be good intentions behind such rules.)

“I do not believe that the crypto financial industry should become like the banking industry today; it is explicitly a protest against that,” says Voorhees “And so we need to shield it, protect it, outmaneuver regulations wherever possible.”

Agree with him or not, the CEO has plenty of experience dealing with regulators. He describes the effects of regulation on his business as “various forms of friction.”

Voorhees notes that the aforementioned $7 to $10 million in fees the company has paid to comply with regulations includes only direct legal expenses. The exchange also has to pay vendors that provide compliance services. In total it’s a “massive expense,” Voorhees says, estimating that dealing with regulatory requirements could account for 10% to 20% of all corporate expenses. 

I ask if there was one particular moment that provoked ShapeShift to turn to the decentralized web. He replies, “There was; I can't actually talk about it though, which sucks.”

How the decentralized ShapeShift will work

ShapeShift has always been focused on swapping assets across blockchains, say bitcoin for ether, but doing so in a non-custodial way, meaning users don’t hand over their coins to the exchange during the process. 

But this is trickier in a decentralized fashion. While there are decentralized exchanges, they typically swap assets that are on the same blockchain, because it’s relatively straightforward to do so. But blockchains don’t talk to each other very well, so until recently there wasn’t really any way to trade between them (without wrapping the tokens).

Thorchain emerged as a solution to this problem. It’s a blockchain network that’s designed to swap assets across blockchains. For example, when someone wants to swap bitcoin for ether, they make a bitcoin transaction to its liquidity pool. Nodes on the Thorchain network check the Bitcoin blockchain, confirm the transaction has happened, and then release the ether.

What ShapeShift does, in its decentralized form, is provide a portal to accessing decentralized exchanges. This includes technology like 0x protocol and the Uniswap DEX for Ethereum-based trades and Thorchain for swapping coins across chains. 

The idea is to make it easy for anyone to use a DEX. “ShapeShift is trying to be an interface that is at least or better as useful as the centralized custodians, but which cannot be stopped and which is borderless by nature and open,” Voorhees says.

But why should anyone use ShapeShift rather than the exchanges themselves? Well those who do are rewarded in FOX tokens, providing an incentive. And, for now, there’s no cost to using the exchange.

ShapeShift’s path to decentralization

ShapeShift is also using FOX tokens to ease the blow for its employees, who will soon lose their jobs. 

Over the next few months, the exchange will become open source. Over time, Voorhees will step down and all of the employees will finish working for the exchange. The final end date will be when the corporate entity is dissolved.

The exchange handed out large severance packages to its employees, including big amounts of FOX tokens that will unlock over the next three years. Voorhees says what they will earn through these token unlocks — at current prices — will be worth more than their current salaries.

The company will be largely replaced and governed by a DAO that will be operated through the BoardRoom app. This means token holders will decide how the protocol develops and can approve funding for development or other ideas. 

As a large token holder, Voorhees will maintain some control over the future direction of the exchange, but nothing like the control he had as CEO. “While I won't be CEO, I have an economic interest in the platform succeeding,” he says. “But my power as CEO will be gone and I'll just be one influential member among the community.”

As part of the displacement of this power, the exchange is airdropping FOX tokens to 1 million addresses that have previously traded on the exchange or own tokens from a variety of DeFi protocols. This community will own about 34% of the eventual total supply of tokens, while employees and shareholders will own 32%. 

This leaves 24% for the ShapeShift DAO treasury, which will be used to fund development, and 8% for the foundation. Notably, by the end of the airdrop, current tokens in circulation will make up just 1% of the total supply — meaning the airdrop will increase the current supply by 100 times.

With the power put in the hands of ShapeShift’s community, and no official team working behind the exchange night and day, it will be a massive transition.

“If we are successful in this, we lose control of shapeshift,” says Voorhees. He acknowledges that this is at least slightly nerve wracking. “And yeah, that's a little scary because it can go in directions that we don't want it to go and it can make decisions that we wouldn't make.” 

Beyond that the exchange will become fully reliant on the code it’s built on, depending on smart contracts that could get exploited if there are any bugs. “There is catastrophic loss risk if that gets hacked or destroyed,” he says. “Yeah, there are existential risks that could totally destroy the project. But we're willing to take those.”