Bitcoin Forum

I want to create a new alt-chain with a few modifications to the Bitcoin to enable a multi-currency, crypto-fiat, exchange.  I am a software engineer (C++ expert) and could potentially do it all myself, but this project is important enough that I would like to collaborate with someone who is very familiar with the existing Bitcoin code base and who can help me work through technical details specific to Bitcoin.

* I will be updating these specs based upon discussion in this thread, so check back from time to time*

Specific changes I want made to the bitcoin client are:

1)  Distribute half of all mining fees as dividends to outputs with a positive balance.
2)  Annotate all outputs with a currency UNIT.
3)  Create an output script that will only allow the output to be spent under 2 conditions:
          a) it is signed by a specified address's private key (cancel the bid)
          b) it is part of a transaction that has 2 characteristics: (accept part of the bid)
                  - 1 output to a specified address in a specified currency at a specified exchange rate
                  - 1 output that allows the change to be spent under the same terms as this output.
4)  When accepting a bid, the input may be coins in one UNIT used as collateral for coins in the EXCHANGE unit.
5)  When one UNIT is used as collateral for another THEN the dividends paid to that UNIT get paid to the other UNIT.
6) Update the hashing algorithm in a way to prevent centralized control or instant monopoly of all shares by asic mining companies.

I suspect that someone who is very familiar with the bitcoin code base would be able to help me get this implemented in very short order.  I have much of it figured out / designed.  Please contact me if you are interested.

I am also looking for feedback on how to improve this idea.  I have explained the reasoning / economic model behind these changes in other threads, but will answer questions here as well.  I suspect that once we get to talk on skype/phone you will forget about the money and be more interested in the result.  But even if you are skeptical I am willing to make it worth your while to spend some time helping me try it out.

Payments can be made in bitcoin or other negotiable methods.

Anyone who can convince me to abandon this idea before I invest more money into it will be given a 10BTC bounty.

Original Explanation of Economics behind this:
Background / Explanation of Economic Model behind these changes: https://bitcointalk.org/index.php?topic=215369.msg2259254#msg2259254

* EDIT *
Updated / clearer explanation:
https://bitcointalk.org/index.php?topic=215488.msg2273237#msg2273237

* EDIT *
I have created a github repository / branch from bitcoin for this project.
https://github.com/bytemaster/bitshare

If you are interested in investing in BitShares to help fund development and bounties (like the wonderful Icon that was just produced) then checkout INVESTING.md at github for the signed terms.  In summary 1000 BitShares will be pre-mined for every 1 BTC contributed to the investing BTC address and your Bitcoin wallet should be importable into BitShares and allow you to redeem your BitShares once it is released.
  
The number of shares pre-mined will be in addition to the 21,000,000 issued via mining.

* EDIT *
I will close out this bounty thread before spending any invested funds.  If the bounty is won, all invested funds will be returned.

If you would like someone other than me to be the decider of whether or not you 'win' the bounty, then I will agree to create a contract with objective criteria that will be arbitrated by Judge.Me.  

You can validate that I have the funds to pay the bounty by checking the balance of the investment address  (Over 50 BTC at that adress are my contribution to this).

Total outside investment thus far:  2 BTC  Thanks!
Total bounties paid:  0.75 BTC
Total tips paid: 2 * .05 BTC

* EDIT *
It is now clear that the only thing BitShares is good for is short-selling 'bitcoin' in a trustless manner.   This is very useful in its own right by allowing hedging, but it is not the system I hoped it would be.

All funds will be returned to investors.

I do not think that you structured this very clearly.  And this is causing errors in your own beliefs.

First of all, the best way to characterize this is in fact a true open source distributed "ripple" based on the bitcoin codebase.  Another definition would be a "native" colored coin blockchain.  Since colored coins is frankly awkward, I have been considering a blockchain that accepts multiple currencies deeply.  What is blocking me is frankly that I'd want bitcoins to somehow be a "native" part of the solution, not an external currency that requires a backer.

Point 1: You somehow think collateral makes your USD not need a gateway.  Uh, No.  There's really no nice way to say it but your thinking here is flawed.  Essentially each individual is a mini-gateway, securing the genesis of your "crypto-USD".  And BTW, nobody who really needs a loan can put up that kind of collateral... people put up cars and houses because they can simultaneously USE them.  A loan is truly underwritten by FUTURE the earnings potential of the person who received the loan.  Irrespective of your blue-sky scenarios, when black monday comes around, the people who received the $1 USD and essentially "created" the 1 crypto-USD have to make good on that and convert the crypto-USD back to USD.  Or be sued to get it.

Fundamentally, there IS no crypto-USD unless its the US government issuing it.  There is only someone's individual promise to pay.  And as we learned in the 2008 mortgage crisis it can be REALLY BAD to "bundle" these promises together under the assumption that they are equivalent!

Ok, now that we've got that out of the way, lets structure the system.

Base: 
  cleaned up bitcoin codebase with a single "native" currency, let's call it "thecoin" (THC)

  new transactions:
  1. Coin-type genesis.  A coin type is represented by a public key.  URL and hash of a coin contract are included.  The private key controls that coin type.  Could require a nontrivial txn fee of THC to miners, not to just one miner but distributed across the next 1000 mined blocks or something to reduce coin type spam.  However, just like there can be essentially an infinite # of bitcoin accounts, so with coin types.  This is good because as I was saying above, you can't combine fiat promises together.
  2. Coin genesis.  Signed by the private key, this allows new currency to be minted.  (THC txn fee)
  3. Coin destruction.  A transfer to the coin type's public key is essentially coin destruction because it gives control of the coin back to the issuer.

  Transaction changes:
  4.  Of course, all txns can have multiple inputs and outputs that take different coin types (coin type public key is of course included in the TXO).  This allows atomic exchange. 
  5.  A new transaction type called "market-based exchange" that is essentially the exact same as a normal txn but just marked as an exchange between anonymous parties (see below).

Exchange:

  For some reason you feel that bids/asks should be encoded in the blockchain.  There are huge issues with that, including blockchain bloat and matching speed.  But there is no need.  Bids and asks (actually they are ALL bids, just offering different currencies if you see what I mean) do not need to be remembered forever. 

These could be a special half-signed txn specifying what is offered and what is asked in return.  These are propagated throughout the network.  Someone trades by supplying and what is requested and signing, making a full txn.  The issue here is the half-signed txn cannot easily be withdrawn.  The only sure way to withdraw is to "double-spend" the underlying TXO so the $ the half-signed txn represent does not exist.  So perhaps bids have an "expiration block number".

Another choice is an unsigned half-txn.  The only issue here is your client needs to remain on-line to sign the txn if someone matches it.

Matched txns are committed to the blockchain, with a fee in THC paid by either/both parties.  Multiple matches against the same half-txn are resolved when the next block is found -- whichever full txn makes it in that block wins.  Note a higher THC fee would encourage more miners to use your trade (txn) as opposed to someone else's, which might make things very interesting...

Another issue would be bid flooding to attempt a DOS.  This could be handled to some degree by miner's fees -- essentially clients would refuse to forward the bid if the TXin does not offer enough THC as a miner's fee.  Clients can't tell the size of the bid because they don't know the value in USD of the coin-types being traded.  So we don't know if a txn is "dust".  So the miner's fee essentially needs be used to eliminate dust txns.  Clients could also refuse to forward half-txns that are far outside the trading range of currency-types as known by looking at txns committed to the blockchain and marked as being an "market-based exchange".

Another possibility is proof-of-stake.  You sign the bid half-txn with an account holding at least M THC, clients only hold N bids from a particular signature at one time.


Done!  Easy!  :-)

I certainly want to structure things clearer, and the goal of this bounty was to bring out errors in my beliefs so I appreciate your response.


This is not a trust-based issuer situation.  Crypto-USD has a fluctuating market price relative to paper USD that trades in a range similar to the transaction fees paid to move money into or out of Mt. Gox, your ATM, Dwolla, etc.   Because the price fluctuates it is backed by supply and demand and nothing less.  The supply is provided by individuals who see a price difference where crypto-USD is worth MORE THAN paper-USD.  This price difference must be sufficient to motivate them to give up the DIVIDENDS they are receiving on their BitShares (thecoin).  BitShares + their dividends have value for the same reasons bitcoins have value.  Thus new crypto-USD is created increasing the supply and driving the price back toward parity.

Crypto-USD is redeemed when the price of crypto-USD is LESS THAN paper-USD.  In this case anyone who issued Crypto-USD can buy crypto-USD with paper-USD at a price below face value and then use crypto-USD to redeem their BitShares held as collateral and start receiving BitShare DIVIDENDS again.  Thus there is profit to be made by redeeming shares and no need to 'trust' anything but the markets profit seeking initiative.    

As a result there is never any IOU in this system.  As all 'crypto-USD to BitShare' exchanges occur on the block chain and all issuance of crypto-USD occurs via a Bid transaction there will be a definite and changing ratio between crypto-USD and BitShares but a relative stable ratio between crypto-USD and paper-USD.


First of all, all crypto-USD is backed by dividend payments paid in BitShares.   The source of the dividend payments on USDs comes from the BitShares used by the system to issue the crypto-USD in the first place.  The source of BitShare dividends comes from half of the mining fees + rewards.  Thus if BitShares have value like Bitcoin then what is backing the crypto-USD is the future DIVIDEND earnings on the Bitshares held as collateral.   The ratio of dividends between crypto-USD and BitShare balances is proportional to the exchange rate.



I think that with the explanations above this statement is clearly 'wrong' as crypto-USD is not an IOU *issued* by anyone.   It is not a promise any more than a bitcoin is a promise.  

Ok, now that we've got that out of the way, lets structure the system.



Yes I was thinking of something similar for defining a new coin-type.  The problem is the network requires an exchange rate to be established before THC can be used to back the coin-type.   So I figured that a new coin-type would be allowed once a certain THC value in open bids for that coin were published on the network.  These bids would be backed by THC (until they were canceled).  With a high enough value threshold there should be enough 'volume' to get a market started and thus the network would allow the creation of the new coin-type in response to the highest available bid and work its way down.  Publishing all of these 'bids' and keeping them open would require transaction fees, time, and locking up of real value and therefore could not be spammed.

As a result there is no need for a new coin-type to be associated with any particular private key.  To accumulate sufficient bids those placing the bids would have to know what it was they were bidding on and what it represented.   For version 1.0 I would probably pre-define the set of national currencies + popular crypto-currencies + gold and silver.   Only after the concept was well understood would I enable the feature to create arbitrary coin types (such as company stocks, oil, etc).

Coins are not issued nor are they IOUs.  They are their own free-floating currencies which are issued in response to a bid on the market and thus are issued in proportion to the value relative to THC.  Of couse this relative value is constantly changing.  The block chain knows the sum total of all THC to OtherCoin issuance and thus knows how much of the THC dividends should be paid to OtherCoin balances and in what proportion.   Thus the DIVIDEND rate as a PERCENT OF VALUE is the same across all currencies.

Therefore if THC were BTC and there was a bid to buy 125 Crypto-USD for 1 BTC then that bid could be satisfied by issuing 125 Crypto-USD backed by the DIVIDENDS paid on 1 BTC.    Later BTC goes up in value and
there is another bid to buy 150 Crypto-USD for 1 BTC.  In this case 150 Crypto-USD would be issued backed by just 1 BTC.  Over time the all Crypto-USD currently issued will yield DIVIDENDS of value at about the average recent exchange rate.  Any differences in the value of the DIVIDENDS in various crypto-currencies would be taken out via arbitrage as people trade between Crypto-USD and THC.

Now the purpose of issuing a Crypto-USD is because the buyer who is paying with paper-USD wants to avoid exchange rate risk.  So he is issued a currency that pays DIVIDENDS of value proportional to the exchange rate.  Market forces will work to keep this as close as possible.   He knows he can then redeem the crypto-USD from the 'THC believers' at the same value regardless of exchange rate fluctuations because what he is really redeeming is a THC dividend bearing bond.




First of all a bid can be broadcast and matched before even getting into the blockchain.  The only bids that would be in the block chain are 'outstanding bids'.   Second, transactions can be pruned.  Third, eventually they do get in the block chain as part of a transaction.  Fourth, a bid with no transaction fee (or low fee) will be broadcast but not included in the chain until a matching transaction was made.    Fifth, the block chain needs to know about bids / asks to establish the exchange rate for issuing currencies.   That said, nothing stops out-of-chain exchanges from being setup like Mt. Gox for those who want to do HFT.  Mt. Gox would be able to operate using this system without having to take deposits and therefore could even operate behind a TOR hidden service.   Thus, let 3rd party dedicated services handle the high-frequency stuff and let the block-chain handle 'trustless' exchanges that might be slightly slower but still not that bad for most peoples purposes.  

All of that said, another way to create a bid is as an INPUT to any standard output that allows it to be spent as part of a valid exchange provided the bid is signed by someone allowed to spend the output.  Therefore the bid could be broadcast without actually creating a new output type.  Spam on the bids could be controlled by proof-of-work applied to the bid.   Bids can now be broadcast/cached and only people accepting the bids would include them as part of a transaction.



Once again, thank you for your response, you clearly took time to think about things and respond thoughtfully.  

I want to concentrate all efforts into this thread, so am quoting explanations from other related threads... more info here.

Hmm, you are starting to make me change my mind. Right now I'm at the point I was at two months ago with Bitcoin. I was intrigued, and thought they might be on to something, and it took me a couple of hours of reading up on the algorithms to convince myself the concept was sound. I'm going to put in those hours again, though I can't promise you I'll reach the same conclusion. And even if I should remain unconvinced, you have certainly opened my eyes to new possibilities. If it works, it's a clever innovation based not so much on new technology, but on a good understanding of (Austrian!) economics. Sent you a small tip for the entertainment value of this alone.

BTW, this reminds me of the unfinished Market.h and Market.cpp that Satoshi accidentally committed and subsequently removed. You are not secretly Satoshi, are you? If so, your cover is blown. ;)

Thanks for the Tip... all tips will be funneled into this project (or the bounty).  I look forward to answering any questions you may have resulting from your research!

to critique your idea

What if the alternate block chain verified the transactions of a peer 2 peer decentralized crypto-currency exchange

each transaction would cost the regular fee of 0.2% of whatever currency is being exchanged and those holding said currencies would recieve interest from that

but what if each transaction also cost x of the new coins created by the new block chain

the new block chain i bleieve would act as a fail safe against alot of problems crypto-currencies currently have

also you could integrate some kind of decentralized peer to peer social network with a rating sytem, like a bitcointalk.onion... kinda

it would make lending and borrowing decentralized and earning more coins for everyone holding

I believe the amount of coins you are holding should give you more coins from the new block chain (example: 50,000 dev coin gives you more coins from the new block chain than 1 btc)

this encourages hoarding all coins

I just now got it... you are trying to achieve parity between usd/btc with the new blockchain, correct?

Ver interesting. There are some important elements, especially the dividends idea.

But there is also a lot of confusion here. Honestly, I would recommend to studying how a paper fiat money system and an exchange works first. Its not at all trivial. Did you know that every bank transaction gets wired over the central bank? Every bank holds an account at the central bank. The way banks exchange money is that they use the central banks system. And the central bank is backed by the government.

In any case: think about it - how can you convert 1$ into 0.01 BTC? You have to transfer the 1$ to a place or a person who has BTC and wants $. The only way to transfer $ is through an entity that has an account at the Federal reserve, aka a bank. Or the entity has USD cash, and you can accept cash. Those are the only ways to transfer fiat money without an IOU scheme. Every holder of USD has a counter-party risk against his bank and against the central bank. Which is why Bitcoin is so brilliant in the first place. But the legal frames make a total bootstrap very unlikely IMO. In some ways it implies that nation-states can't tax people. And they don't like that. Compare the AAPL discussion recently and the broken international tax regime.

Compare that with Ripple where you have all kinds of layered couterparty risks. In your personal IOU network and against the network overall. Which it makes it worse than fiat in a way.

First of you need to be much clear of how such an exchange would allow throughput of 100'000 of orders per day. Then you will see the problem. Take the MtGox volume and calculuate the necessary throughput time. Take into account the speed of light (no kidding). The maximum time for execution would be rather in the 50 ms range or lower (in fact the speed of light makes auto-trading across the globe impossible, but auto trading is the base requirement to process most than 10M$/day). Certainly a blockchain makes such an exchange simply impossible. Just do the calculations of execution time that are needed, say based on 100x current volume at MtGox. Imagine BTC would rule the world, then you need up to 10^12 more volume, which is roughly what the current markets handle. (Global money in circulation is very roughy <10 Trillion$ per day, compared to ca. 10 million $ per day at MtGox). Of course nobody would trade significant volume at 1% fee. Bitcoin exchange fees should in theory approach 0.01%.

An exchange works like this. You have a central datastructure, which is the limit order book. Because it is central, by definition, a distrubted block choin simply does not make any sense. An exchange has to be fast, and so a good exchange has to have a synchronous architecture. In fact that is its primary feature, namely liquidity attracts liquidity. If one single trade takes 10 minutes, you simply can't operate.

If you study this you see where Bitcoin differs and how it improves it. But there is a significant problem (not vulnerability) in Bitcoin in terms of potential adaption. And the problem is that Bitcoins has to interface with fiat banks. Which makes the BTC exchanges act as banks. So if I want to use BTC I have to receive money in BTC, be it a wage, or capital income, etc. Otherwise I have to go through the exchange, and the governments of the world have the ability to shutdown the exchanges, as they already have.

However, what you could do is to have gateways which are liquidity providers. These could meet at an efficient exchange. The gateways would handle fiat money and the exchange handles orders.

Say you are in a country, where you don't run the risk of getting jailed for ML, like you would establishing such a system in most developed countries (have you thought about that?). Then you would do this in a TOR like fashion. Doing this I would consider very, very risky though. Even it would work the first customers are going to be people who want to ML. I would suggest you look at B24 and how this has been going. SH now faces serious charges and in part rightly so, because his exchange clearly enabled ML. Which shows some of the big problems with Bitcoin, and why my enthusiasm is now greatly reduced after seeing this. Essentially BTC in part leads in part to what is considered criminal in most jurisdictions. Which at some point there will be massive backlash. B24 and Bitfloor are closed now. MtGox potentially could be closed at any time.

Such a thing already exists today, it is called Bitinstant.  They charge a fee for 'instant funds' in Mt. Gox and the reason they can charge that fee is price difference.

Actually, you can set a BitShare price for crypto-USD without having to trade with anyone but yourself.  It would lock in the 'exchange rate' and if you were the ONE AND ONLY issuer and held all crypto-USD then your dividend payment would be EQUAL to holding just BitShares and thus there is NO RISK in placing bids without having $USD in hand because the value you receive is proportional to the DIVIDENDS received which is the same both immediately before and immediately after your bid is accepted.   Now if the price changes while you hold-crypto-UDS then you could lose money due to exchange rate changes between crypto-usd and bitshares, but that is what markets do.

Thanks for your summary of the field, but from what I can tell these paragraphs are your most direct challenge to the viability of a block-chain based exchange.   So lets see if I can address this very valid and insightful comment.

Not all trades must occur on the blockchain provided the blockchain facilitates the level of trading required to handle currency issuance and redemption.  Currency only has to be issued or redeemed at the edge cases because anyone willing to hold a balance in crypto-USD because it pays dividends would be a cheaper source of liquidity than issuing.  Crypto-USD can be traded on a centralized exchange but is ultimately backed by trades / arbitrage on the block chain.  So you can think of trading crypto-USD on the block chain like having a direct connection to the stock exchange.  It can be expensive... most people just use a broker which can be faster, cheaper, and lump large trades together.   All that really matters for this system to work is that crypto-USD can be created,  spent like BTC, and exchanged between currencies easily enough to maintain near parity.   HFT can AND SHOULD occur off chain.

After all blockchain real-estate is a finite resource and HFT would bid up the transaction fees forcing only bulk trades to occur on-chain and everything else could be resolved off-chain.

No I am trying to achieve parity between crypto-USD and paper-USD by allowing BTC  to float against crypto-USD.

I am trying to allow one block chain to handle crypto-USD, crypto-GOLD, crypto-EUR, and to allow parity to be maintained without counter-party-risk or IOUs.

Could you elaborate? 

The economics section already addresses the hoarding myth promoted by mainstream economics and throughly debunked by austrian economics.  I will not debate this particular issue on this thread.

I am trying to follow what you are saying, but think what I have proposed effectively accomplishes the same thing.  Could you explain what problem your solution attempts to address?

bytemaster, I have read you reply but do not have time right now for a point by point reply.  But let me ask a few questions and offer one piece of writing advice that I hope will clarify things.

Advice:  you tend to write anecdotal examples and stories and "prime" your and other people's mind to a sub-conscious assumption by using terms like crypto-USD.  In other words, you assume crypto-USD and try to argue backwards why it works.

Instead what you want to do is something like a true white paper:

Proposal:  A crypto currency X with these properties:
1
2
3

Effects:  Combining these properties creates the following interesting effects:
1
2
3:  [Ultimately I think you want to say] Payment of dividends creates a negative feedback loop that drives the price of X in THC (the "native" currency) towards parity with the price of the USD in THC.
This is clear because [now prove it].

Extreme situations:  [Prove the effects work during major market upset]

Result:  crypto currency X will track the value of USD


Questions:

1. How does information about the price of USD in THC enter the system?

2. When I was talking about anyone creating their own currency... you said at one point that "we" will start with just the major currencies.  Who is "we" here?

3. How does crypto-USD enter the system?  I get that someone buys it for USD, but I mean technically how is it actually created?

4. How does your dividend system cause crypto-USD to approach USD value?


And then an observation:

By not letting other people "mint" their own instruments, you tremendously limit the crypto-infrastructure.  Doing so would let:
A company issue its stock or bonds
An individual finance his own mortgage
(and a million variations)

Today, all current crypto-currencies (bitcoin, litecoin, etc) are really the same; they may have minor variations but hold the same fundamental role.  The above allows crypto-currencies to hold roles that interact directly with real life entities, rather then through the indirection of a floating exchange.

Whether an individual instrument is legally issued and enforced is not a problem to be solved by the crypto-infrastructure, just like the same is not solved by the paper these instruments are written on today.  In fact, a crypto-infrastructure really is like digital legal paper, allowing verifiable signatures and near-instant transfer.  But ultimately courts will decide about the legality of issuance and enforcement of a particular instrument.

 

I am working on just such a paper and explanation.  All of your questions are exactly what I need to do.  Thanks. 

I'm happy to help; personally I think multi-currency is a key feature in the next generation blockchain (and sub-chains, described in several postings recently, but much earlier here: https://bitcointalk.org/index.php?topic=92398.msg1019392#msg1019392) .  PM me a google doc link or something if you want to co-author.

I have a much improved white paper published on google-doc available for viewing:

https://docs.google.com/document/d/1FqDgA7J_O2hufetbNY51xue7yE57Euk2_nTa5IOhnJA/edit?usp=sharing

Granted it is still in draft, unformatted form but it takes a lot of effort to explain complex economic relationships in understandable and 'provable' terms.  The reality is it gets simpler the more I explain it.  


Proposal:

In this paper I present a new crypto-currency with aim of supporting the creation of many sub-currencies that closely track the value of any other item in the market without the need to any issuers.  An analogy can be made to a distributed peer-to-peer bank that accepts and pays interest on deposits in any currency.  This bank operates without counterparty-risk or IOUs.

This currency will have the following Properties:

• The native currency will be called a share and is mined into existence on the same schedule as Bitcoin.
• Shares will pay dividends from half of the mining fees and rewards
• Users may issue new sub-currencies by ‘shorting the sub currency’ and backing the short position with dividend payments from a defined number of their Shares.
• Owners of sub-currencies will receive the dividends from the all Shares used to create them proportional to their balances.
• Short positions can only be redeemed by the issuer.
• Users will be able to trade among all shares and currencies and via a built-in exchange.
• All shares and sub-currencies will have the same transaction properties as bitcoins.  

Economic Effects of this new Currency:
      1.  Shares derive their value from the same sources as Bitcoins.
       2.  Because shares pay dividends the shorts effectively pay interest to the longs.  This interest payment is what regulates the supply and demand for deposits and withdraws and ultimately maintains price parity.  

How does crypto-USD get created?
   Someone must go short crypto-USD and back their short position with interest bearing BitShares.

Does it cost them anything to maintain a short position?
  Yes, the act of going short causes the interest rate of crypto-USD to go up relative to the interest rate of  Bitshares  AND the individual who is short crypto-USD forgoes interest payments on their Bitshares.  

Why does the interest rate of crypto-USD go up relative to the interest rate of Bitshares when someone shorts?

    Because the individual short-selling crypto-USD is taking an exchange rate risk, he is unlikely to do so at the current market price.   After all, he will have to buy back crypto-USD in order to recover his bitshares (which he expects to go up in value).   So, he only goes short at a strike-price below the current exchange rate with enough margin to cover his risks.   If USD goes up then it will be more costly to cover his short position and he will lose money.  The risk of USD going up is equal to the risk of BitShares going down.

     Because the exchange occurred at below market rates, the dividend payments which are in Bitshares are necessarily valued at ‘above market rates’.  In other words, the percent gain in interest rates is proportional to the margin built into the short position.

What impact does the change in relative interest rates have on the market?

