Bitshares is a blockchain based crypto-currency, like Bitcoin, but with a major difference: Bitshares can be used as a collateral against something called BitAssets. BitAssets are real-life entities, such as BitUSD, BitBTC, etc. These track the real-life price of the underlying. Therefore, BitUSD tracks the price of USD, BitBTC tracks the price of Bitcoin, etc. How does BitBTC track the price of Bitcoin? Through market consensus (prediction markets), i.e., if the price rises too much, the market participants will have an incentive to short BitBTC and if the price falls too much, they’ll have an incentive to go long BitBTC.
To simplify, Bitshares can be used to buy or short BitAssets, which can be anything from BitGold to BitAAPL, which track their underlying. BitAssets are the derivative products, and you can involve in a number of trades using them. This is much more flexible than just the Bitcoin protocol. For instance, through BitAssets, you can short BitBTC and assuming the price of BitBTC tracks BTC, you’ve effectively shorted BTC.
You can also create much more complex pairs. For example, you can buy the ‘currency pair’ BTC/Gold through BitBTC/BitGold. Or you can trade the ‘currency pair’ BitAAPL/BitOIL (trading the value of Apple Stock to Oil Price). This is therefore a blockchain based solution to trading real-life commodities and entities.
The real challenge is going to be to make sure that the BitAsset actually tracks the value of the underlying, i.e., BitGold should be able to track the price of Gold, which is how BitBTC/BitGold will track the value of BTC/Gold, for example.
To recap: BitAsset = Derivative on Asset, Bitshares = Collateral against your BitAsset position, Asset = underlying real-life entity that BitAsset will track
The tracking is enabled using collateral obligations, margin calls and dividends. These are subject to change,