    Higher interest rates always attract more depositors which will drive up the price of crypto-USD.  This works against the short-seller who needs the price of crypto-USD to go down relative to Bitshares or else he will make a loss.  This is part of the reason the individual short crypto-USD must maintain margin.

    Higher interest rates also trigger other Bitshare holders to consider selling their Bitshares for crypto-USD.  By swapping their savings they may yield a higher return.  This also serves to drive up the price of crypto-USD (and discourage the short-seller and necessitates caution when issuing new crypto-USD).

If the change in interest rates brings in more depositors AND causes existing bitshare holders to switch to crypto-USD for savings, what market forces bring the price of crypto-USD back down?

    Holders of crypto-USD may see the potential for equity gains in bitshares outweigh the difference in interest rate.   In this case they would take the same position as the short-seller in believing bitshares will appreciate.

    Holders of crypto-USD may wish to withdraw their money into paper-USD.  


What happens if there is a run on the bank and everyone wants to redeem their crypto-USD?

If Bitshares lose all value, then crypto-USD no longer pays interest of any value whatsoever and the short-seller has nothing to gain.  Everyone involved would lose everything they deposited with the bank.  This scenario is unlikely so long as bitshares continue to provide a valuable service as a medium of exchange and the underlying cryptography, internet, and power systems remain available *somewhere* in the world.  Thus any depositor who puts money into crypto-USD is implicitly trusting that the underlying Backing of crypto-USD (bitshare dividends) will not go to 0.  

Assuming bitshare do to not go to 0, then crypto-USD will have value to all short-sellers.     crypto-USD will also have value to anyone who expects the bank-run to pass and for depositors to return at some point in the future.   In this case, speculators will start buying up crypto-USD at below face value prices and short-sellers will start covering their positions taking crypto-USD out of circulation.  These factors will conspire to provide support to the crypto-USD price.

In a panic the rush to withdraw will push the paper-USD to crypto-USD price down which is economically identical to increasing the interest rate paid to new depositors in crypto-USD.  The increased interest rate will cause cash to flood into the system to meet the demand for withdrawals.  

The depressed paper-USD to crypto-USD price will also discourage many people from trying to withdraw during the run.  They decided to ride out the storm rather than take a loss in a panic.

So the question becomes what would trigger a run on the bank?  Because there are no IOUs involved and all crypto-USD are backed by real value that does not have counterparty-risk (bitshares) then it is unclear what could cause such a rush short of something threatening the very infrastructure (internet/power) that the system is built on.  

What happens if someone dies before they close out a short position?

Then there will be a permanent bias in interest rate in favor of owning crypto-USD over bitshares.

What happens if Bitshares fall in value by 99%?

Assuming the 99% fall in value is not part of a complete crash to 0 which I have already covered, then I will assume that the Bitshares found support at 1% of their high.

Then the value of interest payments paid to holders of crypto-USD will fall by 99% while the interest rate paid to holders of Bitshares will remain at 10%.   As a result those who are seeking a 10% return will sell their crypto-USD and buy bitshares.  This will depress the price of crypto-USD and help support the price of Bitshares.   Short-sellers (crypto-USD issuers) would be taking it in the shorts so they would be actively redeeming as much crypto-USD as possible as soon as possible to cut their losses.  

Some short sellers may not be able to redeem their positions.  In which case the effect would be the same as if the short seller had died and there would be a permanent interest rate bias in favor of owning crypto-USD vs owning bitshares.   Once Bitshares reach a new equilibrium after the market adjustment, then this interest-rate bias will encourage others to redeem the crypto-USD for paper-USD.

How will the block-chain algorithm determine what exchange rates to use when issuing Crypto-USD?

The blockchain will not have to decide, market participants will estimate the risks of going short to acquire crypto-USD.  Therefore the price will be decided by the user in an intentional act to issue Crypto-USD.    Likewise, these same participants will decide at what price it makes sense to cover their position.

How do you prevent abusing short positions to manipulate the market?

Taking out a short position requires capital of equal value and incurs opportunity cost in foregone interest payments.  These forgone interest payments are what back the value of the short position.  Therefore there are no naked shorts and the shorts have no more power in the market than the longs.  

What prevents people from creating a million different currency types?

First of all, creating a currency type means taking out a short position in that currency which means it incurs a transaction cost.  Second, others must understand and have consensus about the meaning / relationship of that currency type to Bitshares for it to have any value.   Third, the short position must accurately reflect market prices or the issuer will take losses.  If the price too low, the the market will push the price up causing them to lose money on the short position.  If they price it too high, then they will only ever be able to redeem it with themselves and thus would incur 2 transaction fees for wasting everyone’s time.

You shouldn't do this because ANY blockchain currencies with only pseudo-anonymity will be made obsolete by crypto-coin technologies that allow for strong anonymity.

PM for btc address to send the "why not to do this" 10 btc bounty.

I believe that is not so big an issue - in fact, things like Zerocoin could be layered on top of Bitcoin (or a comparable currency).  Or one could implement things like a p2p mixing service based on multisig transactions.  In any case, I believe while there's no really usable p2p anonymisation technology for Bitcoin here yet, it will be possible to upgrade Bitcoin rather than going through the pains of bootstrapping a new currency when that is not strictly necessary.

I didn't say you would get the bounty for providing a reason... it has to be convincing.  You have not convinced me not to spend $20,000 on making this a reality.  Furthermore, just because something else may have extra features does not prove that my features do not work.

Given that my idea is tied more to economics than the exact crypto algorithm, it could easily work with strong anonymity.  In fact, I would be very interested in using a strong anonymity crypto-currency as a 'base' unless it had other usability issues. 

That said, I believe that using an Open Transactions server operating on Tor or BitMessage and using my system to move value into and out of the server would be the preferred solution for anonymous P2P. 

Thanks for supplying more details to your idea, this finally cleared some more things up for me.  In particular if I understand your latest proposal correctly, anyone can issue crypto-USDs (or whatever he/she likes) at <b>any</b> exchange rate they want.  I somehow see how you think that the expected return from dividens on the bitshares backing the issuance regulates the rate they will choose.

However, with my current understanding (I may still be wrong about your idea) I see the following situation:

Assume we have a current exchange rate on the market of 1 $/BitShare, and assume further that currently already 1 crypto-USD has been created in exchange for 1 BitShare by someone else (in accordance to the market rate).  For simplicity assume that we look at a certain time-frame such that BitShares get 100% return over that time in dividends.  Thus currently 1 crypto-USD also returns 1 BitShare in dividends, because it is backed by 1 BitShare as collateral.

Now, what if I issue myself now <b>2</b> crypto-USD in exchange for 1 BitShare?  Then we have 3 crypto-USDs and 2 BitShares backing them, thus each crypto-USD earns a dividend of 2/3 BitShares.  I acknowledge that this is of course less than what it would earn I had taken out also only 1 crypto-USD.  <b>However</b>, because I now have <b>2</b> crypto-USDs, I would earn 2 * 2/3 = 4/3 > 1 BitShares in dividends!  Because the more crypto-USDs I issue for my collateral of 1 BitShare, the higher the fraction of the crypto-USD balance I get, and the more I can "parasite" on the dividends of other crypto-USD issuers.

Wouldn't that lead to people issuing more and more crypto-USDs for ever higher (in terms of USD/BitShare) rates instead of approaching the rate that someone holding <b>real</b> USDs is willing to pay for BitShares?  Can you please tell me what part of your proposal I still misunderstand?

The first crypto-USD is issued in response to a BID in bitshares.    Thus someone has to say, "I want to buy 1 crypto-USD for 1 bitshare" and then if and only if there are no takers with existing crypto-USD can someone choose to issue.    Thus all issuance will only occur *after* all current holders have gone no-bid. 

So while someone may choose to issue at what ever price they want, they are still restricted to issuing only when there is a no-bid from current holders of crypto-USD.

So to pull off your proposed attack (which is very insightful) would require the issuer to place a bid to buy more crypto-USD.  That bid would have to be higher than all other bids to buy which means you would be pushing up the crypto-USD price.  Pushing the price of crypto-USD above market value will encourage people to sell their existing crypto-USD for shares.  Once they start selling then you will no longer be able to issue until they stop selling.   The end result is that in your attempt to increase the supply by artificially placing a bid just so you could issue against it you would end up COVERING your existing short instead when someone else jumped on the opportunity to sell an existing crypto-USD for a profit!

Im still trying to get my head around your proposal, but for now I was just curious since you mentioned investing $20k+ in it.

Would this end up being a community project that would benefit everyone, or is there some monetization strategy for those developing/investing in your value-tracking-currency?

Ok thanks for clearing that up.  This (that bids would be filled first) was my understanding of a previous version, but I could not find that rule in your current proposal thus I thought you had dropped it.  So basically the collateral-short with the network is only done and possible at the very bootstrap phase of a new crypto-currency, when there's not yet a market inside of the system to create initial balances?

I have not thought the following through, but naively this still leads to a very counterintuitive situation for me:  Namely that "usually" from a market you would expect that there are *always* bid (and ask) orders.  Thus that should be the case also for your system, if there should be a functioning BitShare / crypto-USD market (which is the whole point of the exercise).  But in that case, it would never be possible to issue any more crypto-USDs ever (until there are no more bids and thus basically BitShares have gone down to zero value in terms of crypto-USD).  Wouldn't that mean that after some initial bootstrap we have no practical possibility to increase the amount of crypto-USD in response to growing adoption of BitShares?  (On the other hand, *if* there is growing demand for some currently existing amount of crypto-USD, this would drive the price up / the price of BitShares down, until we reach the point of no more bid offers.  But I'm not sure if you really want that because it would lead to a very strange market, wouldn't it?)

Disclaimer:  I'm no economist (mathematician / physician instead), and just intuitively think about markets.  So I'm probably not always good at thinking such scenarios through, I guess.

What are the mechanics of redeeming Q? I won't call it crypto-USD, because I'm not yet persuaded it will track the USD. Is the initial amount of bitshare put up really a collateral, so that you get back your original amount, or do you get a prorated amount of the total amount backing Q? Under what circumstances is the original owner permitted to redeem Q he bought back on the internal market?

I monetize it by mining from day 1.   Everyone who helps make this a reality can start mining on day 1.  Community project 100%.  I don't want to 'own', I just want to see it work.

Still haven't gotten anyone familiar with Bitcoin express interest in the Job.... but I may just quit my day job instead and live off of savings.   I have gotten lots of offers to help support the idea which is great.

So you would premine and then release to the public?

I am trying to understand your white paper. And there are definitely some interesting ideas.


here is my reason, why the idea will not work:
Isn't your key argument, why the crypto-USD will be on parity with fiat-USD, based on circular reasoning ("paradoxical thinking")? So it is false.
In the white paper you answer the question of "what market forces bring the price of crypto-USD back down?" with two arguments which are only true if the individuals assume that in the future the price will be on parity. So it is circular reasoning.

More specifically you give these two reasons:
1) "Holders of crypto-USD may see the potential for equity gains in bitshares". But this potential for equity gains in bitshares is only true if you assume that in the future the price will be on parity. So you use your argument to prove your argument.
2) "Holders of crypto-USD may wish to withdraw their money into paper-USD." Why would they withdraw it. Only if they assume that in the future the price will be on parity, then it would make sense to withdraw. So here again you use circular reasoning.

in the end it doesn't matter if you have bitshares or you issue them to yourself as crypto-USD, because the interest is paid in proportion to your balance.

Please correct me if I am wrong...
Btw, your ideas are indeed very interesing and I very much appreciate your work done here...

The person who goes short can cover their position at any time by buying Q on the market.

You have N shares(S) that pay P% dividends where the dividends = N*P.   If the exchange rate between S and Q is  X  then  what is backing Q is X*P*S / year.  

The collateral is redeemable 'in general' by selling Q for S at the current exchange rate. which may be slightly more or slightly less than the original exchange rate.

The reason why Q fetches a market price close to where you bought it over time is because there is PROFIT to be made by redeeming Q for S anytime Q is slightly below what you paid for it.  The reason why you can sometimes sell Q for more S than you paid originally is because the creation of Q made it more profitable to hold Q than S because Q pays 10.1% and S pays 9.9% and thus anyone who owns Q and expects Q to appreciate against S by less than .2% over some time period would sell their S and buy your Q.  

Here is another way to think about how the prices stay near parity:

If you have two bonds, A = $100 @ 10% and B = $100 at 5% then the net-present-value of A = 2x the net-present-value of B.

Therefore, the reason people who value S are willing to pay more (or less) for a Q BOND is because how they really see a Q BOND is an opportunity to buy a bond that pays more (or less) interest (in S) in as a percent of the Q bond price Y.  If the value of S doubles then the value of the interest paid on Q bonds doubles from the perspective of people who want to own S.   Therefore Q BONDS  become 2x as valuable to owners of S simply because by selling their S for a Q BOND they could earn 2x the S in interest.    Thus on a net-present-value basis the value of Q BONDS tracks the original exchange VALUE because the interest rate changes on Q cause the net-present-value as measured in S of a Q BOND to be about equal to the original VALUE.

Now that was hard for me to follow, but I am hoping someone can take a hint at what I am getting at and explain it even better.
 

 

No pre-mining, it would be public the very first day. 

I think you misunderstand the nature of motive 2.  Someone who wants to convert crypto-USD to USD is doing so because they *FEAR* that crypto-USD will fall in value.  Therefore, they become SELLERS of crypto-USD which pushes the price of crypto-USD down.

Also, if the price of crypto-USD is above face value then that effectively means they can make a profit by selling 100 crypto-USD for 101 paper-USD assuming they bought 100-crypto USD for $99 paper-USD the last time their was an imbalance of withdrawals and deposits.

Therefore when there is a high demand to convert paper-USD to crypto-USD the crypto-USD price rises in paper-USD terms.  When the withdraws take over it falls in paper-USD terms.   

But your assumtion that they *FEAR* that crypto-USD will fall in value is based on the assumption that they assume that the price will reach parity in the future. You haven't proven that this is the case.

For example you could do the same reasoning for BTC by just renaming it to crypto-USD. Just by naming it USD you could argue that people want to sell it for paper-USD if the price is 101$. But nobody can guaranty that the price will be on parity. In reality the price could diverge to some arbitrary number (like with the BTC-USD exchange rate). So I still think that you use circular reasoning... But probably I just miss some important point... Would be nice if you could point me to the correct reasoning if I made an error. thanks a lot..

Have you looked at this Post?:

https://bitcointalk.org/index.php?topic=209269.0


I think this would be a better way to go.

I'm not sure I understand the shorting terminology. The person creating the Q "out of thin air" is figuratively borrowing the Q from a non-existent central bank and has to post a collateral that helps ensure he can eventually buy them back for the still non-existent central bank to destroy?


I thought it was the collateral that was backing the value of Q, with the interest rate differential somehow causing the exchange rate to remain near parity with the USD. I still don't understand the latter part, and like nomailing I think I'm seeing some circular reasoning.


Does this mean that in your scheme there is no way to destroy the Q again?

I have to ponder the rest of your post.

In general, I can see you could have a currency tracking the USD inside a BTC-based system, provided the crypto-USD is always automatically redeemable for BTC from the collateral and the total amount of crypto-USD outstanding equals the USD value of the BTC collateral. I generally understand how differing interest rates could induce people to convert between BTC and crypto-USD, but not how your present proposal does this. And because of the fact that the system doesn't know about exchange rates, I'm skeptical it could even work in principle.

Yep, this is the crucial point.  I would also be interested in how that is achieved.  (I haven't yet understood that fully, neither.)

OK, let's try it another way, maybe that will help clear up the confusion.

Do we agree you could create a crypto-USD that acts much like Ripple IOUs if we had a central party (it could still be a commercial venture, it doesn't have to be a central bank) issuing crypto-USD and redeeming it at face value (minus some small fee). To the degree the central party was considered credit-worthy and reliable, the crypto-USD would then indeed track the real USD.

The disadvantage of this is that you are now reliant on a central party and it is this you want to remedy?

Can you explain the nature and details of the differences between your proposal and what I just described?

How much crypto-USD and other crypto-fiat could the system support relative to the market cap of the underlying cybercurrency? I'm assuming always strictly less. What would happen if we approached that limit? What would happen if the value of the underlying currency dropped to nearly zero, say because it was supplanted by a different cybercurrency without a proof-of-burn transition path?

I have been thinking about the benefits of pre-mining to help get this thing going.

It seems like there is a paradox where no one will invest in this as long as they believe SOMEONE ELSE will and so they can sit back and get no benefit.  My goal is to get this out there ASAP so we need to change the market dynamics to help make that happen.

I clearly don't want to pre-mine like Ripple.  

I suspect there is some balance here, so the best approach I can think of to making sure that pre-mining is fair and just is to set a price to sell pre-mined shares.   Therefore, I propose the following:

1) Anyone who sends Bitcoins to the following address:  18dzTA5JDLrP5bu6spDSqK9wGDLS4sM5bU  will be allowed to redeem 10000x as many bitshares from the genisis block of the new chain.  Thus the IPO is priced at about $0.01 per bitshare.  The gensis block will contain a transaction with outputs that are redeemable with the same private keys.

2) By contributing funds to that address you will recognize that they may be used to fund this project as I see fit to make it a reality.  

3) I will pay all contributors who write code, documentation, create promotional / educational videos from this fund, with the caveat that I may request they 're-invest' some or all of their pay by sending the money back to the fund.  

4) As a result of this structure EVERYONE gets paid for their time at current market rates and that time is reflected in your initial stake in the bitshare economy.   Whether you contribute time or money, it will all be valued at market rates.  

5) I believe this gives us an ability to set a price for bitshares *today* based upon how many actually get issued.  The market forces will be such that bitshares will be issued in quantity until the expected market-value on launch equals .0001 bitcoin.

6) 'pre-mining' is fair with this system because all pre-mined shares are tied to real proof-of-work represented by the bitcoins contributed.

7) I will create an alternate address for people who want to contribute to the bounty to prove the idea will not work.

Please do not send money to this address until I post a follow up post that CONFIRMS this plan.  I will create a more detailed contract and then SIGN it with that bitcoin address.  

What does everyone think?

Good questions and I think I have good answers:

1) Yes I agree that crypto-USD could be thought of like an IOU from a 'central' bank. 

The DIFFERENCE between crypto-USD and a crypto-USD-IOU is the following:

1) There is no limit to how much crypto-USD-IOU a central bank could issue... you have to trust them not to practice fractional reserves.

2) There is only one party that can actually redeem those crypto-USD-IOUs and if that party were to disappear then all crypto-USD-IOUs would be worthless.

3) The crypto-USD-IOU derives its value from a promise to pay, promises can be broken.

4) The crypto-USD-IOU could not pay interest without the practice of fractional reserves (*or*  having a fixed loan period where they are not redeemable on demand, but only after some date... in which case not all crypto-USD-IOUs would be fungible as they would all carry different effective interest rates based upon their maturity date).

5) A crypto-USD is not an IOU USD.   Instead it can be thought of as a bitcoin-bond with a fixed interest rate.  Therefore, its value comes not from a promise to pay, but from the value of a bitcoin bond.   The interest rate paid on the bitcoin bond is established as the average exchange rate at which all outstanding crypto-USDs have been lent into existence.   Thus crypto-USD can be thought of as a bitcoin bond at rate X while crypto-EUR would be at rate Y and crypto-GOLD would be at rate Z.   The net-present-value of these bitcoin bonds would track USD, EUR, and GOLD based upon supply or demand of people wanting to borrow GOLD from the network (withdraw it) and people wanting to deposit gold into the network.   These people will only deposit GOLD or withdraw GOLD in exchange for a bond of comparable value and thus the willingness of people to deposit/withdraw gold will effectively set the bitbond interest rate defined by crypto-GOLD.






 
 

I see no fairness issue either way, as long as you are open about it. It's more an issue of whether the value proposition you are making to both early adopters and the general public is sufficiently attractive to win them over. Fairness doesn't enter into it.

Personally, I would try to avoid a split from Bitcoin, and of course I still need to be persuaded the whole thing would work. Additionally, I don't think you could manage to compete against a fork that didn't split from Bitcoin.

Just my 0.02: if you are preming I will not support your crypto, which seems interesting (but i have to admit I'm not getting many points).

I do not think premining is "immoral"  or something like that, it's just that premining invalidates the "decentralized" concept from the very beginning.

As explained in the other thread there can not be crypto-USD. Imagine I say I have 10$ in my virtual account (i.e. electronic cash). How do I prove that in the system? There is no way, so what I do is a have central clearing authority, the central bank. Every transaction then goes through this central point, essentially to verify this fact. In this sense proving that account A is worth 10$ is the same as verifying transactions from A to B . The whole point of Bitcoin is get around this fact. I thought that was obvious, but I'm surprised to find out it is not. However the problem is that a Bitcoin network has nodes which interact with fiat money. Which makes these outside facing nodes a target. This part isn't solved yet, but has little to do with blockchains. I highly doubt it can be solved. Which means the main network BTC can be shutdown by governments, because without e-processing from bank to BTC the use is very limited. And then there are legal issues to solve. Anyway...

Let me try to use yet another analogy to help clarify things.

Suppose you have 1 dollar in hand and you go to someone and ask for 20 nickels.   If they have 20 nickels they are generally willing to trade despite the fact that a paper dollar and 20 nickels are two different things with different market values.  Base metal in nickel is worth more than face value.   Nickels are heavy and hard to carry around, but paper is easy to move around.  Nickels go through the wash better than paper.   Despite these differences people are generally willing to trade at face value *unless* they both need the properties of one or the other.  I might charge you $1.10 in nickels for $1.00 just because I really don't want to mess with the bulk, but for an extra 10% it is worth my while.

The dollar/nickel trade does not involve any IOU between the two parties.  Both parties traded something of about equal value despite both being labeled and denominated in USD.

What Bitshares allows us to create is a new asset class that can be traded without an IOU at near parity.  This asset class is a Bitshare BOND that pays interest in Bitshares.   If you trust in Bitcoin then imagine a Bitcoin bond that pays interest enforced by the blockchain so there is still no counter-party risk.    You can then concluded that depending upon the interest being paid on that bitshare bond it will have a different net-present-value.   

So you want to deposit USD in to the system and have it maintain parity without any counterparty risk.  Someone else wants to withdraw value from the system in the form of USD.    (neither party wants to convert out of USD denominated assets).   For this exchange to occur assets of near equal value must trade hands.   Fortunately, the bitshare network facilitates that by allowing the creation of bitshare bonds at ANY interest rate and therefore ANY nominal value.    So, you give someone USD and they give you a BitShare bond with Equal net-present-value.

The process of creating / destroying bonds of USD denomination is such that the interest rate will adjust to keep parity with the original value.

Because people can BARTER value for equal value like converting nickels to paper dollars there is no need to interact with banks (once things get big enough).  There is no need for a vault or to trust anyone.

Can you elaborate on how the bonds are destroyed? I tried to asked this before, but I think you understood it as asking how to sell off the bonds, which is not the same thing. In other words how is the stock of outstanding collateral reduced?

When you 'go short crypto-USD' they are tied to a SPECIFIC number of crypto-USD that you are issuing.  You will endup with an output in your wallet with a negative crypto-USD balance that is linked to the bitshares backing it at a particular exchange rate.   To destroy bonds you can create a transaction that 'spends' that negative balance to an output denominated in bitshares (at the encoded exchange rate) provided the same transaction includes an input with a positive crytpo-USD balance.    Thus the individual who creates crytpo-USD can destroy it by reversing the process they used to create it.

 

How does everyone come to an agreement about what a particular sub-currency is supposed to track?

The same way that the market comes to an agreement about what to use as money, or any other convention that is not demanded by government.   If there are multiple competing sub-currencies all claiming to track gold, then the market will trend toward whichever one gains the strongest reputation for actually following gold.  Any variants would end up having to do currency exchanges to convert between two different sub-currencies both claiming to be 1 oz of gold and those inefficiencies would cause everyone to join the majority consensus.   Once one currency gained large enough volume on the exchange and a majority of the 'market share' then it would become the defacto-standard.  Any market participant that had an opinion that differed from the ‘consensus’ would make losses by mis-pricing the asset.  Thus no one would be able to redefine what a particular sub-currency means without changing the group consensus of all traders.

How did language develop?  Who decided what words would 'track' what ideas?  The answer is that anyone who doesn't learn and adapt to the consensus would be unable to communicate.  This is a very natural process and does not require any central authority to define standards.

I hope im not the only one who is very intrigued but a little lost on this proposal!



Any chance you could write an example explaining how crypto-USD is created? i.e. what operations would be involved, what would happen on the blockchain etc

Concretely, how would I 'short the sub-currency and back it with dividend payments from my bitshares'?


Say I have 100 BitShares, and I receive dividends - in what currency am I receiving them?[/list]

Where I live a mango costs 1 USD. Say I create a crypto-mango. I also create a crypto-USD. These require identical backing when I create them. Will their value diverge in the future? If so, why?

As I see it, CryptoUSD will not necessarily follow the price of USD. You can only hope that they will. Am I wrong?

Market participants need to align the price of CryptoUSD with the price of USD. What are the incentives to do this?

BTW: I am a big fan of dividend payments as a mechanism for supporting something like this. See here for example,

https://bitcointalk.org/index.php?topic=197799.msg2280672#msg2280672 (https://bitcointalk.org/index.php?topic=197799.msg2280672#msg2280672)
https://bitcointalk.org/index.php?topic=169204.msg2143460#msg2143460 (https://bitcointalk.org/index.php?topic=169204.msg2143460#msg2143460)

@bytemaster you still haven't replied to my answer above. So I assume we are still on a different level. Maybe I still miss some important point, or you are still reliying on circular reasoning?!
I will try to clarify what I mean, so that we can maybe come to the same conclusions...

You say:

But your assumption that "they can make a profit by selling 100 crypto-USD for 101 paper-USD" is solely based on the assumption that the exchange rate between crypto-USD and fiat-USD actually IS on average 1:1. So it is a circular argument.

So, I just want to point out here, that what you say in the white paper, is not a proof that the price will be parity (on average), because in your reasoning you use the assumption that the price is on parity on average. Do you see the point, and could you agree to this?

If that is the case, then maybe we could come to the following conclusion, which is what I understand from your reasoning: the exchange-rate between fiat-USD and crypto-USD will be 1 on average IF enough people think that the exchange-rate between fiat-USD and crypto-USD will be 1 on average. So although this IS circular reasoning, the idea might still work?! But it is no proof that it will work.

+1; what I was trying to say with the mango example is that even if the exchange rate were 1:1 now, there is no reason to believe it will remain 1:1. Thus, we really need even more extreme circular reasoning:

All dividends are paid in shares; however, shares can be 'sold' for the sub-currency on the exchange.

(On a technical/implementation side of this)
Because 'dividends' are awarded each time a block is created, they cannot be redeemed for 120 blocks, just like newly mined shares.    You redeem them by spending the output, which will then calculate the proper dividend amount based on the coin-age and the summary statistics of all blocks since that coin was received at a particular output.

First of all, I do not blame anyone for having a hard time resolving the apparent circular logic.  This is as tough to explain as it would be to explain how the first spoken languages developed.   In some sense though, bitcoin is a perfect example of 'circular logic' creating value.  On day one of bitcoin there was no 'value' except what some people arbitrarily decided to exchange a pizza for.   That first exchange was truly arbitrary.  Later people made other trades based upon that arbitrary first exchange.  Over time people began to gain some confidence that others would trade them.  Eventually bitcoin will reach a stable price just like USD (probably more-so).   Why will it do this, circular reasoning:  someone exchanged it yesterday, so someone will do it tomorrow, it has value because it has value.    It has value because of consensus.

The first crypto-Mango would be less arbitrary than the first bitcoin-pizza trade (assuming bitshares have established some value like bitcoin has).   The crypto-Mango would start out at parity with mango's or no one would trade a real mango for a crypto-mango.  The second crypto-Mango would only be created because there was someone else who wanted to deposit a mango and someone else who wanted to withdraw a mango.  This deposit/withdraw would only occur *if* the crypto-Mango was worth a real-mango.  Thus the second crypto-Mango would have to be created at the new exchange rate which would adjust the interest paid on all crypto-Mangos.  It would also affect the short-position of the issuer of the first crypto-Mango causing them to either make or lose money.

The third crypto-Mango is yet again issued based on the desire for a deposit, and once again the depositor will only accept a crypto-Mango if its value is close to parity with a real mango. 

The fourth depositor wants to make a deposit, and the current crypto-Mango price is already near parity so he can simply trade his mango with one of the first 3 depositors who already have crypto-Mango. 

Later someone wants to withdraw a crypto-Mango into a Mango.  They need to attract a depositor.  Those who are 'short' are potential buyers because if they can buy the crypto-Mango back they can either cut-their losses or make a slight profit by redeeming it slightly below face-value.  All shorts would be competing to earn that profit which is why the 'profit' will be minimized and approach the transaction fee.   If there was only 1 short, they could demand 50C on the $ to redeem, but there are 1000's of shorts and who ever offers the lowest price 'redemption' gets to make the profit.

So early adopters of the crypto-Mango would take some risks back-stopped by the underlying value of a bitshare.  These early adopters would establish a consensus that would cause the market for crypto-Mango's to grow.  As the market grows then it establishes a history.  Once it has a history people can trust it.

You say:
But your assumption that "they can make a profit by selling 100 crypto-USD for 101 paper-USD" is solely based on the assumption that the exchange rate between crypto-USD and fiat-USD actually IS on average 1:1. So it is a circular argument.
[/quote]

First of all there is a self-reinforcing market dynamic at work here.  I will focus on the underlying dynamic first that is not 'circular'.

There are 2 exchange rates we must consider in all of this.

1) crypto-USD to paper-USD
2) crypto-USD to Bitshare

The short seller is the one who makes a profit by redeeming slightly below face value.  There are many such short sellers and thus they all compete to redeem as close to face value as is profitable.  Why is it profitable, because their value is held in bitshares and they would be able to free 10 bitshares for the "price" of 9 bitshares.   Assume the price of a mango on the market is 10 bitshares, assume someone has is short a crypto-Mango and has it backed by 10 bitshares.   Then they could make money by producing a mango (bought at the local store with USD) provided someone gave them 1 crypto-Mango + 1 bitshare.   

Let me clarify, they could also 'make money' by producing 1 mango in exchange for 1 crytpo-Mango an 1 paper-USD or 1 crypto-Mango and ANYTHING else.  Perhaps they produce a mango with a bite taken out of it in exchange for a full crypto-Mango.   Mango's are neither 'fungible' nor 'divisible' so the example is a bit contrived, but you get the idea.

There are no fundamentals relating the price of cryptoUSD (denominated in shares) to the price of actual USD (denominated in shares).

Say you take x shares and turn them into a cryptoUSD. Now you have a cryptoUSD backed by the discounted present value of txn fee revenue from x shares.

Say you take x shares and hold them. Now you have x shares backed by the discounted present value of txn fee revenue from x shares.

Ignoring liquidity issues, the value of the cryptoUSD could remain constant when denominated in shares. The USD value of a cryptoUSD could go up and down, just like the USD value of a share will go up and down.

You're going to tell me that the cryptoUSD will certainly go up and down in share-denominated price, etc., etc. Why? Suppose no expects it too. Will it still go up and down in price? Isn't complete stability an equilibrium (albeit a useless one)? If so, isn't the entire set of outcomes determined by arbitrary expectations of market participants?

To achieve something functional, you need to
 
a) create an incentive scheme for asset issuers (e.g. reward issuers that create frequently transferred assets) and/or
b) peg your derivatives to something with a physical interpretation (e.g. PoW difficulty).

I suggest you save your money for a well thought out project.

Does one ever get a mango? What I'm reading is your system allows no trust speculation on the value of other currencies against a bitshare, but how does exchange occur? If I understand correctly I have to find someone willing to take bitshares (EDIT: or crypto-mangos) for mangos, not crypto-mangos, correct?

The Bitcoin exchanges provide liquidity and the single point of trust is the only way I can see exchange across currencies to occur. Check out the last posts of JoelKatz (https://bitcointalk.org/index.php?action=profile;u=27870;sa=showPosts) for more on how difficult cross currency exchange is.

You overlooked the critical ingredient that makes this work.  

1) when the crypto-USD is created, it is actually created slightly above market value.  New crypto-USD can only be created when there is no one willing to sell existing crypto-USD at the current crypto-USD to BitShare exchange rate.  

2) all crypto-USD is fungible.  So if you only look at 1 transaction, then what you say is true.  But if the price changes between crypto-USD then the 2nd, 3rd, and 4th depositors will demand more and more BitShares to back the new issuance of crypto-USD such that when each of them receives their crypto-USD in exchange for paper-USD then it would be near parity.   Otherwise they wouldn't buy crypto-USD they would just buy BitShares directly.   The reason they buy crypto-USD instead of bitshares is because they know everyone else who also WANTS a USD denominated crypto-currency will demand that it have near price parity before they would give up paper-USD for crypto-USD.

3) If crypto-USD failed to maintain parity with actual paper-USD then there would be no depositors.  Therefore each and every depositor represents a market force that corrects the ratio of dividends between BitShares and crypto-USD.

Someone who is selling mangos could take payment in 3 forms:  1) $USD   2) BitShares  3) crypto-Mangos.   At the time they accept payment for the real mango all 3 forms must have 'equal value' or they will not sell their mango.   

The difference between selling your Mangos for $USD and BitShares is that BitShares are far more volatile and thus the vendor has exchange risk.   If instead the mango vendor wishes to keep his balance in mangos (so he can get a mango next week) he can ask for a crypto-Mango.  Everyone else who is selling mangos for deposits that they want to maintain parity with mangos would also demand crypto-Mangos and demand that the value of crypto-Mangos at the time of exchange was about equal to a real Mango.   With everyone with a real mango that they want to deposit demanding parity, those that covert BitShares to Crypto-Mangos would have to do so at different rates over time as the price fluctuates.  Thus the depositors are the ones that demand crypto-Mangos have parity (while the price of Mangos is going up).

If the price of mangos fall (hence BitShares are going up) then the value of the dividends (in BitShares) paid to holders of crypto-Mangos goes up.   This means that the shorts who exchanged at the 'old rate' would have an opportunity cost.  They could receive more interest by buying back the crypto-Mangos at the new lower price.  This would serve to close out old short positions (reducing the interest paid on crypto-Mangos) and also causing the value of crypto-Mangos to fall with the value of real Mangos. 

How do they buy-back crypto-Mangos?  They have to provide real mangos to the market.

So is it fair to say this is a system for no-trust speculation on the other commodities as opposed to an exchange?

By exchange I mean a way to put in currency one and get out currency two. The problem you are trying to solve is hard. I think you have arrived at distributed valuation, an interesting, though different problem.

EDIT: For example, for your system to act as part of an exchange:

So instead of having to convert BTC to USD to perceived value of a mango, we can use your system to value a crypto-mango in Bitshares directly by seeing what positions are held in the blockchain.

Added section to white-paper... (a bit redundant to prior replies, but hopefully useful to people here)

I’m still not convinced that crypto-USD will track the value of paper-USD, can you give me any more reasons to trust the value of crypto-USD?

Every depositor who wishes to trade paper-USD for crypto-USD in order to receive interest will demand that the value of crypto-USD at the time of exchange is about the same as paper-USD.  If not they would not accept the trade.   This means that as the price of paper-USD goes up (and therefore BitShares go down) the issuers of crypto-USD will have to do so at ever higher exchange rates to maintain parity.   This increases the interest rate paid on all crypto-USD which makes them interchangeable.  Thus every deposit represents a ‘check-point’ in the crypto-USD price.  Because there is a market/demand for a crypto-USD priced at parity the market will provide it.   After all, the buyers of crypto-USD have paper-USD that the holders of BitShares want.  This covers the case of a rising USD value.  What happens if USD falls?

When USD falls then it means BitShares are going up.  That means the value of the interest paid on crypto-USD is going up and therefore the interest rate (denominated is USD) is going up.  The implication here is that the shorts who created crypto-USD at the old exchange rate would have an opportunity cost by maintaining their short position at the old (higher) exchange rate.  They are foregoing dividends on 10 BitShares used to back their crypto-USD issuance when they could now purchase crypto-USD for 5 BitShares after the price change.  This means they could by a crypto-USD for 5 BitShares and start receiving 10 BitShares of interest.  This market force causes them to close out their short-position even though they bet right, BitShares went up and Crypto-USD went down.

Once you have crypto-USD and crypto-Gold that track the value of Gold and USD then you can trade Crypto Gold and Crypto USD via the blockchain and then withdraw it as Gold or USD.  Thus it is also an exchange.   

I'm missing how that part works.

If crypto-Gold has a market value equal to gold, then you should be able to sell it anywhere for gold or something of equal value.   Thus, you could post an ad on craigslist, visit 'local-bitshares' or exchange with a friend or family member.   

Because it has market value of its own (without depending on any counter-party or IOU) it should allow you to purchase gold.

OK, I was going to respond to your other thread (https://bitcointalk.org/index.php?topic=215716.0) but I'll start here. From what I've gathered from your initial rebuttals of the first skeptics you're proposing to create a synthetic cryptoUSD, cryptoXAU, etc. based on market forces. However assuming there is no central vault or receiver someone buying one of these with real dollars or gold would immediately be paying out to someone selling one. The synthetic chits would not represent real dollars or gold held anywhere, only the expectation (hope) that someone down the line will need to buy them with the real instruments. Is that correct? If not you should provide a narrative of how a hypothetical person would use the system.

For example, I post up an ad on craigslist offering $100 USD to someone who will meet in person and sell me $100 cryptoUSD? Where would these initial cryptoUSD come from if there's no central backer? There seem to be serious flaws to this even beyond the serious flaws Ripple will encounter. I still don't understand enough about Open Transactions to comment on their model but the idea of federated trust entities (reminds me of the hawala system) at least has a real-world model to emulate. I just don't see your system working in the real world without a trusted entity to hold deposits (think gateways in Ripple).

Ok, here's my attempt to collect the 10 BTC bounty.  I am going to flesh out out a large issue in your proposal that I mentioned in my first post and hopefully make you see the problem.  Even if not you, it will make everyone else see it.  Or, if we engage in "design-by-answering-questions" I ask you to consider paying me some small portion of your development bounty.  Because good design is a the most important part of development.  I will publicly acknowledge any receipt of funds so others know you are serious with your bounties. 1CKeoT8vBDQDEpMHz5VAswV39pZJ2GTGYd

The issue is fundamentally "There is no way for USD pricing information to honestly enter the system."  Also, there are several smaller-but-still-critical-issues which I'll designate with [N].  So we'll call the above issue [1].  And in the end you'll see that you end up with a currency that tracks some multiple of BitShares, not USD.

Since you seem to think in examples, here is the problem illustrated by example:

Initial conditions.  1 BitShare = 1 USD,  1000 BitShares mined

Person A creates currency Q, mints 100 Q backs it with (say) 100 BitShares.  So 1 Q is worth 1 USD at this point. Now, the dividends he would be getting for the 100 BitShares are now diverted into paying the owners of the Q.  Right now, that is Person A so the system is in equilibrium.  Money is neither gained or lost by minting a new currency because if Q had not been created, Person A would be getting dividends from BitShares.  Other schemes result in runaway currency creation or a draining of the backing (the value) behind Q [2]. 

Now, BitShares like BitCoin are awesome so in 3 months the price goes to 1 BitShare = 10 USD.  Now those 100 Q, backed by 100 BitShares is nominally worth 10 USD each.  So when somebody bids to buy 100 Q for 100 USD (the original dollar-parity price) nobody is willing to sell for that price.  So the currency is created by someone who offers BitShare backing. 

But how many BitShares is the new currency backed with?  For parity with USD, it must be backed with 10 BitShares.[1]  But who decides that value 10? [4]  No voting scheme works because there is no way the holders of currency Q will agree to that backing level, because they lose money.  Regardless, any voting scheme causes people to vote in their self-interest, NOT to vote in a way that causes Q to track USD. 

Within the system, a trade of BitShares for USD simply looks like a BitShare transfer (the USD portion happens outside the network of course -- it could be physical cash).  Even if you add a field to the transaction to "report" the USD transfer amount, there is no proof that the USD actually changed hands [4].  Or even that BitShares changed hands actually.  It would be easy to transfer BitShares to (another account owned by) yourself with a fake USD amount to drive the reported exchange rate where ever you wanted it to go.


[1] Fiat currency pricing information never enters the system.
[2] runaway currency creation
[3] Proven the short term Q's price follows the backing currency.  Point [3] is that there is nothing else for it to follow...
[4] Bitcoin is based on distrust of all participating parties.  Your system requires some trust or centralization at a minimum to inject fiat pricing into the system, but trust/centralization could also solve [2].


A quote and rebuttal:


Within the example given above (where the backing BitShares are now worth 10x), why would buyers demand near parity?  Just because the name is crypto-USD?  In fact, if they did there would be NO SELLERS (at that price).  Crypto-USD owners would just sit there receiving the same dividend payment (denominated in BitShares), but those same BitShares are actually worth 10x USD.  How can the dividend payment be reduced to force parity with USD?  This requires that USD->BitShare price information be available within the system (and its not).

I appreciate your honest attempt with this post.   If I end up tweaking my design in any significant manner from what I have already discussed as a result of 'bugs' you find in it then I will award a tip proportional to the size of the change.  I have already paid 1 bounty (0.5 BTC) for a logo (though he hasn't yet publicly posted it, I have asked him to). 

Are you willing to back your claims that 'everyone else will see it' with any wager?  It would make this even more fun! 



Getting honest price information is actually a huge and important requirement.  My definition of honest-price information means it cannot be 'calculated' and must always be the result of an intentional trade initiated by a human actor.  All trades imply both parties 'agree' on pricing information and they will only agree if they compare it to everything else in the world they could trade for.  If you can show me a place in my software where I attempt to use an algorithm to 'fix a price' then I will give you a 1 BTC bounty.  I firmly believe that no systems based upon price-fixing (averaging, or otherwise) will work.  (This is why IOU based systems don't in the end... they ultimately attempt to price fix the NOTE with the backed good and the two are never in parity).   


I don't think in examples, I attempt to explain in examples because economic proofs of the austrian variety are based upon Praxeology. http://en.wikipedia.org/wiki/Praxeology    The deductive study of human action based upon the action axiom.   I think on a far more intuitive level (INTJ) that takes time and effort to boil down into something others can take-in.   

That said, I was just about to make a post requesting that people prove to me how logical humans making decisions in their best interest would result in price variance.  So thank you for your example.  I will now proceed to show you where you assume a human actor will make an illogical (unprofitable) choice and as a result debunk your counter example.




You are almost right, but have already missed something critical. Your statement is only true for the very first 'minter'.  What is the reason that Q's are minted in the first place?  Is it not because someone, somewhere, wants a Q == USD?  In order to trade a Q for a paper-USD then Q must be equal to a USD.  If Q were not equal, the minter would be unable to sell the minted Q for a paper-USD.  If the minter is unable to sell Q for USD then they are left with only one option, to redeem it and re-mint it at a proper value.  This would involve transaction costs and therefore a loss.

As a result, the person who decides the price at which new Q is minted for USD is the person looking to sell USD and buy Q.   No voting [4], No algorithm, No pegging, No Price Fixing.  An honest price appraisal as a result of an intentional trade between two people.

The second 'minter' can only mint when the BitShare backing(dividends) is worth more than the new Q that would be issued by the buy-sell spread of Q vs BitShares. Thus, the act of printing the second Q increases the interest rate paid to all holders of Q.  The person buying Q with paper-USD would only do so if they had an expectation that everyone else who also wanted a BitShare-Bond with an interest rate that made Q equal to USD would also demand crypto-Currency Q.   I think we can assume that everyone on this board who wants crypto-USD would be able to come to a consensus and agree that 'Q' is the name of the sub-currency that we will ask for.  Anyone else who wanted Q to be gold would lack consensus and thus the price wouldn't match gold.





There is no need to report anything to the system.  The system does not enforce 'IOUs' except the conversion between BitShares and Q which are entirely within its control.  Reporting of 'prices' is not a valid means of determining price.  Only actual exchanges matter.

I have addressed this before, but I will restate it here again.  In order to 'issue' new currency you must first place a bid to BUY that currency.  If your bid is too high, then it will come from the existing stock.  If your bid is too low, then there would be no takers and issuing against your bid would be doing so at a rate no one else would accept and therefore you would be unable to re-sell your newly minted Q for the price you minted it at.  As a result you only choose to mint Q if you have a buyer (not yourself) already lined up to pay that new price with actual paper-USD.   If you attempt to manipulate the price in the other direction by placing a bid that you hope to issue against.. then your bid will be filled by someone redeeming an existing Q and as a result you would end up covering any existing short position rather than growing your short positions.


 
It enters the system from those who hold USD that will only trade their paper-USD for a bitshare-bond denominated as USD with current market value equal to USD.

No currency is created nor destroyed and no single actor can profitably issue an arbitrary number of Q

Future buyers wishing to purchase a crypto-currency denominated in USD will demand that the price track or they won't sell.

Every exchange made in my system is based upon trading equal value for equal value as judged by both participants in the trade.  Therefore, there is no debt before or after the trade.  All trades are final.  The system is setup such that there is 0 trust and you can assume the most evil individual in the world will be unable to shake the system (manipulate the price) any more than they could manipulate the price in a market of purely physical goods.   


There would be sellers, new issuers! 

I suggest that we turn this this debate into an experiment that anyone can participate in.  I will start a new thread where we will simulate the dynamics of my network and individual actors on this board will attempt to manipulate the price of crypto-USD away from actual USD.  The rules of the game will be such that everyone is attempting to maximize the USD dollar value of their position.  I will come up with a way to manually do the accounting.

Anyone can play the game and if someone devizes a strategy that can 'cheat' the system then they will claim the bounty.  I will use my 10BTC as the initial backing of this 'toy' network.   If you can cheat me out of my backing by following the rules I gave for the network then the bounty will be yours.

Anyone willing to give it a shot?

So I’ve read through most of your posts on this. Let me see if I understand this model.

   IRL-X <-> IRL-market <-> Bitcoin <-> BitShares <-> Bit-market <-> crypto-X

   IRL-market - In real life market (fiats, golds, silvers, mangos...). Includes bitcoin, as its established as of this moment
   IRL-X - That which is in existence (paper fiat, gold, silver, mangos)
   Bit-market - Digital exchange of Bitshares and crypto-X

 1)

So say 25 BitShares (same as bitcoin) are mined in block 1, by a pool A of 25 people. Each person has 1 BitShare now (which may or may not equal 1 bitcoin, this depends on IRL-market). In block 2, 12.5 Bitshares are distributed to among the block 1 shares, and 12.5 is given to a new pool B. Block 3 etc..
   Pool A = 37.5 BitShares or 1.5 BitShares per person | block 3 gives .25 for total of 1.75 per person

   Pool B = 12.5 BitShares or .5 per person | block 3 gives .25 for total of .75 per person

   Pool C = 12.5 BitShares, .5 each
I excluded mining fees, since they seemed negligible: http://blockchain.info/stats

2)

I’m going to ignore the ‘shorting’ because I don’t completely understand it in this Bit-market:

So from User 1A has 1.75 BitShares, looks at IRL-market (say bitcoin = $100, and assuming IRL-market values 1 BTC = 1 BitShare), says “I’m going to issue 10 crypto-X with a 10:1 ratio of 1 BitShares, to which their dividends go towards”, and he finds a buyer of 10 crypto-X for 10 IRL-X and IRL-market.

So what does buyer receive? A dividend address and key? But not the BitShares you said, right? So 10 crypto-X that receives 1 BitShares worth of dividends - 12.5/(Total number of BitShares).
So 1 of the buyers 1A crypto-X is worth = (.10*[12.5/(Total number of BitShares)])

Is that correct? If User 1B issues 10 crypto-X at 9:1, then crypto-X-1A is different than crypto-X-1B, right? Are these differences and histories encoded in the blockchain? Isn’t the crypto-X only similar in value to IRL-X at the time of issue and purchase, and that value is then is set in stone, or at least until User 1A buys it back to un-issue it? Wouldn’t you need to constantly be trading to maintain crypto-X’s similar value to IRL-X?

3)
If this is correct, then what is the point of issuing or calling anything crypto-X (USD, Gold, mangos) when the worth is in BitShares, and BitShares are *supposed* to be valued the same as Bitcoins? Crypto-USD and Crypto-Gold only serve psychological functions, in name and language only. If the main factor for acquiring crypto-X is interest, then why not own the BitShares its determined by, which has more use, liquidity?(-is that the right term)? Changing crypto-X to IRL-X won’t emulate IRL value, but will follow the BitShare fractional dividend tied to it and the BTC price.

4)
It seems like this ‘shorting’, ‘interest rate’ and price parity stuff could work, again I don’t understand it completely in application here. I think you made one or two strong connections and associations with that system to this system of peer exchanges and Bitcoin, however I think you got too excited and made some leaps in logic or other implications, and you are trying to hard to smash them together. I can see this ‘shorting’ and ‘interest rates’ influencing a market, price and being the main factors or incentives, but I don’t see why any crypto-X is worth having. Can’t you make this work with bitcoin and BitShare alone (each of those could be exchange for IRL-X, can’t BitShare’s dividend just add a little value to something already existing?)?

5)
IRL-X <-> IRL-market <-> Bitcoin <-> BitShares <-> Bit-market <-> crypto-X

It seems like you want a complete circle/cylce where crypto-X = IRL-X, but crypto-X = BitShare, and Bitshare ~ Bitcoin; and further Bitcoin ~ IRL-market and IRL-X. It seems such a circle already exists with IRL-X <-> IRL-market <-> Bitcoin (though each step has unique bottlenecks) and Bitshares can fit into this cycle or at least complement it, but  Bit-market <-> crypto-X seems to be an appendage — I don’t see it easily, openly flowing into any other aspects, the use function and travel between seems rigid and complicated for whatever end you are trying to accomplish (forcing crypto-X into existence? easier IRL exchanges of currencies and BTC? digital fluidity?). Unless you somehow peg crypto-X to IRL-X — I have no clue how, making the blockchain obey/enforce IRL prices with outside sources, data? But then that makes it a decentralized exchange with a centralized or regulated factor of price determining it; Bit-market would then be subservient to IRL-market. Also, is this ‘shorting’ occurring completely inside the Bit-market, or is the User/Issuer bouncing between IRL- and Bit-markets?

6)
Too, it doesn’t seem like the power is balanced. When block 4 is mined, Bitshares from block 1 have almost doubled (~1.91 BitShares) by their dividends and represent  ~48% of the BitShare total, and BitShares from block 4 are 0.5 BitShares and only 12% of the BitShare Total. (Assuming the 25 users per pool from above, with each new block being earned by a new pool of new users). How are the Bitshares from later blocks suppose to compete with the earlier blocks?

7)
Finally, is this suppose to be accessible to the average person and user, or just to hardcore financial users? Bitcoin is hard enough to make accessible. If your user aim is the general user, then why rush this project? Early implementation could harm the overall idea and drain your money getting it to work.

I totally acknowledge that I might be wrong and that this whole thing may be over my head, but I technically count as an average user, and it the average user is your aim then perhaps this will help both of us. Overall, I think you should be a little more careful with explaining this concept. You seem to jump between the technical workings and aspects of the system, to multiple economic schools of thought, to psychological reasonings determining behaviour of users, and in between.

This is not about a wager.  This is about me putting a h*ll of a lot of time and effort into understanding your system which, frankly nobody is understanding and everybody seems to be giving up on because it is either not clear or not workable.


Yes, a fact that you have completely failed to address until I brought it up.  If you are going to design-by-question-and-answer please start admitting it.

You have not previously stated anything about price information.  That is my point.  Fiat currency price information is not entering the system.


There IS no trade from the point of view of the system.  There is only "I give you 100 Q".  The fact that you gave me 5 twenties from your pocket for them cannot be encoded honestly into the system.


My example starts with minting at Q==1 USD.  At that point someone wanted Q==1 USD.  But not now.  Now, the holder of Q wants it to diverge from USD and become infinitely valuable so he can buy a private island.   So I missed nothing.  And all subsequent minters want to mint Q for NO backing BitShares at all.  That way the second minter gets the dividends from the backing BitShares put up by the first! 

But if the first minter has any say whether to allow minting, he'll vote NO for any backing less than his original.



Great.  I'm looking to sell USD and buy Q.  So I'll decide the price and buy 1000000Q for USD .01 in BitShares.  Now there are 1000100 Q backed by 100.01 BitShares.  I get 99.999% of the dividends of 100.01 BitShares and paid .09% of the cost. 

This is not trade between 2 people, this is minting new Q!


Ok what you are saying now contradicts or at least limits the above.  So your rule sounds to me like I can't mint unless I offer a little bit more backing then the previous guy (and nobody sells me Q for that).  That is fine, and it means that Q will rise slightly in value relative to BitShares.  Since in my example BitShares has increases 10x relative to USD, Q will now be worth MORE then 10x USD.  So minting cannot bring the price of Q into line with that of USD.

You need to pick one rule or the other.  If you let me mint for less backing, I will print Q to worthlessness.  If you do not let me mint for fewer backing BitShares, Q will never descent to USD parity if BitShares rises relative to USD.  You cannot let me mint for backing USD because USD is not in the system.  You cannot let me mint for a backing of BitShares-equivalent-to-N-USD because BitShare-per-USD pricing information cannot be honestly inputted into the system.

If my description confused you, just note that you said nothing about USD in the above rule.  As I said before, USD pricing information is not entering the system so it CANNOT be part of whatever equation governs Q.  So Q tracks BitShares not USD.



No, I'll bid low and then choose to mint Q at a low price and sit on it for the dividends paid by your minting it at a high price (see example above). 

Now you'll argue that every minting has unique BitShares that back it.  So now we actually have N different currencies that are called the same name.  In other words Q is not "fungible"; it breaks a key property of a currency.  My low-backed Q is not as valuable as your high-backed Q.  Anyway, I'll still choose to mint it at a low price and sell it to some sucker who doesn't know the difference.  This will happen until Q is valueless which is why "fungibility" is an important property.



No it doesn't because the exact price paid in paper-USD cannot be honestly recorded in the transaction.




Start by actually posting how you do the accounting so we can put this to bed once and for all.


Sure...

Just another idea to throw into the mix: it is in fact possible to get fiat data into the system by playing with signed data from an oracle, as described in the documentation about scripts. Of course, that creates a dependency on a trusted third party, but thinking about this may give us new ideas.

This sounds like fun, im in!

One could even make a pretty rudimentary game, perhaps a simple web-app, to simulate your currency...

Im gonna make an attempt here...

So we have already established that there exists a market for USD/Bitshare which is likely to be fairly volatile. So we have USD/Bitshare information. Everyone has it.

No one will buy Q from you if you back it with a tiny amount of Bitshare. The buyer knows how much Bitshare he wants backing his Q.

If you mint and fail to sell, you lose out due to transaction fees etc - you should have just kept hold of your Bitshares.

EDIT:

So this is how the system motivates minters to mint at a lower backing than already exists, but not too low as there will be no buyer available.

Am I on the right track Mr Bytemaster?

That's what my intuition says too. Mind you, it's not impossible to back a crypto-USD with BTC, but doing it without a trusted third party seems to be problematic, and even with a third party there's no getting away from exchange rate risk.

Simulation Game Thread / Rules:

https://bitcointalk.org/index.php?topic=218507.msg2297712#msg2297712

Ok, is Q "fungible" or not?  That is, if I have 1 Q and you have 1 Q and we trade them did end up with the same value?  When you say "...backing his Q."  You are telling me that Q is not fungible.  If it's not fungible, its not a currency... Its a whole bunch of different currencies called the exact same name.  How many Q does a Mango cost? You can't price it because my Q is different then yours.

Ok so if we assume Q is fungible, then the sum of all the backing BitShares must apply evenly to all Q notes.


So if Q is fungible this is what happens:

You mint 100 Q and back by 100 BitShares.  Then I mint 1000000 Q and back them by .01 BitShares.  Now I don't need to sell.  I just sit on my 1000000Q and pull in the dividends coming from the 100.01 backing BitShares.  Your original 100 Q gets you (your ownership/total Q issued) 1/10001 th of the total dividends.  You get almost no dividends.  My 1000000Q gets me 1000000/1000100 (or almost all) of the dividends.

So Q is not a viable currency if the next guy can mint for less then what the previous guy paid.

However, if BitShares rises relative to USD, then to get the price of Q down relative to BitShares (on par with USD) I must mint for less backing.

Therefore Q is either not a viable currency or cannot track USD when BitShares rise relative to USD.

All sub currencies are fungible.  All units of the same currency pay the same number of BitShares per unit of sub-currency.

If User A  mints at 10:1 and User B mints at  5:1 then the resulting dividend will be 15:2.

Can someone mint for themselves? What is to stop Bob from minting 100Q with say $0.0001 worth of Bitshare collateral?

Such that he has now 100Q which are worth $100 and perfectly fungible

Ah, forget it. I'll be productive.

How about you replace your concept with a voting scheme.

Briefly:

1 Bitshare = 1 vote. A vote is binary and moves the price of cryptoUSD up or down by 0.1%. Votes are cast whenever blocks are mined. Blocks are mined by PoS, so each bitshare has an equal probability of mining a block.

"Why don't the voters lie?" = "Why doesn't paypal re-denominate paypalUSD?"

Bitshares are ownership stakes in bitPaypal. Bitshares/bitpaypal will only retain value if people tell the truth.

Bytemaster: RE: Simulation :

1. "minting" currency is not defined in your game rules.

2. In fact again the actual rules of the BitShare system is not defined.  Your "rules" just define how we issue buy sell orders.

3. Choosing Mt. Gox exchange rate is just going to delay and obfuscate the situation.  Its theoretically (and practically when you look at crypto currencies) possible for the exchange rate to vary by 90% in weeks.  But I don't want to play this game for an entire year just to prove a point.  And just to remind you, the point was NOT to make money, but to prove that crypto-USD does not track USD relative to BitShares.

Please respond to my prior posting.  You have offered the 10BTC bounty.  Now you are changing the rules AGAIN, with this endless game.

 

I'd like to play this game. Shouldn't we start an 'Market' thread to keep this 'Theory' thread and the 'Blockchain' neat?


Agree with this; the 10BTC bounty should stay here. Its still ultimately up to OP if he isn't convinced.

Exactly. QED.  bytemaster, please send the bounty to: 1CKeoT8vBDQDEpMHz5VAswV39pZJ2GTGYd.  Remember, I'm saving you 20000 bucks.

Edit: But if I have to sign me up for the game.  I'll take every currency anyone creates, instantly mint 100000000000000 units (or whatever the maximum currency units are) for 1 bitshare (or whatever the minimum is), therefore reducing the currency's value to essentially 0.  These currencies will never track USD.   And as a bonus, if I'm the only one doing the above, I'll get all the dividends.

Ok.  The primary problem we have here is me properly communicating what the rules of the new blockchain are.  The purpose of the game is to teach you all the rules of the chain.  As we play the game and walk through each transaction you will discover what you can and cannot do.   This isn't me changing the rules, it is me revealing them to you. 

This should be acceptable to everyone because I am the one risking real money, while you are the student attempting to understand. 

The only requirement of my 'rules' is that they can be defined / implemented in a block chain and do not depend on arbitrary 'outside' information.

If in the process of playing the game the rules are revealed to work, then we all win and we can get on with building Bitshares.   If in the process of playing the game I am unable to define a set of 'instructions' that the blockchain/computer could follow and maintain near parity then you will win.

If you are concerned about 'design-by-question' and want 'paid' for helping to design a working system then I cannot help you out.  If I am wasting your time discussing an unworkable system then you will win the bounty.  If by working together we can refine my ideas into something that is workable then we all win and you can get paid for your time by the existence of a revolutionary new system that you can be an early adopter of.  Win/Win for you and me.   

 

This violates the rules of the chain.  While you can choose to issue shares at what ever exchange rate /quantity you like, you can only do so in response to an open bid confirmed in the prior block.

I open the bid of course (I've said this several times).  If you don't allow me to open the bid and mint the coin from the same account,  I simply do it from 2 separate accounts that I control.  So if nobody fills my bid, I do so from my other account.  If someone else fills my bid even better.  Either way crypto-USD is devalued to 0.

I am offering the game as a means of proving to everyone definitively whether it works AND to make wining this bounty less 'subjective' and instead based upon a somewhat experimental result.    Clearly, you all are having a hard time convincing me and I am having a hard time convincing you... therefore debating is actually not helping either of us reach the desired goal (winning the bounty or winning support for the idea).   So in all fairness, I am not changing the rules (the rule is you have to convince me), but instead offering you a fool-proof way of convincing me.  Thus entirely in the spirit of this bounty.

Correct, you can open the bid and issue from the same account *but* there is a 1 block delay between you placing your bid and it being filled.

Secondly, only the highest bid can be filled.  You can *not* arbitrary decide to fill a lower bid.  The highest bid can be derived from the block-chain history.

You sound like you are making this up as you go along.  The bandwidth limitation of 1 "minting" per block will render the currency useless for nontrivial economic activity.  That would be like only one mortgage can be closed per day (or every 10 minutes, whatever it does not scale) across the entire USA.

Regardless, I keep my bid there until I can fill it.  It costs me nothing.  So people who want to keep the price of crypto-USD high have to keep issuing "fake" bids.  "Fake" meaning they don't want the crypto-USD but have to bid for it to lock me out.  If they forget to do so once, my bid is filled with minted coins so the currency becomes worthless.  Nobody would hold money in a system that is one filled bid away from destruction like that.

And even if they never forget to issue a fake bid, these actions will actually slowly mint new crypto-USD currency, thus devaluing it.  Ergo, it STILL is not tracking USD.

I will create a market thread for the game, that is a good idea.

I am open to suggestions on how we can establish the changes in the exchange rate.  After each transaction is 'committed' you get to pick a direction +5% or -5%.    However, you only get to pick the direction again after 5 other players have had an opportunity to pick the direction.   Therefore, you all can conspire to work together or defect and attempt to move it in different directions.     My only concern is that if we pick something that doesn't accurately reflect real market behavior then we may need to refine this aspect of the experiment.

I truly apologize for sounding that way, but I started this thread with an inspiration that I felt could work and I had the major parts figured out.  Minor details are being filled in as we go.   

While minting can only occur once per-currency every block, trading among existing crypto-USD holders can occur with as many transactions as will fit in a block.  Furthermore, I have stated repeatedly that the blockchain trading is designed for low-frequency trading and high-frequency trading would have to occur 'off-chain'.    If I need to tweak the block-chain rules to use 5 minute blocks instead of 10 minute blocks to improve this a bit, then I do not think that would change the fundamentals of the system. 

When matching a accept transaction to a bid transaction, the transaction that pays the highest transaction fee wins the 'race'. 

Let me clarify one more time what the purpose of this bounty was:  I wanted to discover the small little detail that I missed that is 'unresolvable'.   I placed the bounty because I believed that any 'details' that remained could easily be 'resolvable' and result in a system that still produced about the same result. 

This is supposed to be a fun, exploratory process for everyone involved.  The reward for figuring out how to build a system with the properties I described are huge for all of us.   If you want "all of the details now" the best way I know to explore this is the game.

Yes, but now we are discussing whether I can destroy the currency.  I think I have proven in my previous postings that it will not track USD which is the original issue.

Additionally, to repeat myself, nobody will trust a system that if ever there are no reasonable bids, my unreasonable bid that renders the currency worthless gets minted.  Every 5 minutes 24x7 I have a chance to "win". 

If the currency got any interest at all, what would happen is a type of ponzi scheme -- not a rising one, but an exponentially increasing death.  This would happen because people might bid higher then my "infinite" bid, but lower then the original minter's backing.  The highest of those would get minted if the original minter does not sell at a loss.  Or if the original minter sells at a loss, the value of the currency is reduced.  Rinse and repeat and you have a slowly descending currency value.  But at some point all holders would realize what's going on and sell at any price, wiping all the bids from the books and then my "infinite" bid would get filled.

This is why Bitcoin has a limited number of coins.

If you limit the number of coins, OR limit the velocity of coin creation, you would possibly have a viable currency, but then you cannot track USD because you cannot print enough to match helicopter Ben!!! :-)  And that STILL assumes you have an "oracle" that knows how much should be printed...


I am sorry if you now regret placing the bounty & I do think that your idea of a dividend is quite interesting and creative.  But when I examined it in depth and for many hours it turns out there are unresolvable issues.   

You offered to pay for a critical examination and now you have gotten one.  Its time to be the man and pay up or duck and take your scammer tag.   I have worked hard to understand your system.

But life is not entirely over.  It may be possible to add dividend payments to help "debounce" a USD tracking currency.  But it is fundamentally (at a minimum) going to require a trusted source -- an "oracle" as people call it that reports USD to BitShare exchange prices, and minting/price limits based this oracle.  If done properly, this would be "better" than a crypto-currency backed by $ in a vault because if the oracle is shut off, at least the currency retains its last value and simply diverges from USD.  Whereas a vault backed currency means you could open the vault and see nothing inside.

The Zerg,  I truly appreciate your efforts here, but I am not going to pay the bounty AND continue to invest time and money into this idea.   If and when you can prove that I have abandoned this idea and I have not explained my reason for abandoning the idea nor awarded the bounty to anyone, then you can call me a scammer.

You have not understood my idea because what you keep saying back is not what I am actually suggesting.  This is why I am offering the game.   However, I do not want this discussion to turn into a back and forth debate about my integrity.  If you think I am a scammer, then just sit back and watch the game play out and don't invest any more time.  Otherwise, lets have some fun and discover something great! 

I am putting a lot of time and effort (and money) into teaching the details of my idea.  It is very hard to do in writing, so if you would like to talk over skype then I would welcome that.

This is extremely interesting. Somebody is going to figure out the best way to get a stabilized decentralized currency which tracks external values like USD and gold, and that person and their investors will be very, very rich.

bytemaster, I also wrote a whitepaper with another way to do this (see my signature). I think you might find it interesting. If you see anything there which you like, feel free to steal it.

You are the first person I have seen offering to collect bitcoins now to fund future development of a cool new protocol like a kickstarter project, with backers getting a cut of the new protocol. I wish more people would do that - its a great way to invest in innovation!

As it stands, I would probably be a small investor, just to see where this goes. Like many others here, I am skeptical that your price discovery model will work, but I don't see many opportunities to invest in this space, so I am hopeful that if your idea doesn't work, you will evolve it into something which does work.

If you wanted me (and perhaps others) to be a major investor, your proposal would have to be amended as follows:

• Build on top of bitcoin as a new protocol layer rather than starting your own alt-chain
• Do price discovery by having multiple data sources who publish a "ticker" into the block-chain. Crypto-USD holders then vote on which ticker (or group of tickers) they are using

I look forward to seeing what comes of this.

Points:
1. The strategy detailed above to wipe the value of the crypto-USD is ironclad.  
2. And so it the point that nobody would trust a currency where if the bottom bid got filled it would zero the currency value.
3. And the observation that paper USD price information never enters the system so therefore no currency can track it has been simply ignored by you.

You know I originally started looking into this to possibly help implement it.  But continued posting instead of just disappearing to save you your $20000 and earn the bounty just like you said here:


This is exactly what I have done.  I have shown how the system as originally formulated would fail.   I have spent significant time thinking and writing about BitShares and seemingly convinced everybody but you about the faults with the BitShares system.  You are clearly no longer ready to pay 20k for an implementation so you changed the title of your thread from: "Help Wanted $20,000+ Job creating Distributed Blockchain-based Exchange" to "BitShare Economic Theory and 10 BTC Bounty to prove it wrong."  So I guess I have essentially "convinced you to drop your current idea".  Now you have started simulations to see the failure modes I described occur and figure out some fix.  But even if you find a fix, I still fulfilled the bounty.

You are no spring chicken here.  You should know that posting a 10BTC bounty for one thing and then transmuting that offer (after I posted a winning strategy) into paying the winner of a simulation is going to get you a scammer tag.  And double-shame on you since as a 2010 registrant those 10 BTC may have cost you almost nothing.

But at the same time I think your heart is in the right place.  Like Mathew Wright, you just don't understand the value of other people's time.  That is why, as you yourself admitted, nobody was paying attention to your idea until you offered the bounty/ implementation.

So prove you value other's time and that we can take you at your word.



EDIT: thread readers help me out here... did I convince you the crypto-USD could not track USD and that it is in the a person's interest to devalue it by minting millions of coins?

I am going to make another attempt at proof that does not rely upon 'examples'.  

The first thing I will do is clear up any idea of 'backing' or 'collateral' and instead we will do some comparisons based solely on revenue streams.

Given two revenue streams, one that pays 2 BTC / year and one that pays 4 BTC / year, how much more valuable is one stream than another? Regardless of the price volatility of BTC one revenue stream will always be twice as valuable as the other revenue stream.

When you combine 2 bitshares to create 1 crypto-Q (cQ) you are really creating a new revenue stream cQ that will always be worth 2x the value of 1 BS.

If you combine another 4 bitshares to create a second cQ the value of all cQ will now equal 3 BS.  

Now all I need to do is insure that the variance in the revenue stream of crypto-Q vs BS tracks the variance in the real world price between BS and Q.

So I create a '0-sum' game between BS and Q.   To create crypto-Q you must give up current market value of Q in BS.   To buy Q with crypto-Q requires they have the same value.  Therefore, as long everyone is buying crypto-Q with Q (and no one is selling crypto-Q), the price of crypto-Q must, by necessity, follow the price of Q up or down. If it didn't the creators of new crypto-Q would be unable to buy Q with it or they would be paying more than they need to.

Now what happens if we reverse the process and only have sellers of crypto-Q.  Who are the buyers?  The only buyers at this point would be the 'shorts' because there is no one else in the market.  How much would the shorts be willing to pay?  They would be willing to pay anything below their creation costs and still make a profit. The more below the creation costs the greater the profit.     But the shorts are competing against one another for this profit opportunity and who ever was willing to accept the least profit would win.  So, how does a short buy crypto-Q?  They must provide the seller of crypto-Q with Q.   So all of the shorts compete to provide Q to the seller of crypto-Q at the highest price possible (lowest profit possible).  

The key to making the above relationship between shorts-and-longs track the actual market value is to ensure that all of the shorts maintain a cost basis as close to the current value of Q as possible.    This means we want a market force that causes someone who is short crytpo-Q at 10 BS to close out their position long before crypto-Q falls to 5 BS.  If the short didn't close out their cost basis at 5 BS then in theory the last seller of crytpo-Q would only get 50% of face value and that would be a failure of the system.    

Fortunately, there is another market force at work.  The individual short of Crypto-Q at 10 BS is paying is paying 2x as much interest to the holders of crypto-Q as the shorts with a 5 BS cost basis.  Therefore, the short who was short at 10 BS will cover his position and potentially go short again closer to 5BS and in the process make a profit by freeing 5 of his 10 BS from being mortgaged.

What drives price parity while the value of Q is rising and the value of BS is falling is the demand of depositors to receive equal value.
What drives price parity while the value of Q is falling and the value of BS is rising is shorts competing to buy BS (which is appreciating) at a discount.

I think I have given many, many examples of how the price stabilizes.  I would like to see one example that causes the price to not follow parity assuming:

1) No buyer accepts crypto-Q in exchange for Q unless it has equal value.
2) No one can short new crypto-Q so long as there is someone with existing crypto-Q willing to sell at that price.
3) There is a large market for crypto-Q with many competing shorts, buyers, and sellers.
4) All parties are profit seeking / maximizing.  

Lets construct one trade sequence at a time... and demonstrate the instability.  So far all I see is a lot of handwaving and straw-man that violate the rules of the blockchain.  Lets stick to the rules.  Propose a sequence of transactions that you would execute and if they conform to the rules of the blockchain and yet result in easy manipulation by a single party then it clearly will not work.  

The worst-conceivable-outcome that I can contrive involves the complete disappearance of all depositors seeking crypto-Q paying interest.   In this event, the value of crypto-Q gradually falls until the very last crypto-Q reaches parity with the short-issuer with the lowest basis.   But this outcome is so out-there that I cannot conceive of a single reason why all of a sudden no one would care about getting a high-yield crypto-Q revenue?   I need to see what would drive all depositors away when they could get crypto-Q at a discount?    If you told me I could get $100 of bank credit for a $90 deposit, I would jump on it.  As the price fell further more and more people would jump on it until the price reached parity.  
 



  

dacoinminster:   thanks for your encouragement. 

I would recommend you reconsider your 2nd requirement: not have accurate 'prices' via averaging, voting, or any other means of calculating them.  All prices must be derived from an intentional decision of two people to trade.   If you did have a 'ticker' someplace, then that ticker would have to be sourced from somewhere based on real trades (not reported trades).   Unless there is an active 'auction to the highest bidder' then prices can be easily manipulated.  Therefore, I do not see how a decentralized trading system could depend upon a centralized datasource producing real, verifiable trades that occur at auction.

Someone earlier mentioned that something that could build on top of bitcoin would 'outstrip' other currencies.  Presumably because of the network-effects of bitcoin and brand-loyalty. 

If I wanted to build on top of bitcoin without breaking backward "compatibility" it would be almost impossible.  You would need to add new types of scripts that older clients do not support.    You would end up needing to post 'colateral' in bitcoin and that collateral may be insufficient.  You would end up with 'escrow' services and 'counter parties'.    The closest thing I could think of would be something along the lines of my version 1.0 proposal:

1) someone could post  2x the bitcoin collateral to issue a 'colored' coin.  A certain amount of that collateral would be paid out to the holder of the colored coin over time.   The problem is that you are price-fixing both the margin requirements and the term length.  If you don't standardize on those two things then the colored coins wouldn't be fungible.

I really think that there is nothing wrong with creating a new chain as a means of moving forward, especially if the API was 99% compatible.  Value is easily transferred from one chain to the other and you would have just as smooth an upgrade path.   Sure the miners may not like it if they have a lot invested that isn't transferrable, but that is just the nature of markets.   

I already mentioned this problem some time ago ... but apparently the rules are such that this is not possible because minting can only be done when no-one else is trying to sell Q.  Thus if we have a market and Q has any value at all (some bid offers) basically never.  This is what's my current problem with the proposed system.  And yes, I also do agree that I *still* haven't really understood all the rules; also the whitepaper doesn't clearly define every detail as I think a proper definition should.  (But maybe as a mathematician I have different assumptions on what a "definition" should be than other people.)

The mechanics of what you're trying to do are completely over my head, but Austrian economics is most definitely not.

For this comment alone, I'm watching this carefully. (and hopefully I'll learn something useful to both of us along the way!)

When I was a kid, we called it "saving", and those who did it did better at life.

Isn't this the case also for all real-life currencies.
So I think you haven't presented a proof that the idea will not work.

First of all I would like to thank everyone who has contributed to this thread.   I think we can all agree that the 'ideal' solution to the exchange issue is to the ability to create any crypto-currency that will track anything else and has value in and of itself.   The complete lack of counter-party risk makes my ideas an order of magnitude above all other known approaches... if they can work.   

Clearly there are some doubts and that is good and healthy.  I have provided a lot of explanations based upon sound austrian economics of how prices would stay in parity.  All that remains is understanding 'hacking' attempts.

Can one person change the value of crypto-USD, profitably?

So lets see if we can classify the proposed attack vectors:

1) Someone gets the wild-idea that they want to hijack crypto-USD and completely debase it by issuing more and more crypto-USD backed by less and less BS.   If this were possible, then anyone who bought crypto-USD would lose a lot of money.  So lets step through this attack:

       Assume the initial price of 1 crypto-USD is 100 BitShares and that equals parity.
       The attacker says:  Hey, I want to buy 1 crypto-USD for 1 BitShare.
       There are no takers, so the attacker issues 1 crypto-USD for 1 BitShare and keeps the crypto-USD for himself.

       At this point crypto-USD will be paying a revenue stream 50% of what it use to pay.   The attacker is making money because it only cost them 1 BitShare to gain a revenue stream of about 50 BitShares.   At this point crypto-USD is already entirely debased and it would appear that you found a potential weakness.

Lets see if this weakness is entirely intractable and without any defenses that could be implemented in a blockchain or by market participants.
       
        a) For this attack to be successful there has to be 0 demand or no open bids at all for a crypto-USD based currency
               * implication here is that crypto-USD is already worthless, and that after the attacker completed the transaction, he would be unable to cover except at
                  a reduced evaluation.
               * when the attacker did decide to cover his short position then instantly crypto-USD would be back to its old value.
        b) Therefore, this attack could only occur in a very thin market long before crypto-USD was established as 'crypto-USD'.
        c) Any market-participant interested in 'defending' the crypto-USD valuation would have bids placed at or near 100 BitShares.
               * they would know that they could make money if they could buy crypto-USD for 99 BitShares... just like the attacker was attempting to buy for 1 BitShare.
               * All 'attackers' would be competing against one another to 'debase' the crypto-USD and make a profit, but only the 'attacker' who
                  debased it the least could 'win' any given bid.
               * Only one such attack attempt could occur every 10 minutes due to the requirement that new issuance can only occur in response to the highest open bid in the block-chain.
         d) The real backing behind crypto-USD is everyone in the market who wants a crypto-USD at parity to USD.  If there is a known exchange rate of  $100 paper-USD per BitShare then those who want to buy a crypto-USD would buy it at any price up to 100 BS.   Therefore, so long as there is demand for paper-USD there will be bids to buy it at or near the current exchange rate.  Only if the value of paper-USD fell would it be possible to 'debase' crypto-USD and in that case the debasement is proving my theory that the price will follow the market value of paper-USD.
          e) I would argue (but cannot prove) that the demand to buy crypto-USD would be higher than the demand to buy BitShares simply because of the exchange risk of owning BitShares.  So it *might* be rational for someone to bid 101 paper-USD to buy 1 crypto-USD.   This would create market forces that would entirely destroy the potential for your attack.

In conclusion, I hope I have identified and debunked the potential for such an attack as being both unrealistic and something that could only happen in what I will call a SIDS (Sudden Infant Death Syndrom) attack on a new crypto-USD.   

So how would the market protect against SIDS?   As a BS holder, I want to see their value go up.  I also know there is a market of people who would buy crypto-USD at a premium from me if crypto-USD were 'stable' and tracked the market.   As a result my self and other BS holders who understand the same logic would back the crypto-USD exchange rate near parity with our own BS.  It wouldn't cost us much, if anything because we are really investors in BS and crypto-USD is just another form of BS.   As a result the initial 'creators' of crypto-USD would never let it go no-bid early on.   Once crypto-USD had gained some traction and a history then it would be 'grown up' and the market would take care of itself.

I don't think you've done that at all. I was attracted by your initial argument that a real interest rate differential would drive the exchange rate to parity, but on closer inspection I don't think the argument is valid. A pity, because it would have been great if it had worked. Your other arguments sound like hand-waving, circular reasoning, and wishful thinking to me. I'm still open to persuasion, but I'm pessimistic now. It really looks as if there is no reliable way to get fiat data into the system.


I'm not even interested in the hacking argument. It looks as if you no longer even have a prima facie case.

Ok, so now you have a new argument:  namely that there is no way for fiat data to enter the system.  By fiat data do you mean price information?  The exchange rate between crypto-USD and BS is clearly valid in the system... what is not 'in the software' is the exchange rate between BS and paper-USD or crypto-USD and paper-USD.    So are you suggesting that the software needs to know those exchange rates?  Why?

It's not a new argument, both Thezerg and I have mentioned it before. I can see the exchange system between Q and BS establishes prices, but not how it gives reliable information about USD vs BS. You started with an ingenious and superficially attractive argument about interest rate differentials, but unfortunately it appeared not to survive closer scrutiny. The rules of the system were unclear, and despite ongoing tweaks you have not persuaded me exchange rate parity is at all likely. In fact, it now seems positively unlikely to me, much as I would want it to be otherwise. Mere reputation doesn't appear to do the trick, and the exchange system doesn't give reliable data about the price of USD vs BS, it gives information between Q and BS, which unfortunately need not be the same thing.

I don't think you're ready to give up on it yet, and that's fine, but it now does look to me as if you're wasting your time. Other interesting tricks may be possible with your idea for interest rates, but crypto-USD doesn't appear to be one of them.

Here is the biggest challenge I see so far, without something like Mt. Gox how does one establish paper-USD vs BS from which all other prices are derived.   It would appear that initially the price discover of paper-USD vs BS would be OTC and thus have wide-spreads and some liquidity challenges (like early bitcoin days).   But gradually the value of BS would become known my market participants even without a Mt. Gox.

Clearly this 'value' would not be in the software, it would exist outside the software on other (less efficient) decentralized exchanges or even perhaps on a (more efficient) centralized exchange.  

Once this 'price' is known then the BS client would probably have a table that looks like this:

BS      10%
GLD    100%
SLV     3%
USD    0.1%

Those who hold BS would move it to the highest yield sub-currency after factoring in exchange risk.  Those who held BS and wanted to sell would have an easier time if they first converted it into a form that was more 'marketable' because it was less volatile.

The only price information the user needs to provide would be the price of BS in $USD (in that user's perspective).  So the user enters:   $100 BS per USD.

The software then displays the prices:

BS    $100
GLD  $1000
SLV   $30
USD   $1

Given that information the user can trade between GLD, SLV and USD.  

So all that remains is to tie the client to a public 'ticker' the user trusts.   This ticker would not be used by the blockchain, but instead to allow the user to see prices in terms of $USD or EUR or any other currency instead of expressed as percentage rates of return.

Sorry I don't really understand this argument. There would be a market for buying and selling BS just like there is a market for Bitcoin.

You would go to MtGox or BitStamp or whatever and you would get your price information for BS just like you do for BTC.

Sure, there would be a USD price for BS, and a USD price for Q. There would also be a BS price for Q, and arbitrage would make sure the three were in equilibrium. But there appears to be no convincing mechanism to make sure the USD price for Q would track the USD.

greBit gets it!   Thanks for helping to explain / defend the approach!

So the focus should be on disproving this point in a concise manner to convince the OP (+ other interested parties :) ) to stop wasting their time on an unworkable idea

Start with "Q would not track USD because ..."

Well, the argument would really have to come from the other side, since there is no compelling reason to believe otherwise in the absence of an argument. Why would one asset class track another in the absence of a causal link? And why wouldn't it track the EUR instead? The fact that bytemaster has radically changed his system without abandoning his belief he can make Q track the USD should give you (and him) pause. I want this to work too, but will power alone isn't going to make it work.

But I already gave my argument: no fiat data can reliably enter the system, or so it seems to me.

Well look at the title of the thread. The onus is on someone convincing the OP that his idea his unworkable. This thread is for getting the 10BTC bounty


That argument, although it may satisfy you, is pretty lacking and will not earn you a bounty in any case :)

I'm not in it for the bounty.

The idea of a decentralized Cryptofiatexchange is out of the box thinking we need to further advance the widespread use of cryptocurrency.

 Bytemaster's  thread is a modern example of what pioneer inventors (Thomas Edison,Leo Baekeland, Salvador Luria,Alexander Graham Bell, Hiram Maxim, David Bohm, Lars Onsager,Satoshi Nakamoto etc etc) must have endured.

As I am not a coder, mathematician or have a degree in economics, all I can offer is my support via donation. Is there an address to send payment for investment?

The only thing constant in life is change

Cheers

This has been stated several times, but it is not true. You underestimate the psychology of all market participants. Actually fiat data could enter the system through all parties which are trading between real USD, bitshares and crypto-USD.

Here is an illustration of how it might work, just by psychology:
Let's compare it to bitcoins. The supply of bitcoins is exactly determined. Therefore the bitcoin-USD exchange rate is very volatile because the demand is always changing according to good or bad news about bitcoins.
In contrast, now lets look at the supply of crypto-USD. The supply is floating and constantly changing according to the decisions of all market-participants (going short or long).
Nobody so far has stated exactly if the exchange rate will definitely go up or go down. So nobody knows exactly if it will go up or down. Therefore we could assume the following:
A) 40% of all market-participants think the exhange rate between crypto-USD to fiat-USD will go up
B) 40% of all market-participants think the exhange rate between crypto-USD to fiat-USD will go down
C) 20% believe that the concept of bitshares will work and therefore they think that crypto-USD will track fiat-USD

So 40% will go long, 40% will go short and 20% will go short or long depending on if the price is below or above parity.
Therefore the 20% of all market participants are enough to drive the market to parity.

Egad Brain!   That is a wonderful insight and explanation!  So can we go take over the world now?

The proponents seem to think that it would follow USD simply because people want it to.  LOL!  See below



Let's stop right there.  Right at "you must".  Who enforces that?

And in fact if your crypto-Q really worked it should be able to start at any backing (value) and be pulled towards the valuation of Q in BS.

I think you want to research control algorithms.  Look up "PID" proportional-integral-derivative control. 



As I've shown in my examples and was shown in the first round of the game, there is NO first force.  Nobody will buy crypto-Q above the average BS backing of the original buyers.  There is only the 2nd force which will cause crypto-Q to slowly fall to zero.  Owners of crypto-Q cannot stop this fall, because of the "minting" rule.  The minting rule was that if the top bid is not filled, it is "minted".


How come you are the only one who does not understand this obvious strategy?  It is even WORSE with lots of buyers.  They just offer bids with a lot of volume but always with less backing then current owners.  If the current owners sell, they are selling at a loss.  If they do not sell, the currency is minted at the lower backing, so the buyer gets some of the dividends from your backing.  Next iteration someone does the same thing AGAIN.  The only thing stopping this process is if ALL the buyers run out of BitShares which is why it works better if there are lots of buyers.

But in fact the strategy is so easy to use (now that I discovered it) that nobody would touch crypto-Q with a 10 foot pole.  Because as soon as they buy some, they'd lose $ to a lower bid in the next round.



Exactly, and I asked this of you 4 days ago:

But you still don't "get" it.  Which is that the information must enter the system in a way that is provably honest even with dishonest participants.  Or just give up and use an "Oracle" -- an exchange like Gox or 1 million of them ARE "oracles" if they simply "report" how much fiat Q was paid to buy/sell X BitShares.

And I asked this:
And so now you've moved to a system where anyone can mint a currency.
And this:
Which has turned out to be a critical Achilles heel of the entire system (see above).

And here's the point we are debating now.  And in fact, the dividend system does NOT apply any control algorithm to drive the price of crypto-Q toward Q.  As I showed above (and several other times), it simply drives the price down.



That's it right there.  It is NEVER known.  Because anyone holding crypto-Q wants to lie and trick crypto-Q to rise relative to Q.  And anyone not holding crypto-Q wants to trick crypto-Q to fall relative to Q (so they can buy it cheap).  And finally, any "disinterested" party is by definition an "oracle" and additionally its impossible to prove that they are truly "disinterested" and haven't bought crypto-Q on the sly.



Yup that's it that's "ALL" that remains, LOL!  But not an "oracle" that the "user" trusts -- its got to be one the entire network trusts.  You'll understand once you learn about PID control algorithms and apply them to your dividend in order to actually force the price of crypto-Q towards the price of Q.  In order to do that, the network as a whole needs to agree on a particular dividend rate for every moment in time.  To pick this rate, it needs to apply a PID control algorithm with the following inputs: crypto-Q per BS over time, and Q per BS over time. 

You cannot report Q per BS without an oracle because Q is a fiat currency that is completely external to the network.



The sad truth of the matter is we're doing all the work, first off by refining the idea to the point where it is actually understandable to the majority from a vague set of "for instances".  And second by pointing out the flaws.  And we were seduced by a carrot of 20k for dev and when that wasn't enough to garner interest 10btc to prove the flaws.  Which we've done time and time again.

We've refined the rules to the system to the point where they succeed except for a single data point -- the value of Q in BS.  Its obvious. 

You can't drive a car blindfolded.  You can't execute a control algorithm if you don't know the target price.


I'm going to give bytemaster a few days to understand these concepts and play his simulation, etc.  But after that, payment or scammer tag.

Even though his heart was in the right place we can't let people promise bounties and not pay if we want to keep this forum even vaguely a marketplace.  I'm sorry that the result is not what was wanted.  I would also have preferred to be implementing a FOSS system with the properties that bytemaster originally claimed.  But that is unfortunately not reality.

I hope you readers will support me on this (by affirming that BitShares has been proven unworkable) when/if a determination needs to be made by theymos.

Well, crypto-Q doesn't become crypto-USD unless someone is willing to trade paper-USD for crypto-Q.  Therefore, the original creator of Q created something other than crypto-USD.

Ok you just made a claim: there is no first force.  You did not prove it. 

So there are now two ways you can respond:  prove the force doesn't exist *or* prove that even if it did exist it still wouldn't work.

Well, I don't care about either the $20k or the 10 BTC, I was attracted to this because it would be revolutionary if it worked, and at first it looked superficially as if it might.


I'd caution against this. I agree bytemaster's heart is in the right place, and we never really did establish the rules of the game, put money into escrow etc. Personally, I had no reason for that, because the money wasn't the reason I participated. We might all draw another lesson from this: if you intend you collect a bounty, make sure you set up the rules first and make sure you set up an arbitrator first.

I hope bytemaster will give up after trying to get it to work for a few more days. I hope he and others aren't going to learn the hard way that this won't work. If they do succeed, the more power to them, but as Elon Musk puts it: I'm not sure success is even a possible outcome. I think bytemaster has valuable contributions to make, but it seems to me this isn't one of them. His earlier idea for a Bitcoin-financed Tor-like P2P network looks a lot more valuable to me.

I will also take it upon myself to *prove* that it does exist:  

Suppose you hold Bitcoins, you believe in Bitcoins, but you  *REALLY* need some paper-USD today.   You are terrified of selling your Bitcoins because it could double tomorrow.   So instead, you borrow against your bitcoins at the current exchange rate ... or perhaps even at a premium... so that you can convince someone to give you paper-USD today.    When the value of Bitoins double then you will be able to cover your short position with half the BS used to create it and you be very happy.    If the value of Bitcoins falls... then you will be unable to cover your position and will be in the same boat as if you had simply sold your Bitcoins... except... that if it ever does rise again you can still see that profit and so your position isn't a complete loss.

If someone would like to arbitrate this bounty via Judge.me then I will gladly accept to arbitrate it.    If you feel the terms of the bounty are too vague and subjective or lacking in an objective basis by which it may be collected, then I will work with anyone to define an objective basis.    Here is my proposed objective basis.   If I do not produce an implementation of BitShares within 1 year then we can conclude that I decided not to invest in it.   If I can produce receipts, documentation of time, that show I am still actively working on it and investing money then we can conclude I was not convinced and was still investing in it.    We have the fact that if it is *unworkable* I will be losing money by investing in it, so I have no financial incentive to lie about being convinced *or* to take a position that I will ignore logic in order to avoid paying the bounty. 

So, anyone who is only in this for the bounty and would like a signed, objective, contract disputable via Judge.me then please send me a PM and we can discuss the terms.   

For everyone else who either trusts me or is in this for reasons other than the bounty continue as always.

Honestly me too.  Rather then just disappear once I realized it would not work, I stuck around and posted again and again and again after everyone but bytemaster was convinced.  Beating my head against this wall.  I did THAT for the 10BTC


Maybe, but that is not how this forum system works today... there are countless examples of promises without escrow made that end up getting scammer tags.  And I believe in the way it works today.  If it worked your way (i.e. I can post any promises and don't need to fill them unless some higher authority enforces it) it would definitely undermine the philosophy of the libertarian readers of this forum.  And render subject lines like: [Bounty 10 BTC: XXXX] useless.

Just for the record, I am not the only one who is unconvinced by your argument.   Will everyone who thinks this could still work please affirm their belief that it hasn't been proven unworkable.

1) I didn't post this anonymously.
2) I have offered objective means of discerning whether or not I am a scammer
3) I am as libertarian / anarchist as they come (haven't met anyone more so)
4) Not having escrow is not undermining the forum... I have already paid out bounties related to this project and I am clearly investing a ton of time and energy attempting to produce something that if it works would be AMAZING.   
5) The purpose of the bounty was to show that I am serious, the value of the bounty depends upon your trust in my ability to be convinced and integrity to pay out.  This value is different for everyone and may be 0 for some.
6) I have offered the equivalent of 'escrow' and that is the creation of a more concrete contract with objective terms and arbitration with Judge.me,  all of which is clearly libertarian and in line with this forum.

Questions or can we drop this and get back to changing the world?

Ok here's the proof.  You say in your first line that a depositor (and by that I think you mean someone who owns Q, the crypto currency that supposedly tracks USD) won't sell because he wants to receive equal value.  Yes.  So instead my bid will be minted at the lower price.  It will be the highest lower price but it will still be lower.  Repeat until 0.  Because my bid is minted, there is no force pulling Q up.

Sure someone who REALLY wants Q could buy it even higher.  But this will be temporary.  He'll have paid more for less in dividends then I did.  So he'll rapidly choose my strategy.

Note that nowhere does USD actually affect the price of Q.

And Q has nothing in terms of marginal utility that BS does not already have, so people won't need to use Q for the reasons they need Bitcoin.



Yes please! :-)


But Bytemaster, I'm going to choose to believe that you will pay the bounty when you realize that the system is unworkable so great let's drop that aspect.  And more importantly, I hope after you realize that your brainchild won't work you invest your 20k into a system that actually DOES allow representation of external currencies. 

But that system will unfortunately be one where trusted individuals and corporations keep USD, gold, etc in a vault.  Or are backed like a stock by the value of a corporation still have to post annual reports.  Or for mortgage offerings, an assessor still has to check out the house and digitally sign the mortgage bond contract.

However, given the above "trust-based" currencies, can bytemaster's dividend or backing technique create a "combined currency" (think currency backed by what's essentially a mutual fund containing verifiable quantities of "trust-based" currencies) that mitigates risk of default.  This combined currency would track whatever its constituent currencies are denominated in (i.e. USD).

Cheers!
thezerg

Depositor:  Someone with paper dollars that wants crypto-Dollars
Withdrawer: Someone with crypto-Dollars that wants paper-Dollars.

It is the Depositor who demands crypto-Dollars track parity.
It is the individual who wants to have exposure to 'Bitcoin Growth' but whom needs money that will mortgage bitcoins to get dollars... thus they will mortgage at a price that will attract depositors so that *they* can receive paper-USD.

I'm still not convinced by either side.
As you can see from my earlier posts I was first also very skeptical about it, because bytemaster used circular reasoning when he says that the price will be parity.

But still I also haven't seen a proof that it will not work. For example, it is not enough to say that the fiat price cannot enter the system because

I am not yet convinced either way.

I am intrigued by the 'attack scenario' discussed by thezerg to gradually bring down the price. But I expect a refuttal to arrive shortly. Does it violate the all-users-are-profit-seeking rule?

But I disagree that there is no fiat price information. There is a marketplace for USD/BS. So every user has this information in the same way that everyone can find out the BTC/USD or USD/EUR exchange rate.

It is really sad that you confine your thinking to such a box.  Without opening your mind to the possibility that such a solution could exist you will never even attempt to conceive of such a solution, despite it being clearly desirable.

That said, I am 100% confident that crypto-USD could track USD if you could trust some 'anonymous' backer to enter the market and 'peg it'.   I claim that market forces will take the place of the 'anonymous' backer, but clearly you could use my system 'as-is' and add someone to 'hold the peg' without that individual having to actually expose the location of their vault or bank account.   You could even have a group of independent individuals working together to hold-the-peg and thus make money off of the buy-sell spread between crypto-USD and USD while still being anonymous.

Perhaps my refutal to that was lost in the mix... but I believe it was a very good one:

Perhaps this explanation will actually help you see *how* my idea works.   Clearly any corporation could buy a vault to hold gold, USD, etc.  This corporation wants to be able to operate anonymously and therefore doesn't want anyone to know who they are or where their vault is.   Instead, they build brand-equity over time by pegging crypto-gold to gold.   They charge a small transaction transaction fee for taking money in and out of their account and they also pay you interest on your account.   In order for their business model to be successful people must come to trust that crypto-gold will indeed track gold.  But that is easy enough for the corporation to do because they are actually holding the gold and the BitShares and thus are fully capitalized.  So they issue crypto-gold and the market observes the price action and realizes that it does indeed track.   Eventually people start trading gold/crypto-GOLD near parity and everyone is making money even though they do not know who the real backer is.

How would this be better than if the stated corporation just issued colored coin IOU promises? Is there less trust involved?

Yes there is less trust involved.

1) Anyone else could enter as a backer and make money on "ATM" fees in the same way as this anonymous backer.
2) You have crypto-Gold which has value to ANYONE at market value where as colored coins only have value to those who *TRUST THE ISSUER*.

Let me clarify:  the only way to ultimately convert colored coins to Gold is to go to the issuer.   The issuer would have no way to 'start' a colored coin system anonymously because a colored coin really only has the value of the BTC being used to color it.   Where as crypto-Gold actually has the value on parity with gold and the issuer can easily 'peg' that value anonymously.   

There can be any number of issuers and ultimately, anyone who has Gold at home is an 'issuer' that could make money backing the crypto-Gold price for a transaction fee.

QED

So even if the hypothesis that 'market forces will cause price parity' proves to be false, we still have a better system than anything else proposed?

Third party backers come in to guarantee price parity, make money in the process, and would not require significant trust.

Im getting more convinced by this idea.

Ok I wrote I big long rebuttal but have since deleted it.  I don't give up my claim to the bounty but I give up convincing you for awhile. 

I've already spent 10btc of my time, trying to couch my proof in a way you will understand.   So run your simulations, and fork Bitcoin and spend your 20k.  When you learn a bit you will see the exact issues I brought up.  But please fork Bitcoin into Bitshares publicly so the community will have a great basis to build a multi-currency distributed crypto exchange.


Oops except for this one last try (not going to respond though):


Given the way the bitcoin solved the byzantine general's problem, you can't enforce the rule "stop a minting event if someone buys the bid". 

And it was the lack of a solution to the byzantine general's problem that forced all crypto-currencies to be centralized before bitcoin's proof-of-work solution.  So this is a big problem.

Google it to really find out why, but in summary, there is no proof that all bitcoin nodes "see" any particular unconfirmed txn.  That's why some unconfirmed TXNs (esp. ones with no txn fee) don't make it into the blockchain right away.  So an "attacking" miner could simply claim to not have seen the "fill" orders (or any buy orders) and therefore mint coins to fill a very low priced buy of infinite coins that the attacker himself issued.  The likelihood of success is proportional to the miner's fraction of the total hash power. 

So bid/asks must be in the blockchain.  When this is the case the exchange slows down so much it is unusable and not scaleable.  Today we are irritated because Gox can't keep up with 10s of txn a second.  Imagine every 10 minutes. :-)  And even then a finney-attack variant (premining blocks but not submitting them until certain external conditions favor yourself) could get you an "infinite" minting event if you are lucky.


Do the readers of the thread actually understand the bitcoin technical details or am I the only one?

I've exchanged messages with Bytemaster and posted in his thread in the Economics sub-forum. Here's a repost of one of my posts for this thread:



Here's a few areas from the whitepaper that were especially concerning:


Bitcoin gets its value from its utility. Where would the utility for the BitShare blockchain come from? From it's ability to create sub-currencies according to the whitepaper. The big problem is that he has no way of making these sub currencies even resemble the value of those assets:


So there is no mechanism to force anyone to trade these electronic representations of assets for anything resembling their price in the physical world. This is a big problem because this is the only thing giving value to his alternative blockchain. BitShares would get their value from the sub-currencies being related to real assets, and not the other way around as he proposed. Since these sub currencies can't be forced into any particular price they will never work. This is a fatal flaw in the plan.

The logic of collective action, economics, and game theory all say that humans do whatever is in their best interest that they can get away with. Sub-currencies would quickly spiral totally out of relation to any name that is slapped on them. Without any mechanism to ensure that the represented currencies resemble the value of real currencies they do not represent anything and hence add no value.

---------
 
You can't expect the community to maintain the prices of these representative electronic sub-currencies at their own expense. People will only do what they can make money on.

Link to other thread: https://bitcointalk.org/index.php?topic=217181.0

These businesses are 'market forces' and thus it would prove the hypothesis.

Fair enough, I have also spent 10 BTC of my time debating you and everyone else.


These are all good arguments regarding the 'scalability' and transaction rates that are possible on a blockchain.   But ultimately transaction rates don't matter to much as long as they can happen.  If it is 'slow' it just means the spreads will be slightly higher.  There are 'off-chain' exchanges that can be anonymous and fast with lower spreads, but BitShares solves the problem of getting value into and out of those anonymous exchanges without 'exchange risk'.

So, how fast can 'in-chain' transactions occur?  I could trade at the same transaction rate as Bitcoin's transactions provided both parties signed the transaction.   It is only the 'open-orders' that are 'slow' and open-orders are usually placed at prices slightly above or below the current market price and therefore having a 10 minute delay before an order can be placed or canceled would be perfectly acceptable.  It would prevent people from placing and retracting 'false bids' in an attempt to manipulate the market.

So a parallel network could exist where people broadcast half-signed transactions that could be accepted by anyone.  These transactions do not count for the purpose of establishing 'price' information used for issuing new crypto-Gold.   Only bids that go 'unfilled' and are placed in a confirmed block may be used for that purpose.  Only 'speculators' and 'experts' will ever mess with these details and so they will probably operate in volume.  In fact, centralized anonymous exchanges would probably 'back' their exchange by placing volume orders in the block-chain to provide liquidity and reduce spreads. 

Conclusion, I think BitShares solves a much bigger problem than creating a 'real-time-exchange'.

Sure I can, a mint transaction would consume the same output as a bid transaction and thus ONLY ONE could get into the block chain.   

If the block-chain had a rules such as:
Does this block contain more than one minting transaction for crypto-Q?  Reject Block.
Does this block contain any trades of crypto-Q for BS in addition to the minting transaction?  Reject Block.
Does this minting transaction occur below the price of the highest bid from prior blocks?   Reject Block


This would prevent the mining attack you just proposed.

You still haven't explained how the sub-currencies gain any relation to what they represent beyond more or less 'everyone is just going to work together to make it so regardless of money to be made (or losses to be avoided) by not doing so':


That's not how economics or game theory work. People try to maximize their own utility (value gained from their actions). Collective action is the result of many individual actions. Bitcoin is not some project where everyone works together to make it valuable for its own sake. Everyone is trying to make money, that's why Bitcoin has value. There is no trust involved.

If any asset can take on any label, there is nothing holding the value of crypto-gold to that of gold whatsoever (even recognizing your interest paying proposal). Even calling it crypto-gold, crypto-usd etc is totally baseless. Market forces as you currently have things set up work against you and would make the whole thing fail.

Yes, I represent market demand for this to exist.  I suspect that others in this thread would experiment with $20 to buy some 'just in case' and in which case they also represent demand.  So, there is demand for BitShares among those who believe it works and therefore they have value today simply because we believe they have value.

Everyone has profit motive to see the peg hold, but lets assume it is only 1 party:
1) eGold was in the business of providing backing to digital gold.  They made their money off of transaction fees.  If they could have pegged crypto-eGold to gold they could still make their money off of transaction fees while not having to even be public about their promise to peg.  This is a profit-motive, self-interest based reason for them to peg it.
2) Assuming eGold was trying to peg crypto-eGold to gold and they had the reserves 'backing' their peg, could any other market participant 'break the peg'?

If you can show me how eGold could be cheated out of their business by a 3rd party attempting to devalue crypto-eGold then you will probably have the key to convincing me this will not work.  If no third party can break an intentional peg, then I have shown you the profit motive that ultimately drives the two to parity.

If I have 1% hash power, I have 1% * 1% (one ten thousandth of a chance to get two blocks in a row):

Block 1: Buy all the bids in the block chain.
Block 2: I (the miner) pick the block contents -- required in byzantine general's solution -- so:
It will only contain 1 minting txn (mine)
It will cointain no trades.
It will contain a minting transaction of *the rest* of the currency for .0000001 BS

It will be a valid block that gives me ALL THE COINZ!!!!! and therefore ALL THE BACKING DIVIDENDS!!!  ;D
And would even be legal!  Its not like I'm double spending to steal from you.

I can't believe I have to spell it out for you... Put your thinking cap on.

You can increase chain-depth requirements... and I can increase my hash power through pools.

If a bitcoin miner gets 51%, he can only double spend HIS OWN MONEY (which would become pretty obvious quickly and in fact simply means that he has liabilities against he double spent and they bring him to court if they can identify him) or block you from spending.  He can't get all the coins.  Its an important distinction.

+1 yes, someone who understands real systems instead of wishful thinking fantasies.  Welcome to the forum's most frustrating thread...

Zerg, you haven't convinced me things are unworkable, but you have provided the most challenging and innovative attacks that cause me to put on my thinking cap.  Thanks for hanging in on this discussion, send me your BTC address and I will drop you a 0.05 BTC tip for your efforts, you deserve one even though you haven't yet convinced me.

The whole scenario you have proposed is a bit insane. Egold is not going to back BitShares (and by extension so called 'crypto-gold') with real gold because you have proposed that BitShares pay out interest.

 Interest payments increase the supply of BitShares and cause them to become less valuable over time (like the federal reserve printing money).
Whereas Bitcoin's money supply is fixed to give people confidence their coins will not be subject to infinite term inflation. This makes people interested in Bitcoin and gives it value in the first place. Scarcity and desire combine to create value. If nobody wants them or the supply continually expands forever the price will only go down.

So if Egold pays real gold for BitShares in any way they are going to be losing money. The system is not conducive to the behavior you have proposed.

The interest payments in my system come from transaction fees.  My money supply is ultimately fixed just like BitCoins.

The 'interest' on the 'gold deposits' is paid in BitShares and comes from the 'revenue stream' backing the crypto-Gold, not from 'eGold'. 

Thus, the only thing eGold is interested in is that the peg remains *and* that it doesn't end up costing them money.   If you can show me how they would go out of business maintaing a peg then that will be a problem.

Note, I didn't say eGold would back the value of BitShares... BitShares can fluctuate all they want.  I said eGold would back the value of 'crypto-Gold'. 

Ok, so in addition to having a large amount of CPU power, the attacker also has enough existing capital to buy up all bids.    It is good to know that we are getting to attacks that are now very expensive to carry out instead of just attacks that anyone could do.   The act of buying up all bids also means those with open bids didn't lose money they didn't "agree to". 

Lets look for counter-measures:

1) Everyone who holds crypto-USD could place a 'fail-safe' bid at say 90% of face value.   In this case the attacker would effectively do a hostile take-over of the currency but ultimately wouldn't be able to steal very much (less than 10%) .  Everyone else would then just switch to a new crypto-USD.
2) You could place a limit on the % of the order book that may be cleared by any one block.   I don't like this approach as the % is arbitrary, but it would probably be acceptable. 
3) With a hash-algorithm resistant to GPU and ASIC you would have to rely on pools to begin with (or have a bot-net).

Anyone else have any creative ideas on how to mitigate this rather 'expensive' attack?

Slight clarification, the BitShare revenue stream backs the value of crypto-Gold, eGold would just peg the exchange rate (prevent over-issuance).

Here's a failure scenario:

Company A has 1000 ounces of gold.
Company A makes 1000 crypto-gold and pledges to honor them for 1 ounce of gold shipped to your door each.
They sell all of their crypto-gold to investors while gold is worth $1400 per ounce.
The price of gold goes up to $2000 per ounce.
Many people decide to cash in their Crypto-gold to the company because the price has risen.
The company now has a ton of crypto-gold and no real gold and they can't buy enough to cover demand.
When everyone else realizes this (shortly after they begin refusing to honor trades of crypto-gold for real gold) the price of crypto-gold collapses because the company can't maintain the peg.
Crypto-gold is now worthless. Company A declares bankruptcy. Company A goes out of business because nobody can trust them anymore.

The only thing propping the whole system up is consumer confidence that the company has a practically infinite supply of gold.
 If too many people sell too quickly the company goes under.
The only reason people wouldn't sell is if they were confident that the company had a practically infinite amount of gold to trade for crypto-gold and felt secure holding it.
Because everyone is acutely aware that no company has infinite resources and crypto-gold would only be as good as the company's trust this is pretty much impossible.
It's about as far from a trustless system as you can get.

Hold on buddy... you skipped some steps and created colored coins instead of crypto-Gold.   
First step, what is the current value of Gold in BitShares.
At what rate of exchange did they convert BitShares into Crypto-Gold.
When the price of gold changes, what is its new price in BitShares?
How many BitShares can they buy with the gold they have in their vault?
Is it more or less than the number of BitShares required to buy crypto-Gold?

So can changes in BitShare value make the value of crypto-gold fluctuate or not?
You just said it was irrelevant. You have to pick one.
Otherwise we are all wasting our time. You can't just change the rules on the fly like that.

Either scenario kills sub-currencies really.

When BitShares go up the interest paid on crypto-Gold goes up.
When BitShares go down the interest paid on crypto-Gold goes down.

So clearly, price changes in BitShares to result in changes in crypto-Gold... the question becomes what is the opportunity to profit.

Clearly if BitShares go down in value then eGold would have to up the BitShare backing behind their goldcyrpto-Gold.  Do they have the money to do so?  Yes, they can sell some of their gold at the new exchange rate and re-issue crypto-Gold at the new price.

What if BitShares go up in value?   Then the value of crypto-Gold goes up to!  They can then buy crypto-Gold with less BitShares than it took to create it.  Then, redeem their mortgaged bitshares and the result will be enough BitShares to allow the to purchase more gold!  

End result is that as long as they charge a slight 'spread' or 'transaction fee' they can make a profit with 0 risk.

If BitShares can be mined why would a company ever create a sub currency that they trade gold for based upon them? If the price of BitShares goes down, the value of their crypto-gold held goes down. They then can't buy any real gold and people who want to cash in can't get any. Everything collapses. They would basically be giving away all their gold. That's charity not business.

All BitShares would have to be mined already for a company to feel confident that trading gold for electronic currency would not be a risky investment due to inflation of BitShares.
Without a company to give away money, there is nothing to keep the price of sub-currencies corresponding to any physical currency in your proposal.

You are basically just assuming that BitShares will be valuable and always increase in value. Bitcoin has decreased in value many times and survived.  Under your current proposal if prices go down, everything collapses. That's not a stable system. The obvious instability of the system will prevent anyone from thinking it is valuable in the first place.

All mining can do is affect the value of BitShares and as I have already demonstrated, if BitShares go 'down' then they can sell some gold to increase the 'backing'.

If bitshares go back up, then they can repurchase their crypto-Gold  to free their mortgaged BitShares with enough profit to repurchase the gold the previously sold.

This, mining is irrelevant to the price of crypto-Gold.

These are contradictions.

I never said the price would track perfectly,  I said it would track within a range of +/- a couple of  a percent.  The change in BitShare price create a profit opportunity to correct the crypto-Gold price.

Mining definitely would have an effect on the price of BitShares because it increases the supply.
If supply increases but demand stays the same prices go down. That's the most basic economics possible.

You are basically just assuming that demand will automatically outpace supply at all times.
That's not going to happen. Bitcoin has been up and down so many times and survived it all.
Your system would collapse at the first hint of trouble. That's not going to thrive, it's going to die quickly.

So either a company screws themselves over or everyone voluntarily tries to keep the price at a certain peg even though it will make them lose money. Both are against the basics of market behavior.

No, that is not what I am assuming.   Even if the BitShare supply were constant, the price would fluctuate relative to Gold.   And earlier I showed how regardless of the price fluctuation between Gold and BitShares, eGold could peg crypto-Gold to gold (within +/- a few percent transaction fee).

As a result, it does not matter what BitShares do relative to Gold whether due to mining or a scary news article, eGold could maintain the peg.
 

This is so stupid. Egold does not have infinite money. They can't always maintain a peg no matter what.

Just go ahead and dump all your money into logos, coding, etc, without a working system. You probably won't ever pay out your bounties anyway since you think you're just so smart (and convincing you is the required condition for payment).

I'll just report this thread and move on. Bye.

Because BitShares can be thought of as a claim on future Revenue.  The reason eGold could maintain a 'peg' is the same as traditional hedging works.

You decide you are going to mine Gold and that it will cost you $100 and 1 year to get it, so you 'pre-sell'  (aka short) your gold at $100 and then cover a year later when you produce it.

If the price of gold falls over the course of the year, then you just buy it at market price and keep your profits.  If it goes up, you have no losses.

Thus BitShares allow you to 'hedge' your position in BitShares and because you have a hedge, you are able to eliminate the effects of exchange rate changes over time.

Ok .05 BTC is peanuts so here's my counter-offer.  If you truly value my challenging attacks to your system (and you know they DO take a LOT more time to think up then drawing a logo) then pay for them.  Every time I show an attack that illustrates any or some combination of:

1. a problem in your system that makes you change a rule or add a new one
2. a way to nearly zero the value of a crypto-currency
3. a way to force minting enough coins that gets me the lions share of the dividends.
4. a way to force crypto-Q to diverge from Q
5. a way to force the system to leave me with more BS and/or crypto-Q then I started with (aka to "make" money).

You pay me .25 BTC.  If I show attack A, and you modify the rules and I show attack A' which is just slightly different that's 2 attacks.  Imagine you're really writing the code, updating it, and releasing it every time, but instead of pwning you, all the coins and millions of dollars, I just get .25 BTC.

I post one attack at a time, and do not post another until I receive the .25BTC.  If you want to stop the process you must indicate so in this thread before paying me the .25BTC for the prior attack.  That way I won't post the next one when you want to quit. 

These payments go towards my claim on the 10BTC bounty.  But if you stop the process, you essentially agree that you're abandoning the project and pay me the rest.  But if I run out of ideas, I am not abandoning my claim... because of my previous discussed but not (yet) accepted by you ideas of why its broken.  If you obstinately reject one of my attacks, at my option I can "shelve" it for a time when you might recognize it, or I can simply realize that you are not actually willing to pay anything and so cut-my losses and stop posting attacks.

If you agree to these terms, please show your appreciation for my blockchain attack and start the games by sending .25BTC to: 1CKeoT8vBDQDEpMHz5VAswV39pZJ2GTGYd


Cheers!

How to create a crypto-Gold with an anonymous backer:

First we need a dividend-paying crypto-currency like Bitcoin, which I shall call BitShares, the dividends can be paid from 50% of mining fees.
Next we need the ability to 'short' BitShares to issue a new crypto-Gold at the current exchange rate.
Next we need the ability to cover the 'short' by reversing the process by turning 1 crypto-Gold back into BitShares.

Next consider the business of eGold (shutdown in 2009), they allowed direct instant transfer of gold between accounts.  They made their money on transaction fees.  The problem they faced is that they were not anonymous and thus accused of supporting money laundering.    What if eGold could have issued a crypto-Currency that could be backed anonymously.  They could still make their money on transaction fees and as long as crypto-GOLD tracked the value of actual gold then people could trust it.   They wouldn't have to trust it as a 'promise to pay', but could trust it because they could see that its current 'dividend rate' was the proper multiple of the dividends paid to BitShares and therefore crypto-Gold was actually worth the same about as physical-Gold.

So how would eGold operate?  

Step 1: Acquire 1000 oz of Gold.
Step 2: Check the exchange rate of Gold vs BitShares
Step 3: Issue new crypto-Gold at the proper ratio of Gold vs BitShares.
Step 4: Anonymously promote that you will maintain the peg of crypto-Gold to Gold.
Step 5: Let others exchange crypto-Gold for Gold because it is currently at parity.
Step 6: When the value of Gold goes up in terms of BitShares by 10%
                  -  Sell 100% of your Gold and buy BitShares at the new exchange rate.
                  -  Use these new BitShares to issue new crypto-Gold at the new exchange rate.
                  -  Cover your old crypto-Gold shorts using the new crypto-Gold thus giving freeing your old BitShares
                  -  Buy gold with your old BitShares, you will end up with 10% less gold than you started with.
                  -  Everyone gains more faith in crypto-Gold...
Step 7:  When the value of Gold goes down in terms of BitShares by 10%
                  -  You can now use  9 BitShares to purchase crypto-Gold and free 10 Bit Shares of collateral.
                  -  You net 1 BitShare which you will hold incase the price goes back up.
                  -  Parity is maintained.

Step 8:  Maintain buy / sell orders between BitShares and crypto-USD on the market with enough spread to make a profit any time there is deviation from market prices.
???
Profit!

You can't make this argument.

Q is not tied to any fundamental real world value.

It could begin tracking the price of mangoes, go on to track the price of USD, and end up tracking the price of excrement.

I will accept your terms because you seem to be very competent at finding things with a few, minor, tweaks to the clauses.

1) I have discussed many rules and sometimes your attacks violate an existing rule or a rule that you did not understand.  Pointing this out or clarifying an existing rule shall not count as a new rule.  If any other poster on this thread will agree with me that it is not a new rule, then I win, if no one will agree that it is an old-rule that you misunderstood... then you win.
2) Working the system with only transactions between yourself (no other people) is the only way to collect on #5, otherwise you would just be playing the market spreads to make money.
3) crypto-Q and Q will vary in price as the ratio of depositors / withdrawers changes and this is expected behavior.   You must show that given an honest anonymous 'backer' with a large fixed supply of Gold and a matching supply of BS and no new infusions of cash that has the intention of maintaining a peg of crypto-Gold within +/- 10% can be driven to bankruptcy provided they are intelligent about managing their spreads/margins.  
4) you must zero the value of crypto-Gold backed by the anonymous 'peg'.
5) you must mint enough crypto-Gold to get the lions share of the crypto-Gold dividends from the anonymous 'peg'.  
6) Your attack must assume all actors are rational profit-seekers.
7) Your attack must not be something that Bitcoin is also vulnerable to (51% etc).

* edit *   I want to clarify that I may choose to stop paying you without giving up on this idea.  It just means I do not believe your attacks are valid. Thus not paying you does not entitle anyone to the full bounty.


The purpose of the anonymous peg is simply to avoid the SIDS attack issue which is an entirely different area of discussion.  

Therefore, I will send you 0.25 BTC for your most recent attack.   Thanks for hanging around and helping out.

.25BTC incoming confirmed!

GAME ON!!! :-)    


Now let me put on my thinking cap.  ...Probably nothing until tomorrow...

Ok, the introduction of 'Q' is only confusing the issue.   As a result I would like all further discussion to *assume* that there exists a company (eOil) that holds 10,000 barrels of oil as well as enough BS to buy 10,000 barrels of oil.   eOil wants to generate a new currency called crypto-Oil and thus wants to peg the price of oil to crypto-Oil.     I chose oil only because it is more 'divisible' than gold, but you could also assume an infinitely divisible supply of gold.  

Next, assume this company is attempting to peg  crypto-Oil to the price of Oil... now drive this company out of business.

Until I post otherwise, the offer I made to thezerg is open for all takers.

If you also propose a 'fix' for your attack at the same time that you present the attack, and I accept the fix then I will double the reward and pay 0.5 BTC instead of .25 BTC.

Rules of Operation for the Anonymous Peg Company:

They only sell their crypto-Oil for a 1% premium above current market price.
They only buy their crypto-Oil at 1% below current market price.
They only 'issue' new crypto-Oil at market price.

If you have to go into that much explanation, just to get people to understand it... (And I am not seeing any advantage, just more overhead.)...

Than it might not be worth the added effort.

Perhaps you should work on the shortcomings of the existing coin, instead of just adding more complexity to an overly complex idea that has had almost every "complexity" bypassed, and thus, nullified of its original intent... Thus making it all overhead, just to operate it and keep it sustained.

Just my 2-cents...

Issues with the current system...
1: Originally based off, "luck" to encourage competition. Just discouraged everyone, so they made pools, which defeated luck. Thus, wasted overhead. (Also led to the discovery of the 51% attack.)
2: Horrible exponent curve for "reward", leaving little to offer past eight years of mining, unless fees are driven-up to near-rape-costs, just to convince someone to process an actual transaction in the future. Thus, no-one will want to waste time processing orders for dirt.
3: Failure to think ahead about "network issues"... When the future is down to the top three "controllers/bankers"... they will have to process EVERY SINGLE TRANSACTION each... (Only 3 confirms, unless they do it twice, thus, wasted overhead. There will not be 6, because 3 will barely make money, and less than 3 results in the 4th issue below.) That is a LOT of high-speed networks and "centralized control", with high overhead, and many offices in many countries, needed for each of the three top guys!
4: There must be three, or you get an unbalanced and unavoidable 51% self-attack that can never be corrected by the other. If one of those three goes down, the entire network has to shut down, or results in a 51% self-attack again...
5: Reward system is setup to completely crush any lesser individuals (the majority), who "created" the system. As opposed to just rewarding those for the efforts they actually expend. (Individuals, not machines. Machine advancement = less effort that results in more work, thus, reverse of realistic acceptable and logical intention.)
6: Reversibility, Trust-limited-transactions, and Corrections. (You actually tackle some of that.) Not that it should be FORCED, but it should be AVAILABLE.
7: Actual accounts, for those who want to "work in the confines of the 'legal-system', without penalty"... Again, AVAILABLE, but not FORCED.
8: Solidity... Something that limits rewards, IF transaction-fees are supplemented... Thus, stopping market-flooding of dead-earned credits that just cause a liquid market that screws with people's desire to use it, for anything other than a pump-n-dump or paper-trader-market. (Like gold and silver.) And/or takes "transaction quantity/volume" into that formula of reward.

Might want to have an ACTUAL market-study done on your "modifications", before you spend all this time developing something that is just going to amplify the bad, and turn itself into a self-sacrificing currency. (Like bitcoins are destined to become, in the not so distant future.)

EG, Building YOUR system off THIS system, is like using monopoly money as your base-line for a "system"... It just won't work in this aspect.

Thanks for joining the discussion with some very good problems that could also be an improvement over BitCoin.   I have thought about ways to address some of those issues in the new blockchain, but the point is really moot if someone can prove that the fundamental purpose of BitShares (crypto-Gold) does not work.   That said here are some of the other 'updates' I would am considering to solve your issues:

0) Include a hash of the 'currency contract' in the genesis block that outlines what things the developers *may not change* without forking a new crypto-currency.
1) Define the block-chain to be a fixed-bandwidth / block-size maximum.  The result of this change would naturally limit the available transactions and thus make 'transactions' more valuable.  This would drive up dividends and push more transactions 'off-chain' where they belong while keeping things decentralized. 
       - ideally most transactions will move to OpenTransactions servers hosted behind BitMessage and OT servers would use BitShares to bail in / out of crypto currencies.
2) Native support for transferring value to and from a parallel chain.  This would allow many 'sub-chains' to interact with one another through nodes that join 2 or more chains, but no node would have to join more than 1 chain.   This would allow non-linear scalability with automatic load-balancing between the parallel chains based upon transaction fees / dividends.

     - BitShares makes support for parallel chains workable based entirely upon transaction fees.  The smaller chains would have lower transaction volume but require a trade to move value between the two chains.  Thus if BitShares ever became 'overloaded' it would just split and HARM NO ONE.   In fact, because the values in any one BitShare network track 'gold' or 'silver' then it doesn't matter what the price of a BitShare is and multiple BitShare networks could be set up provided there was market demand for it.  This would scale much better and far more decentralized than BitCoin ever will be.


3) Block-chain history compression by including the hash of a list of all unspent outputs in the merkel tree.  Nodes could drop the complete transaction history and only hold the unspent outputs.  This would greatly reduce the size of the block chain.

4) Define a new hashing algorithm that is RAM intensive, ram is already a very expensive specialized asic (transistors) and thus asics would only be able to optimize a small percent of the transistor count required to perform the hash algorithm.  Thus hashing power is controlled more by transistor count than processor architecture.

5) Cause each transaction fee to reduce the mining reward by 50% of the fee.  Thus as transaction fees increased the mining reward would naturally fall toward 0, combined with the fixed block size and ability to fork off new chains once one chain reached capacity would probably eliminate the need for 'arbitrary' mining reward reductions.

6) Reversibility is a no-go... it requires a central authority.  If you want that there are off-chain approaches or multi-sig support already.

Attacks that I find do not collect bounty...:

Assuming I have 50% of the hashing power... what can I do?
  I can delay all transactions...
  I can delay potential bids from being placed into the chain...
  I can pick winners / losers for matching bids... half of the time.
 
  The market response:  increase bid/ask spread to account for the delays.
  Attacker benefits:   they could have better arbitrage opportunities.
  Trader Response:   add more hashing power so you can gain the advantage.
  Net Result:  Arms race among professional traders to add hashing power to gain an advantage... thus making 50% attack even harder.

Assuming there is someone out there attempting to peg crypto-Gold to gold.. how can I screw them up?
  1) To issue new crypto-gold I would have to out-bid them, thus pushing the value of crypto-gold up... no real complaints from the holders and buying opportunity for the peg who would profit from it.  In theory there is no limit to how *high* I could push crypto-gold above the gold price.   The peg would make a ton of money from the extra dividends he was receiving from the attackers over-priced issuance.   The attacker wouldn't be able to redeem their 'short positions' for a profit and thus face an ongoing opportunity cost until they admit their losses.  

  2) To cause the value of crypto-gold to fall below parity they would have to sell crypto-gold.  To sell crypto-gold they must first acquire it and the only way to acquire it is to mint above market price or have bought it from the peg.  If they bought from the peg, then they paid 1% above market price.   I suppose the peg would have to 'buy' at market price or it would give the attacker an opportunity to mint below market price.   * I will have to change the business plan of the peg * as a result... this doesn't change the rules of the block-chain though.  

After considering the business plan of the Peg... I theorize that a single individual with only a hand full of very divisible coins would be able to maintain the peg and profit from it assuming they could be efficient enough with their off-chain buying/selling of gold for BitShares.   

I then theorize that everyone in the market would be competing to make profits using the same model as the peg, and thus whoever was most-efficient with off-chain BitShare/gold transactions would make all of the money.  Because of the efficiency gains of the most profitable peg, it would drive down the spread between buying and selling crypto-Gold.

That ONE thing there, would make it illegal for use in the USA. (Destroying a history of transactions.) Being a MINTER, will require these records also. Unless you don't intend to allow people to use actual "bank notes" (currency), to be exchanged for the virtual currency.. but without a "central authority", you have no control over how, and who uses it... thus, it will legally be assumed it IS being exchanged, and that individual IS a minter, and they ARE legally responsible for exchanges and distribution of mined "exchangeable note currency", and the records of the exchanges, to operate in the USA, legally.

Reversibility does not need a "central authority"... Giving a USER the ABILITY to REVERSE a transaction SENT to THEM... (Return = non-taxable proof of "no-earnings".) They decide if they want to reverse/refund a transaction to THEM... Otherwise it looks like more income to the other person, and to you, and you BOTH have to pay taxes for income that was not actually made. (To also provide proof in the "List of non-deleted transactions", in the event of "being summoned to a court of law", which will require unaltered proof of that transaction, up to 20 years later.)

Oh, I see... you want to use only foreign investors that "Are not part of the United Nations Agreements"... Then continue... lol...

You also forget, it is the "marketers" who decide what the "value" is... and you have no control over that.

This can be pumped-and-dumped like all the other markets. You just buy your own overpriced coins on your own exchange, paying the fees which will be marginal to your rewards, to make it look legitimate. (Thus, the actual records would be shown, but the history would be "erased" by your "compression of removing transactions and keeping balances". Like what they do with bitcoins now, through the exchanges of unlinked transactions/accounts. Only coins sent through an exchange change the "value" of the exchanges charts. A private sale would not be tied to a monetary-exchange, and thus, hold no "market-altering-value".)

A marketer simply has to lie, and SAY the listing "value" is higher, or lower than it actually is, stopping you from listing lower than that price for a sale, thus, making you list a higher price, which makes room for their pump-and-dump coins to be injected and purchased from themselves. What so you think that spike in the market was, where coins were sold for $250... That was the marketers pushing the listing value up, so they could sell the coins they held at $200 per coin... Then the market came back to reality.

P.S. Being RAM dependent is NOT sufficient... Ram is cheap, hard-drives are TB's of virtual-ram, and "Web-servers" have more RAM, in-hand, than you could possibly fathom. However, that will slightly HINDER the ASICs... it will be only a fraction of the hindrance you imagine, as they are plugged-in to a "computer with ram". "Proof of work" is a neat concept, but a waste of power. Proof should be actual transactions, not useless "coin creation". (That should be a reward for "transaction processing", when No transaction fees are present... Like for refunds/reversals/moving-funds-to-your-other-accounts.)

Seems like you are just trying to re-invent "paper-trading" of gold and silver... which is a failure that is killing china at the moment, and was banned in the USA.
http://www.zerohedge.com/article/trading-over-counter-gold-and-silver-be-illegal-beginning-july-15

Paper-trading = Trading values of gold, without having the gold present or available. (Trading with easily manipulated "margin calls", that only reward the exchanges that trade, which are unregulated.)

Again, you are just adding unregulated complexity to a screwed-up base-line system, that is just going to screw it up even more. Just program yourself an "exchange"... Use any available input of currency-types...
All the alt-coins (Bitcoin, litecoin, feathercoin, terracoin, mincoin, namecoin, devcoin, bbqcoin, freicoin, goldcoin, silvercoin, chinacoin, ppcoin, lxcoin, bytecoin, Lindens, IMVU-credits, gamegold, etc...) and real dollars... (USD, JPY, CNY, etc...)

Oh, wait... that would make you a FOREX broker marketer then... Using your own internal coin as your "uni-coin"... which wouldn't actually have to be mined, just compared to the value of each market, based on your customers supply and demands. (Like paypal does. You just reinvented paypal. Except you have no control over it, and will just be manipulated by alien forces beyond any control, that will eventually crash the market you created, itself.)

I swear, I saw a uni-coin running through the woods!

I'll get this bounty... Simply because you can't do anything you actually propose. lol.

Your talents are better focused elsewhere, where they can actually reward you with something substantial. Programmers should stay away from money. They just don't understand it enough to make it work like a non-programmer wants... (The ones with the actual money, not the virtual money.)

How we want it to work...
I give you a twinkie to hold, I expect a twinkie back in a week, not half a twinkie the second I put it in your hands... not two twinkies, but that would be cool!

We don't want to hear that our twinkie is given away to someone who didn't have twinkies, just because he had a big mouth and takes a bite out of every twinkie that ends-up in his hands, and now there are no more whole twinkies left... but if I wait long enough, I'll get two-halves of a twinkie from the next two people who will give that same person one twinkie each. Give it to the neck-beard, he will eat it, give it to the twig-n-bones girl, she will eat it... Now I am going to starve, after feeding all those who didn't need my twinkie, but all wanted it. I'll be lucky if I get my twinkie back at all!

First of all there are no IOUs in my system.  There is no 'broker' and at all times all parities are trading two assets that have value at parity on their own with no 'backer'.
Now I am using an 'anonymous peg' to replace the much harder to grasp 'market forces', but even if my system required a real anonymous peg, it would still be better than anything else.

So I suggest you focus on showing me how you would make trades to send my anonymous peg into the poor house.

All transaction history would be there for 'full nodes', but 'light nodes' could drop as much as they want.

I could care less about laws so long as there is no theft or fraud... lets focus on technology to enable fair trades, not how to be in compliance with laws.

You clearly don't understand the order of magnitude difference between RAM and virtual-RAM in terms of performance.   
You also have no understanding of Bitcoin because every one of your arguments could be levied against Bitcoin + Mt.Gox.

lol... ok... Your whole system is IOU's... You are not giving actual gold to people for actual gold (which would be stupid and redundant)... it is all virtual-debt... If there is no broker, there is no market... nothing to crash/alter... just private sales, which have "No records of value"... What are you going to just "say" it is worth x, with no proof that you sold any for x value? You need a broker to have a "value of transactions", which only a broker displays. Seriously, you know your stuff man... where do you think the charts you see are coming from? Brokered sales, recorded and displayed in a chart.

You win...

You develop your coin, then we will see who actually knows what the hell they are actually talking about.

You are the idiot who suggested RAM as a "limit". Not sure what computers you use, but SSDs are RAM, and multi-striped, are faster than most sticks of RAM, and since RAM is cheap, cheaper than an ASIC, or CPU, or GPU... That would hardly be a "limiting factor", as you stated. Yes, on a home-computer it might... but not on any server-computers with multiple TB of RAM installed. (And ASIC's have access to RAM, by the computer they are hooked-up to. They don't need to work with RAM directly, because they don't process anything in RAM.)

Have fun playing, you C++ master! lol.

P.S. My virtual-ram is in RAM. So, yes, I KNOW the magnitude of the two... it is YOU who doesn't understand the limits you think you are imposing. Thus, not good enough to program what you think you want to program.

Ok, if you attempted to use a SSD for mining you would quickly wear it out, they have read/write limits and every hash attempt would completely change every sector.

Sure, big data centers can have huge amounts of ram.  They cannot purchase that ram much cheaper than anyone else can.   What is the total amount of RAM in the largest data center?   Compare that to the total ram in ALL home PCs. 

Now do the same comparison with mining SHA256 ASICs...

Are bitcoins IOUs as well?   Would a dividend paying Bitcoin be an IOU?   Do Bitcoins have no value?   Do they only have value because of a pump & dump scheme?   Who 'says' bitcoins have value?  

If bitcoins have value then BitShares could develop the same value, (proof: Litecoin), if enough people thought they had added benefits of Bitcoin.   Even without the support of crypto-Gold, some people may prefer the dividend paying model to the existing model.

If my currency allows the creation of an anonymous 'peg' then it clearly has much more value.  

Ok, suppose I am a major holder of crypto-oil.  And suppose crypto-oil's demand is high because it has tremendous utility.  

Normal case:
Essentially, people are giving eOil (and others) money or oil contracts and eOil is giving them crypto-oil.  Eventually, eOil is going to run out of crypto-oil and will have to buy at market.  If nobody is willling to sell at that price, eOil's bid is minted so crypto-oil remains pegged to oil.  This makes sense because eOil's backing increased.

Attack:
So during every block I fill the minimum crypto-oil denomination, stopping the minting process.  Now the only way eOil is going to get crypto-oil currency is by bidding high enough to encourage existing holders (me primarily, but other holders can of course profit from my action) to sell their shares.  I have decoupled crypto-oil from oil and once eOil bids high enough I'll sell my crypto-oil to them at great profit (5 to 10% for a few days work), buying it back at a lower price when crypto-oil re-couples to oil.

If eOil refuses to buy my high sell offer, they cannot acquire crypto-oil and so must stop doing business.

I *think* this is a variation of an attack I thought of in the shower this morning (posted and fixed (without rule change) in the new bounty thread)...  so let me first rephrase the attack how I understand it and then offer corrections.

The goal of the attack is to prevent eOil from issuing new crypto-Oil.  The result of not being able to issue new crypto-Oil is that crypto-Oil would diverge UP from the value of oil as more and more 'demand' for crypto-Oil must be met by the same 'supply' of existing crypto-Oil.

To execute this attack all that must occur is some trade of crypto-Oil for BitShares at the highest bid price to BUY crypto-Oil.
So the attacker who has some nominal amount of BS and crypto-Gold places an offer to buy and then accepts his own offer, or he must simply sell his crypto-Gold for the highest Bid.

If all he is doing is 'selling' crypto-Gold then he will eventually run out.  Because he would be selling at the highest-bid and taking them out, he would be increasingly selling below market value (at a loss).

If he is attempting to 'sell to himself' and thus never run out, then there are some other challenges he would face.

How would the market participants respond:
1) the attack wouldn't be 'free' due to transaction fees (2 of them, bid + acceptance)  (this isn't a rule change, it works just like bitcoin)
2) the issuer could offer a higher transaction fee to make their issuance take priority  (miners would ignore the sale with 0 fee in favor of the issuer with some fee)
3) the other holders of crypto-Gold could sell into the attack and thus claim the attackers above-market bid before the attacker could.
         * they could get priority by offering slightly higher fees than the attacker (made possible by above market bid)
         * if the attacker compensated by increasing his fees... it would make the attack cost more and thus unsustainable.

If the attacker wasn't placing bids, just 'filling' existing bids to buy cyrpto-Oil by providing crypto-Oil, then eventually he would runout of crypto-Oil.


All of that said, there could be some clarifications / tweeks to the rules that may make this attack 'clearly' non-profitable.

1) To issue a new higher bid, it must have a value greater than the old-highest-bid by 2x the transaction fee included.   I don't like this rule because 2x could be seen as 'arbitrary',
   but considering the value of 'x' is decided by the market it isn't as bad as it could be.  Like Bitcoin, there would have to be a min trx fee that most miners require.

     - net result is that the attacker exposes themself to a loss of 2x the transaction fee
     - the attacker creates a profit opportunity for someone else to make profit by accepting his above-market bid (selling him crypto-Oil) with fees up to 1.99 times the transaction fee used to create the bid.
     - therefore, the attacker would require 3x the normal transaction fee to achieve this attack:   1x  for creating the bid and 2x for accepting his own bid without the risk of losing to someone else.

2) I suppose the attacker does not need to issue a higher bid, they could simply match the current high bid.
     - this could be mitigated by processing bids of equal price in a first-come-first-serve basis which means he would have to use his crypto-gold to fill everyone elses order first.
     - presumably the highest un-accepted bid is also 'below market rates' and thus he would be selling his crypto-Gold at a loss.


3) I suppose he could 'fill' .00001 of the highest bid and thus tie up the network legitmately for a long time with only a small amount of crypto-Gold.
     - this could be mitigated by requiring all fill order amounts to be some multiple of the transaction fee.  It wouldn't make sence to pay a $1 trx fee to buy $1.01 of crypto-Gold unless you were
          attempting to 'attack' as cheaply as possible.
     - this multiple could probably be on the order of 10 x... though I hate to introduce random 'magic numbers' to the rules.  But I suppose this is no different than
       what bitcoin must do to prevent spam and dust in Bitcoin.

I think your attack is invalid even without the new rule changes I just proposed:

If you are filling every order with your crypto-Oil, then eOil has no need to aquire any crypto-Oil to provide to the market, presumably you are able to satisfy demand and thus keeping the price pegged.

If I were eOil, I would just sit back and watch because you are keeping the price stable for them.
If you attempt to fill "just a little" that is also fine: eOil will make profit on what it fills until it runs out and you make profit on what you fill.

Once eOil runs out of crypto-Oil, they can place a bid to buy it at market price (1% below what you are selling for).  They would be buying for less than they sold so this would be sustainable, of course their
bid would not be accepted by anyone until *you* satisfy all demand above parity.   In the mean time other people (not the 'attacker' nor eOil)  who own crypto-Oil could also sell at a profit. If there is no-one else,
    then the joke is on the attacker who continues to own crypto-Oil which is paying dividends below what he could receive by accepting the highest bid and thus he maintains a constant 'opportunity cost' and thus is not seeking profit but an arbitrary increase in the value of crypto-Oil.

From the market's perspecitve, having crypto-Oil valued so high above market price will bring in other sellers until there were no more holders of crypto-Oil.

You, the attacker, will have 'cornered the market' for crypto-Oil but to maintain your control you would have to 'refuse to sell' despite bids above market value... thus you have an opportunity cost (are losing potential dividends),
   that you could be making by converting your crypto-Oil to BitShares.   You will continue to lose money until the market price of crypto-Oil falls to the point where eOil can now buy profitablly (at parity).

If you decide you just want to 'destroy' crypto-Oil and never sell, 'just to spite' them.   Then those looking for crypto-Oil will just issue crypto-Oil2 which you will have none of and crypto-Oil2 will carry on following the price.   No holders of crypto-Oil lost money by your actions and you had a ton of opportunity cost.  eOil aslo did not lose money.

The seem to be of the same family (I read your posting after I thought his up).  However I think (didn't look too closely) that you concluded your attack would not work.  But this one is different enough so it will.


Yes he could sell to himself, or it is unclear in the rules whether a someone can mint and fill a partial bid.  This would mint a bit-dust quantity of coin and block other minting.  I was thinking that partial minting is possible.  But if it is not possible, the other way works.

1. yes but transaction fees are trivial compared to blocking a (say) 100 million dollar company from doing business.

2. The attacker could counter-offer.  This would raise the effective cost of the crypto-oil purchase for eOil.  eOil might as well just buy at the attackers market price of +10%.  Or the attacker could start using bid-blocking (that is, instead of offering small mintings, the attacker offers bit-dust bids just above that of the eOil.  The attacker can go as high has he wants because he's offering small quantity.  But eOil must counter-bid with non-trivial quantities because it needs non-trivial quantities.  When eOil is high enough, the attacker fills the bid with a sale!

3. It does not matter, the attacker's above-market bid is very small quantity.


Yes, this last is very specifically the attack I am proposing -- both to bid and fill small quantities to lock minting.  I think I've earned my mini-bounty ;-)


As for solutions:

I'm afraid if I crack my own solution later you'll think I knew the exploit a-priori, so I hesitate to offer a solution.  But please take my word that right now I think these options are quite strong rules.  At the same time, I haven't thought more than a half hour about them:

Something that chooses the minted bid by multiplying the bid by the quantity and taking the biggest?

Or best I think:  If the top X% by volume of bids are not filled by sales then they can be filled by minting in the next round.  But only filled at 10% per round.  That is, it would take 10 rounds to completely fill the top X% of bids.  

I'm not filling every order.  The point is I'm partially filling the order with bit-dust quantities to block the minting.  Or if that is not allowed (the rules are unclear), I am bidding bit-dust quantites just above eOil's offering so if minting happens it is MY bit-dust quantity that is minted.  I can always top eOil's bid because my quantities are tiny.

Yes, this attack assumes that crypto-oil is growing in popularity and therefore eOil needs currency to fill orders.  Sure the general public may fill eOil's order with a sell.  But eventually the people willing to sell at that price will run out.  Normally at this point a "minting" event would provide the currency and increase the backing BS.  But I am denying the system that option.  So we have a the limited-currency resulting in massive deflation situation that bitcoin has so aptly demonstrated.

  Of course, periods of potential deflation (increased demand) will be easy for an attacker to determine.  Either just by looking at the historical minting rate on the blockchain, or just by reading the news :-).

Additionally, since the bit-dust orders are so small the attacker can essentially keep it up indefinitely (or loses almost nothing) if he happens to pick a period where crypto-oil currency demand is NOT increasing.

Cheers!

Let me try to summarize the primary flaw in your attack:  you cannot force eOil to buy, thus you cannot force them to take a market position that would cause them to loose money.
What you can do is buy up all crypto-Oil (presumably at above market rates that profit eOil or someone else).
Once you own it all you must sell to prevent someone else from minting.
You are not actually earning any more dividends due to bids on crypto-Oil going higher and higher.  The only time dividends change is as a result of minting or covering.. therefore the attacker has constant 'opportunity cost' (violating the profit seeking rule).
The only people who "suffer" from your attack are those who hold oil and want to buy dividend-paying crypto-Oil.   You will have set the cost of dividend-paying crypto-Oil so far above parity, that they will not buy from you.  You are the only one left owning any, everyone else has sold to make a profit.
This will create demand for a new crypto-Oil which could be started by anyone.  The new crypto-Oil2 would be issued by eOil at parity and offered for sale at 1% above market price.  All of your customers would 'flee' and purchase crypto-Oil2 and use that until you lowered your prices... to parity.  Thus it
cost you a lot of money, but otherwise didn't harm anyone else.


If eOil refuses to buy above parity (why should they?) then the only thing your attack can do is increase the value of crypto-Oil.. something everyone who wants to withdraw crypto-Oil cannot complain about!

Even if you only sell the smallest dust amount (similar to bitcoin's rules...so not new)... you will not be able to prevent others (not eOil) from selling to fill at a profit.

Eventually you either own all crypto-Oil, sell all of your crypto-Oil, or everyone else switches to crypto-Oil 2 with no losses.

If others can sell to fill at a profit then so can I.  My job is done, I have caused the currency to rise in value due to scarcity.  At 10 minutes a pop, if I bid or fill 1 satoshi worth of crypto-Oil I can go on essentially forever without materially changing my position.

Switching is an interesting proposition.  But I think technically I win our .25BTC if my attack forces everyone to abandon the crypto-Oil currency and move to another one.  And I think I win in intention as well because a currency switch can't happen quickly because the backing BS is tied up.  Also, you are not considering the human factor -- there is tremendous market inefficiency and cost involved to get people to switch over.  No one would trust eOil or crypto-Oil again...

And people would be leery with good reason, because I can block minting on EVERY crypto-Oil currency issued after its creation is announced on the blockchain.  So eOil would be forced to create not just another currencies, but a whole bunch of different ones, the number depends entirely on how much eOil is able to mint during currency creation -- this is basically just how much $ it has on-hand every day due to new sales.  So a new currency is created every day... and the whole system has to trade between the N crypto-oils by looking at the BS backing each one.  In other words, they are trading BS in a crypto-oilN wrapper.

 

Not quite how the dividend payments would be implemented.  Clearly it would be unsustainable to create actual
transactions for all dividend payments due... that would be 1 transaction per output and the fractions would be
below the size of .0000000001 bitshare.

The miner would only ever start out with 12.5 Bitshares + 1/2 of the fees, the matching part that is paid as dividends is simply 'noted'.

Now when a user wants to collect the dividends on a particular output, they must create a new transaction that 'spends the dividends' from
an existing output.  The software will look at the 'coin-age' of that output, total up all dividends for all blocks solved since the block
that included that output and calculate a 'total dividend payment'.  This dividend payment could then be transferred to any other address.

You can only 'spend' the dividends from an output with over 120 confirmations.   Even though you can spend the 'balance' at any time, just like in bitcoin,
    you can still go back and collect your dividends later.

Now this is where it gets interesting, because all transactions have a fee, it is impossible to redeem dividends that are too small.  Therefore,
    if your turn-over on an output (say 1 BTC held for 1 block) would result in a potential dividend of   12.5 / 21,000,000 and thus be 'unspendable' until
    the value of a BS rose dramatically.

As a result if you want to collect dividends you want to concentrate your balances and hold them for a long time.

Some more design work may need to be done to effeciently distribute dividends.  Another alternative is to have dividends accumulate separately in every output and
then follow spends.  Dividends would have to be expressed as Average Coin Age + Amount because I cannot convert them to balances until they reach 120+ confirmations
or else a chain split would invalidate a ton of transactions. 

Clearly there is some R&D on how to effeciently distribute dividend payments, but I believe that is solveable as it is just math and book-keeping.



   Lets try to clean up your example:

   Assumptions:
   1 BitShare = 1 BTC
   1 BTC = $100
   X == ???    I will assume a $10 dollar bill. 

   User wants to create a crypto-X share, they can only create a crypto-X share in response to the highest bid for crypto-X that has at least 6 confirmations... so
   presumably somewhere in the blockchain there exists an output of the form:

   Output:  [BID]
        10 BitShares  spendable by any transaction that pays 1 crypto-X to address A


   User then create a new 'issue' transaction based upon that Output:
   
   Inputs:
         [BID] 10 Bitshares  (from bid)
   Outputs:
         1 crypto-X payable to address A
         10 mortgaged BitShares paying dividends to all crypto-X shares (not just the 1 we created), redeemable with 1 crypto-X


   To doublecheck out math:
     Value In:   10 BitShares
     Value out:  1 crypto-X  worth 10 BitShares
                 10 Mortgaged BitShares redemable with 1 crypto X
                 
     No value created or destroyed.

   The person who made the Bid received 1 crypto-X, and paid 10 BS, the person who issued the currency received 10 mortgaged bitshares.


If 1 BS pays a dividend of .01 BS per block and one crypto-Gold pays .10 BS per block, which one is worth more to own?   Clearly crypto-Gold pays 10x as much as BS and is thus worth 10x as much despite all payments being made in BS.


 
  I think the disconnect is that you are comparing worth by looking at 'absolute' dividend rates instead of 'relative' dividend rates.  Given two revenue streams paid in 'undefined' good X, one pays 3x the other 1x, which revenue is worth more and by how much assuming x != 0?   The value of X is entirely factored out of the value comparison and thus irrelevnt. 


   
   The dividend rate paid to early adoptors will indeed be high, but don't forget there will be One Million BitShares issued to those who invest pre-launch and help make it a reality, so the initial dividend rate will be 25/1,000,000 every 10 minutes. Also, like any new business those who recognize the value and buy in first see gains.  Those who 'wait' until it is safer have opportunity costs associated with being less risk-adverse.



Ok, the usability by the average user is HUGE and is actually VERY simple.  They will have a user interface that displays the current 'price' of all crypto-X in terms of BitShares by pre-calculating   crypto-X dividend rate / BS Dividend Rate and therefore users never even have to 'see' the dividend rates, instead they see relative prices derived from those dividend rates.   Thus they can tell when crypto-Gold is over-valued compared to crypto-USD without ever having to think about BitShares or Dividends. 

The only people that really need to understand the dividend rates / etc are the early adopters / investors who care about where the value is coming from.  Once they understand the machanics they can 'trust it' and start trading based solely upon absolute prices drived from interest rate ratios.   Thus all of the complexity is only present *now* when I have to show everyone why prices track as they do. 

Correct.


Just because it goes up due to momentary scarsity does not mean you broke the peg (remember my +/- 10% trading range).
The margin between crytpo-Oil and oil is what provide profit motives for people to bring goods into/out of crypto-Oil based upon supply and demand.

So all you did is partially fill one order ABOVE MARKET VALUE.  Because there exists bids above market value we can assume the following:

0)  While eOil has crypto-Oil they will sell at a profit.
1)  eOil will not buy nor issue ( you stopped nothing they wouldn't have done anyway )
2)  Everyone else has profit motive to sell and bring the price down.
3)  You have opportunity cost by not selling the full amount.

So the only way you can claim that you are a rational, profit-seeking, actor is if you have some way to profit from this which is greater than the opportunity cost.


NOTE:  Those who purchase crypto-Oil have only one requirment:  its value shall not fall below parity by more than a couple of percent.  Therefore, breaking the peg to
the up side actually means they profit.  You cannot hurt someone who owns crypto-Oil by pushing the price above parity and keeping it there.  You would be losing money
every day you held the peg due to transaction costs. 


So, lets look at what it would take to ACTUALLY pull off this attack:

a) you would need to purchase crypto-Oil above market rates and hold it at opportunity cost.
b) you could drive everyone to sell their crypto-Oil for BS at a profit as the value of oil falls.
c) you would discourage / prevent new people from trading their oil for crypto-Oil.
d) you would cause eGold to issue crypto-Oil 2 which was cheaper than crypto-Oil yet also would never fall below parity.
e) everyone with crypto-Oil would trade into crypto-Oil 2 at a profit.
f) market will continue as normal with no one taking any losses except the attacker.
g) the attacker would then have to sell crytpo-Oil at a potential loss, and then start buying crypto-Oil 2 above market rates...
h) eventually the attacker will be bankrupt while everyone else is receiving higher dividends thanks to all of the transaction fees
   the attacker is racking up to no real effect.


So you have failed to put eOil out of business or steal any money from anyone.  You did succeed in disrupting the market, forcing it over to another crypto-Oil 2 which would cause ineffeciencies and confusion.
Your attack would only work once you had cleared out all other sellers, and thus would be very innefective in any large market like gold, usd, etc.

Your attack takes advantage of the fact that you can issue 'dust' orders.
Your attack is not profitable, and is more along the lines of DOS.
Your attack would not be possible if you could not place 'dust' orders because you would run out of capital too quickly by filling orders above market rate.
Therefore, you would need rules like bitcoin has to prevent 'dust' transactions from propagating or being included.


Therefore if we had the following rules:

You can issue against multiple bids at once provided they are at the same price.
All bids must be a multiple of 2x the minimum transaction fee. This forces grouping of bids in the same 'range' to be the same effective price.
Define a minimum 'order amount' to prevent dust orders... this order amount could be defined by 'miners' and therefore subject to 'market forces'.

The block chain is clearly not an effecient datastructure for micro or high-speed transactions, so lets assume that there are a number of
'spam filters' that the clients could run to detect this kind of DOS attack.

Given that assumption we can conclude that when it comes to 'trading' the blockchain will only be used by those who can trade in multiples of $100 and anyone
wanting to trade in smaller lots would have to do so 'off chain' on a Open Transactions server.


Does your attack work if you don't have access to dust?


Considering you failed to drive eGold out of business or steal money from anyone *and* your attacker was not motivated by profit and took constant losses, technically I don't think you should win the 0.25 bounty.

That said, this was a good attack and provoked thought and rule changes so I will award you 0.25 because it was still valuable.  It will be paid in a few hours.

When this project is completed, I will be one of the first to read the white paper.  Very interesting ideas.

The relationship between crypto-USD and bitshares is equivalent to cash and treasury bonds, correct?

Not quite because cash is a revenue stream of 0...  I am trying to come up with an analogy.

Thanks for the award!  The attack requires greater capital without dust so eliminating dust bid minting prevention is certainly a good first step.  I still think I would succeed in either decoupling crypto-Oil or driving eOil out of business so I'm going to offer my final thoughts for you to consider:


Exactly! -- or anyway I would prevent new people from trading it at parity.  What you may be missing (and your simulation game is certainly missing) is that a large portion of any market (and ESPECIALLY consumable markets) isn't made up of speculators -- its made up of people who NEED crypto-Oil for a definite purpose.  In the case of crypto-Oil, probably so they can send it to someone somewhere who can then use it to receive physical oil from the tanker to ensure his refinery keeps running.  Crypto-oil is certainly better the actually shipping the oil, and it is also better then BS or bitcoin because it theoretically tracks oil.  So the refinery can hold 6 months "reserve" in crypto-oil "safely" and draw on it every day.

So when eOil says they cannot fill the order because they do not have crypto-Oil to sell these people aren't going to say "oh ok I guess I'll buy banana futures".  They are going to go to a competitive instrument -- like a trust backed colored-coin running over the bitcoin network.

And if eOil is doing say 1 million a day in transactions that takes a lot of people.  Sales people.  IT, etc.  And financial commitments like advertisements.  You can't just turn the people off and then turn them back on when the attacker gets bored and gives up.  So the attack destroys eOil because they lose customers and must pay their employees to do nothing,  because eOil can't sell them crypto-oil currency if they can't get it from the market.  One simple way to get it is to offer to pay more for it of course...

let me put it in 2 lines:

tl;dr: Minting is a key feature of your system.  Therefore you must think that it has some important function.  Whatever that function may be, the attacker can use blocking bit-dust bids and fills to create long periods where that function is not available.  This cannot be a good thing. :-)

The purpose of having an anonymous peg was merely to simulate the 'invisible hand of the market' that was confusing the debate, the idea being that there is just 1 eOil company, but 1000's of them all competing to provide goods to the market.  The purpose of making it anonymous was to make sure there was no 'trust' or 'contract' between eOil and the users of crypto-Oil.   So, the biggest problem you have forced me to face (whether you realize it or not) is that my pricing mechanism either forces everything above parity until there is no longer a connection or to 0 with most of the dividends going to the attacker.   

Clearly my pricing mechanism is broken... but never fear bytemaster is here.. and he has a new pricing strategy that is far better!

The source of our problems is establishing the minting rate... right now it is entirely one sided with no market forces to push it to the proper rate.  This occurs because the exchange was based upon trading existing crypto-Gold for BS and attempting to 'tack' minting onto an entirely un-related exchange.   So, here is my new strategy for controlling mint rates:

1) It is entirely pointless to have an exchange between BS and crypto-Gold because we know the exchange rate 'exactly' based upon the dividends... thus my old exchange was 'pointless'.
2) What we really want is an exchange between 'minting' and 'melting', thus when you melt you reverse the process of minting by turning crypto-Gold into BS at some 'rate'.   

So instead you turn the market into an 'mint' vs 'melt' market...
    - when I melt...  I want the highest possible ratio that allows me to buy the most gold.
    - when I mint.... I want the lowest possible ratio that allows me to sell the crypto-Gold for gold.
    - the two market participants must agree to the mint/melt price.
   
* note * the minter is no longer given an option to cover at his mint price, thus there is no longer a 'short' position to be covered.

So how would this work?
     - Initially there is no crypto-Gold... thus, you can mint at any price you want you are creating a new currency
     - This creates new crypto-Gold which the holder does not want to melt for some time.
     - When there are no melters, you can only 'mint' at the same or higher ratio (no debasing)
     - Once there is an offer to melt, that is the highest (and lowest) you can mint at (melter/minter just exchange).
     - When there are no minters, just melters, then you can melt at the current rate.

Why would someone mint in the first place?
     - to create a new peg and establish a new crypto-Gold.  Those who have crypto-Gold know they paid 1 gold coin for it, and it was at parity, they are not going to take a loss if they can help it.
     - If the value of gold goes up it requires more BS to back it, thus you can always mint at a new higher rate.
     - If the value of gold goes down, then crypto-Gold will be 'over-backed'.  No one will want to 'mint' at the old backing... and any crypto-Gold holders will not be able to 'melt' over the mint price,
          both parties realize that the only price they can 'agree on' is the current market price of gold.   This would allow 'one in' and 'one out' of the crypto-gold market.

Why would someone melt from a high-yield (over-backed) crypto-Gold balance into BS?  
     After all they could just trade their crypto-Gold balance at full value without melting!  No one will melt unless they are forced to melt and thus we need to find a way to force melting.  I think the way you do that is to only allow transfer between addresses while in BS form.  Thus, you can only transfer value through BS, but you can store it as crypto-Gold.   

If we ignore the technical challenge of turning every gold wire-transfer into two market orders... this approach should work.

So, how would eGold operate? 
    - initially they would Mint as much crypto-Gold as they could sell for gold with a fee.... thus they have acquired a lot of gold.
    - if the price of gold goes up... egold would sell some of their gold for BS and offer to mint for anyone willing to melt.. there would be a spread (egolds profit)
    - if the price of gold goes down... the crypto-gold would now be backed by too much BS... so the holders are earning a lot of interest... this causes a rush into
      the crypto-gold market with everyone wanting to 'mint'... but they could only mint at the lowest melt price.. this forces them to mint high and for the melter to melt low so
they can agree on a price... thus parity will be established with supply and demand.


I am re-opening the bounty on this thread!

See the following video explaining bitshares: http://www.youtube.com/watch?v=RPbSaznUbg8&feature=youtu.be

BitShare Dividend Algorithm
Dividends are generated with each new block as 50% of the transaction fees and mining rewards.

Because Dividends are generated via mining, they cannot be confirmed nor spent for 120 blocks. If we were to attempt to pay out dividends sooner than that then a chain split would invalidate all transactions on the bad chain and the dividends could generate a lot of 'dust' (aka: outputs to small to spend).

As a result the following algorithm will be used to claim dividends:

1) Whenever an output is spent, it may claim all dividends from blocks with more than 120 confirmations as part of the balance.

2) All dividends from blocks less than 120 confirmations become part of the transaction fee. This will serve to aggregate all of these 'unconfirmed' dust dividends into a single fee that will be 'recycled' once the next block reaches 120 confirmations.

3) The end result is that high-frequency transactions generate more dividends for those who hold!

4) 'inter-day-trading' by rapidly minting will result in 0 dividends and thus no profit opportunity.

5) For high-speed trading, do that off chain where you can speculate with sub-second timing if you like.

This is what convinced me this system will not work:

Assume I issue  $1,000,000 of crypto-Gold at todays exchange rate.

Tomorrow Gold goes up by 50%.

Where does the extra $500,000 of value come from to back the already issued crypto-Gold?

If I simply issue another $1,000,000 of crypto-Gold at the new exchange rate... it would still be diluted.

Therefore, there would be no profit to back new crypto-Gold with *MORE* backing than existing crypto-Gold.

http://3.bp.blogspot.com/_26CFEHYphXI/R7x2yldi9qI/AAAAAAAAAWs/hHMYurkbyKg/s320/docbrown.jpg
DO YOU KNOW WHAT THIS MEANS???

The only way to make BitShares work anything close to what I had dreamed would require users to post collateral in excess of the current exchange rate to create crypto-GLD (closer to Version 1.0)

Why didn't I see this before?  I was looking at small 'incremental' rises that would push it up and then extrapolating wrong.  I was thinking that individuals who 'wanted interest bearing USD' would pay a
premium to get the return, and therefore cover losses.  It might work for small movements, but certainly not for large ones.

Why couldn't anyone convince me before?  Because no one could explain it in such simple terms.

Lessons learned?   It was incredibly valuable to have input from those who hung around and the bounties I have paid have been well worth it.  I also learned that my arguments were very convincing to everyone around me and to multiple investors who also couldn't see what I was missing.  Even TheZerg whom I paid 2 bounties to was resorting to using more and more arcane attacks that required very expensive attackers.   

When I re-read some of the arguments against my system in light of my new perspective, I see that indeed I am lacking outside pricing information. 

-------------------------------

That said, what I do know for sure is that I have created a system that enables 'short-selling' of bitcoins.   Assume we ignore all of the crypto-Gold/USD stuff, and focus just on 'mortgaging' 1:1.   It would allow you to receive $USD today 'selling' your mortgaged shares... and then buy back your shares in the future when they are cheaper.   

The ability to short-sell bitcoins would enable people to hedge their bets and 'reduce' volatility both of which would be incredibly useful and potentially worthy of investing in on their own.

So, if anyone wants to talk about the potential uses / benefits of a crypto-Currency that supports trust-less short-selling then I am open to discuss it.

--------------------------------
Regarding the Bounty:

I do not believe anyone here *convinced* me.  If you believe that it was your input that convinced me, then I will listen to your arguments, and if I still disagree then we can have it arbitrated via judge.me then I am game.
Those who did help me and provided constructive feedback received tips or were paid for their exploits/time.

Regarding Investors:
All investment funds will be returned, unless you want to pursue a short-selling crypto-Currency.

Thanks everyone, I hope you found this discussion / idea had some redeeming value on its own even if it was a dead end.

Great. Now you can abandon this idea and help me implement the mini-blockchain idea. ;D

QFT

bytemaster,

No one can convince anyone of anything... I can only lead you there, but you have to do some thinking on your own.  Which you have now done.  This is a universal truth.  I believe that I led you there so deserve the 10BTC bounty.  While there were other posters, I was one of the first and I am the only poster who did not just give up and move on.  The second posting I made asked the very question that you now realize is unanswerable "how does USD pricing information enter the system?" -- and other issues that in fact remain unresolved.

I write the above in the hopes that you will happily pay me the remaining balance on the 10BTC bounty in full understanding of my efforts.

But it is technically irrelevant because you agreed to the following terms of our .25BTC bounty:  These payments go towards my claim on the 10BTC bounty.  But if you stop the process, you essentially agree that you're abandoning the project and pay me the rest.

Go ahead and find the above statement in the the following quoted exchange (bolded) which can be found earlier in this thread.

Please do not force some tiresome judge.me process.  Meet your commitments honestly.  Since you have abandoned the project, but have already paid me .5BTC in bounties, those commitments are 9.5BTC to address 1CKeoT8vBDQDEpMHz5VAswV39pZJ2GTGYd.

Best,
thezerg

TheZerg,
     You have convinced me that I would owe you the bounty if I gave up on the project and decided not to invest money in creating a distributed peer-to-peer exchange based upon dividend paying BitShares.  As such, I will commit to pay you the 10 BTC bounty as the only person who stuck with it once I actually do give up; however, I gave up pre-maturely and because 'rule changes' in how the system *could work* were part of determining when a 0.25 BTC bounty would be paid out and I have paid out a 0.25 BTC bounty for each rule change you forced me to make I will now present a new set of rules that will solve the problem.  As a result of these new rule changes I am accelerating my investment in the exchange and ultimately you only convinced me that one particular set of block-chain rules was unworkable.     

   I would now like to offer you the following settlement and open new opportunities:  1) I will issue you 10 BTC worth of pre-mined BitShares (1000) if I continue with the project through to completion *or* I will pay you 10 BTC - in addition to any bug-fix bounties paid in the event I fail to follow through.   Either way you should win and either way you would have a clear-case in arbitration that is no longer subject to impossible to prove claims.  Furthermore, everyone on this forum will be able to judge whether you are owed the bounty in non-ambiguous terms and I will therefore not even bother with arbitration and simply pay you.

So, here is the deal, I am re-opening the bug-finding process with 0.5 BTC bounty per rule-change you can find.  I still value your efforts. 

For starters you should consider this thread: https://bitcointalk.org/index.php?topic=223747.0  which explains the works of the system.   I will be releasing a video update describing the process as well. 

1) Anyone may sell short any asset on the exchange provided:
       a) there exists a buyer who is willing to take the other side of the trade *at built-in market price*
       b) after the short sale, they have 3x the value of the short sale as collateral.

2) Any short position may be redeemed by the market when the value of the collateral falls to 1.5x the value of the short.
       a) half of the position is sold and the proceeds are used as collateral for the other half of the position (unless collateral would still be insufficient, or the balance would be 'dust')
       b) there is a 5% fee paid by all shorts which force the network to cover their position. The goal is to
          encourage any short to keep their margin sufficient or close out their position early. This fee also
          motivates miners to give closing out of short positions priority over most (all?) other transactions.

4) All 'short' positions must be closed in full before any of the collateral may be spent.
       - as the price of an asset falls, the effective interest rate paid to longs will go up as the ratio between short and collateral grows.
       - this will cause increasing opportunity costs for the short position which will motivate them to cover the entire position
         and re-open their position at a new base. 
   
3) Dividends paid on BitShares held as collateral are redirected to individuals who went Long (taking the other side of the trade).
       a) As a result, crypto-USD pays 1.5x to 3x to dividend rate rate as BitShares.

4) Users place their bids / asks into the blockchain as 'outputs' that can be canceled by spending them, or accepted by
       spending them as part of a transaction that satisfies the bid and market requirements. 

5) No block may execute a trade below the highest bid or above the lowest ask in the block chain.
      -  The order in which trades are executed is based upon 'price' first, 'fee' second, and otherwise up to the miner
      -  If the highest bid is greater than the lowest ask, then the transaction occurs at the *bid* price.

6) No transactions that contain multiple currency units are allowed outside of the bid/ask system.
      -  This requirement may be lifted after a careful audit for potential attacks by circumventing the 'market'.

8) In the event that the price of an asset changes so rapidly as to blow through all 'margin', the Longs will eat the losses.
      - this is the justification for the higher dividend rates paid to the longs and the opportunity cost incurred by the shorts.
      - No system can gurantee 0 losses and BitShares is no different.

9) All trades on the built-in exchange incur a 0.05% transaction fee that contributes to mining fees / dividends.  This fee is
   designed to minimize the profitability of 'rapid trading' and generate profits for the BitShare holders.
      - minimum transaction size limits will also be imposed (like Bitcoin) to prevent dust spam.
      - minimum transaction fee just like bitcoin also applies.

10) All dividends paid to 'transaction outputs' in the last 120 blocks are recaptured as mining fees, spending these unconfirmed
dividends would result in chain-splits invalidating the tranaction.
      - as a result, those who spend money rapidly will receive no dividends, while those who save will receive the dividends.

11) Users may transact in any currency just like they do Bitcoin (provided all non-market transactions only deal with a single currency).
      - this includes trading of their short position.

12) No block may clear out more than 5% of the value of all open bids/asks for a particular asset.
      - this prevents certain classes of attack in 'thin' markets.

13) A maximum reduction in exchange rate of 5% per block.  The goal is to give market participants time to add collateral or buy the
dip.  It would also prevent certain types of attacks based upon 'rapid manipulation' of the price.

14) No trade may occur unless there are at least N? bids/asks capable of 'reversing' the position.
      - this aims to prevent attacks on new issuance and insures that there exists a deep enough market to justifiy creating
      a new asset class.  It also 'halts' trading when the market gets thin.
      - the definition of 'capable of reversing' is still TBD

15) You must wait 10 blocks before spending the output of a trade.
      - if we allow people to immediately spend with the proceeds of a trade then, chain forks could be exploited to
        reverse trades, manipulate prices, and cause losses.

All of the rules above ultimately mean that trading can only occur at 'human speed' and all high-frequency trading will be
forced off-chain.  Trading is not 'free', but cheaper than any current exchange.   


In particular I am looking for ways that the market can be manipulated that do not also apply to traditional markets.  Some avenues of
attack that must be considered:

1) What would happen if someone had 51% of the hashing power?
   - they could control what bids made it into (or out of) the blockchain.
         * prevent people from canceling bids.
   - they could control who got want bids.
         * play favorites
   - they could do anything they could do with Bitcoin.

2) What would happen if someone had 1% of the hashing power?
   - they may gain some advantage in picking/choosing bids.
   - would this motivate professional traders to invest heavily in mining?
   - would the competition ultimately be good for the network?

3) What weaknesses would be exposed by having all short positions and margin available as public information?
       * Somone with significant capital could 'trigger' a short-squeeze by bidding up the underlying asset.
           - is this mitigated by not allowing uncollateralized shorting?
       * The short-squeeze would then enable new shorts to sell at higher prices (offsetting their attempt to push it up)
       * In theory someone could take advantage of such moves... but only if they could move fast enough between
         short and long positions to 'head-fake' the network.  Because all positions require 6 confirmations before they can be adjusted does it
         make it difficult or impossible to benefit from this kind of manipulation?

4) In theory all 'shorts' are naked, but backed, and are ultimately settled in BitShares.  What are the implications?
   - don't trade in illiquid, rare, or non-fungibile/divisible items.  It would be up to the Longs to assess this risk.
   - the total 'short' position for any asset class is public and therefore can be audited.  If the total short position
   is too-large the market will respond by discounting the 'long' position from face value.
   - how does 'naked' shorting enable manipulation?  In theory, someone with a large amount of capital (BitShares) someone
   could keep selling into a market.  This would result in pushing the price down but would also drive the dividends paid
   to longs up. 
   - Because longs are not buying with leverage, short-selling to push the price down CANNOT trigger margin calls and further selling.
   - another way this can be viewed is that the 'shorts' are 'borrowing' the USD from the longs and are posting collateral and
   paying interest to do so. 
   - any naked-short is ultimately has to cover and thus 'unwinds' his position.  He can only profit if supply and demand
   actually creates a fall in prices independent of the action of the short-seller.

5) Why would anyone go 'long' against someone known to be naked-short?   Perhaps you can think of the short-long market as
  a betters market where the winner takes home BitShares.  All market participants are attempting to manipulate the price and
  predict which way it will move.  50% think it will go up, 50% think it will go down and the result is a tug-of-war.  What
  are people really betting on?  They are betting on what *other market participants* will do!  How do you know what the
  other participants will do?  You have to assume they are all expecting the price to follow real market prices. Anyone who
  is out-of-sync with the emergent consensus opinion about what a price should track will ultimately end up making losses
  in this market.

You have self-admitted to essentially throwing out the entire approach and starting anew.  That was the point of the bounty... to stop you from going down the wrong street.  The point was not that the entire idea is utterly impossible like a perpetual motion machine.

If you want to keep the trust of this community, please pay the bounty and THEN I promise I will examine your new ideas closely (you'll note I already posted a quick positive message about how interesting the approach is) and contribute as best as I can. 

But actual payment is essential rather then deferment.  I honestly haven't even looked at the details in the offer in your posting, and I won't until the 9.5BTC owed is received. 

That type of "re-negotiation" behavior is what rings ponzi alarm bells in people's minds... you don't want that.  What you want is me to be able to affirm that you've got the ammo to fund your ideas...

Ok Zerg.  I will pay the bounty to you and respectfully request that you *choose* to contribute the funds back to this project in exchange for 9500 BitShares.

In the future I will be more careful about my bounties.  

Paid, please confirm.

Confirmed!!!  Thanks for standing by your word!

You are moving closer to what I suggested previously, but you still do not have a credible mechanism for introducing price information into the system. There are other problems too, but this is the big one.

Ignore this stuff about interest, shorts, and longs, etc... It is not critical and it is a distraction.

The key question is "how is price information input into the system?" A MARKET WILL NOT WORK. FULL STOP. The instruments being traded have no fixed definition. You are asking the market to simultaneously decide a) what the asset is b) what the assets price is in terms of bit shares. There are an infinite number of equilibria described by (a, b) pairs. e.g., recall that a cryptoUSD can turn into a cryptoMANGO and visa versa. (a) is ambiguous. You continue to pretend that a cryptoUSD is a cryptoUSD because someone calls it that. Stop pretending.

Use voting by third-party observers to set prices. Create incentives for the third parties to vote honestly.

Otherwise, continue wasting your time and money.

Before a trade can occur a Buyer and Seller must *know* what they are buying / selling.  Therefore, unless there is some sort of 'understood contract' of what a crypto-USD is there would be no trading.  If there *is* an understood definition of what a crypto-USD is *then* the market can handle the rest.  Anyone who trades contrary to the consensus would lose money. 

Okay, names are good enough to establish market conensus. Let's take that on faith.

 I made 100 "cryptoUSD" to sell you. They are each backed by 3 satoshis. No matter though, I'm sure market consensus will create extra cryptoUSD with adequate backing. Buy them for 99 USD each now and you are sure to profit. Wait, if that happens I receive 99 USD for 3 satoshis...

Names aren't good enough at all. You need a third party authority. It could be a decentralized authority, but it still needs to be an authority.

You are entitled to your opinion, so I am going to create the centralized version of this exchange first because that will prove the model.    If it works in a centralized manner where the central 'authority' is merely simulating matching bids / asks, then do you agree that it would work in a blockchain?

No.

What is the difference?   

I think as a proof-of-concept, your model (with some refinement) will work.  My concern is whether or not it will be practical.  As you know, a functioning market requires liquidity and I don't see any efficient way to inject liquidity into the model right now.  Basically you're stuck at the fiat to crypto exchange hurdle.  Using escrow and such works on a micro level but if you scale everything up to a macro view, I just don't see how you're going to be able to get all the necessary funds into the market. 

Maybe I'm getting ahead of myself but it seems the main feature of your new endeavor is to eliminate the need for fiat deposits.  Without an efficient way to do that, I can't see a need for all of the rest.  I'm hoping in this respect you are more visionary than I am as I think this is the main issue facing Bitcoin right now (how to decentralize the exchange of fiat to BTC).  I'll be watching closely and hopefully adding some productive comments along the way.  Maybe even some capital if I can be convinced this is potentially a viable solution.

This is certainly a growing pain issue and adoption will be slow at first.   But lets make some assumptions:  assume that crypto-USD ends up tracking actual USD within a small range for 6 months.   Assume that crypto-USD is actually paying a 10% APR.    Now, ask yourself this... how many people will be 'interested' in trying that out?   How many people will create a business out of accepting 'deposits' of USD for a small fee and selling crypto-USD?   Perhaps just as a hobby?    Watch as this starts catching on and people realize they can make money.  All of a sudden it goes viral and you can deposit / withdraw cash with just about anyone for a small 'ATM' fee.    Sure, it may take a while to catch on, but it will.

Any created business that accepts USD and issues "virtual currency" will have to obtain a money transmitter license.  They'll have to comply with the same AML/KYC laws.  So essentially it's like setting up gateways like Ripple, just off network.  It would be difficult to do as a hobby unless you deal with very small denominations.  Although maybe established gateways and Bitcoin exchanges could be enticed to be brought on board, afterall they've already forked out the cash for the licenses so they may as well dip their toe in as many markets as they can.

The dividend paying aspect is interesting and where your idea differentiates yourself.  It will help to garner interest but even by your own admission, you cannot protect the longs from big market corrections.  In a young and illiquid market, you're going to have large price swings.  Will a 10% dividend be enough to entice a large amount of investors to see that reward as commensurate with the risk, that's the big question.

10% will be the rate after 2-3 years, early adopters will see 100%+ rates as  50 BS per block will be a much larger percentage of the initial money supply.

Clearly if you are big enough to be a gate way then AML laws will apply, but I suspect many people will just do it casually when they want some extra money.  Large number of informal arrangements can add up.