Bitcoin Forum

*EDIT*  I have posted a white-paper explaining this process here: http://the-iland.net/static/downloads/BitSharesWhitePaper.pdf

I will payout a 0.5 BTC bounty each time someone finds an 'attack' on this block-chain algorithm that results in me creating a custom rule to address.


Imagine you wanted to open up a new exchange that did not accept USD deposits but still allowed people to trade USD vs Bitcoin.  How would it work?

First I would have them deposit Bitcoin.  I would let them 'short' dollars by selling them into the market provided the result of executing the trade
would leave their account with  - 1 USD   and  2 * Exchange Rate BTC.   I would then force them to 'cover' once 2* Exchange Rate == 1.5 USD.  We can then be sure that they will *never* be able to walk away with a negative USD balance unless the exchange rate fell "instantly" by over 50% and even then the losses would be limited.

I would then allow users to 'transfer' USD balances between eachother provided any negative balance maintained sufficient collateral. This means that someone could exchange paper-USD outside the exchange and receive a positive USD balance inside the exchange.  For this to work someone has over 1.5x the collateral posted backing that USD.

Then at the end of the day I would allow them to withdraw only via Bitcoin.

The net-result would be an exchange with no ties to the traditional banking system, yet still minimal risk to those who participate.  All prices
would have to be honest or someone will lose their collateral.  It is a kind of Nash Equilibrium backing all exchanges.

I would charge transaction fees and use those fees to pay interest to those with net margin in excess of 1.5x. I would also charge a one time fee
for short selling that would be paid as interest to the holders of USD.   You could only short-sell when there are no longs selling and everyone must compete to win the short position with the highest fee winning.

This would be a VERY traditional margin-based exchange supporting short-selling.   The cool thing about such an exchange is that all of the 'rules' could easily be encoded into a Blockchain and require no 'outside parties' to manage the exchange.

As a result this new structure solves all of the pricing issues with BitShares.   Market participants would all understand that their $USD balances are all backed by collateral and relatively safe.  There is risk involved if the price swings too quickly (USD going up, Bitcoin/Shares going down) and it would have the effect of generating 'short squeezes' that would tend to keep prices in equilibrium with less volatility.

So the question becomes, would you use an exchange based upon these principles?  What if it was entirely encoded into a blockchain?

I dont really understand your how that should work. Make a proof-of-concept site and we have something to talk about.

meanwhile, have a look at bitcoin.de , they dont ask for a money deposit, only a BTC deposit from the seller. So in case the buyer doesnt actually pay, nothing is lost and and the BTC can be returned to the seller; on the other side, the BTC from the seller is frozen when a transaction starts, so when a buyer did transfer the money but the seller doesnt confirm, then the exchange-owners can always check and release the frozen amount of BTC.
It is slow (because of banks), but it works.

When you open a brokerage account you deposit $1000.   Then you want to sell some stock short, so you 'borrow it' and sell it on the market.   Your account is now 'short' the stock and you must maintain enough money in your account to buy back the stock even if the price of the stock jumps by 50%.   If the stock does jump the the broker may use your margin to buy-back the stock and cover your position.

If we consider your 'deposit' owning Bitcoins, then you can 'borrow' USD and sell it on the market provided you maintain enough BTC in your account to repurchase that USD even if the price of USD goes up 50%.

As a result of your margin the person who lent you the USD can be relatively sure they will get their USD back even if the price moves against you.  

The question is 'who' actually lent you the USD that you sold?   The answer is anyone who will give you real $USD in exchange for your digital USD.   Why did they lend you that $USD?  Because they know it was backed by enough money to any changes in the price and that the brokerage firm will liquidate your account to make sure they get their $USD back.

As a result the entire system can operate without any central planner so long as there is a means to enforce some simple margin requirements and a mechanism to exchange.

 

How can anyone give you real USD when the exchange doesn't accept fiat deposits?

You can exchange deposits on the exchange for cash.

Imagine you had $100 in Mt.Gox, you could meet someone locally, give them $100 cash to send you $100 on the exchange.

A bit like back square one, isn't it?

edit: trading is not the hard part, it's getting fiat for bitcoins and visa versa.

I hope to simplify the process of getting into/out of BitShares by allowing people to trade crypto-USD directly at face value without exchange risk.  This way no one has to worry about finding someone locally with 'reasonable' margins for buying or selling BitShares.

Could this exchange not operate on top of Bitcoin? does it necessitate having another alt-coin?

Unfortunately, it does require another alt-coin for 3 reasons:

1) The collateral rules must be enforced by the network.  There is no way I know of to 'lock' or 'force the sale' of bitcoins without the private key being kept secret.  That said, this system could work in a 'centralized manner' behind a Tor server using Bitcoin as-is.  You would still have to trust that Tor server and if it was ever found you could lose all of your deposits.   If you know a way of 'controlling bitcoins' while keeping the private key public (on the p2p exchange), then it may be possible...  It may be possible to implement something similar using Open Transactions and the bitcoin voting pools but that approach seems less robust and would take longer to develop.

2) There is no way to pay dividends with Bitcoin.

3) It is very easy to move value between chains.  Those who don't want to use the 'exchange features' enabled by BitShares could just keep Bitcoin.  Eventually people will realize that Bitshares have all of the qualities of Bitcoins + more AND most of their existing infrastructure that uses JSON-RPC to talk to Bitcoin will still work with BitShares.  This creates a smooth, natural, market-based migration path.

Investment Update:

So far I have lined up $30,000 investment into making this happen.  This $30,000 will get me through the first 3 months of development. 

Right now I am looking for people willing to pledge follow-on investments necessary to keep me cash-flow positive while I bring this idea to market.   

Because I know it is very 'risky' to invest money with someone at this early stage, I am asking only for pledges that will pay out on alpha-release of the new test-chain.  All investments will result in pre-mined shares in the new chain (1,000,000 limit to pre-mining).   Granted, receiving the money up front would put my wife at ease for this reason the first investors get the most pre-mining.     

Ideally, I would like to set up a company to handle the legal issues and hire additional people to accelerate development, find bugs, and otherwise do things that are not my strong suit. 

The first 500 BTC of investment I receive will be issued 1000 BitShares per BTC.   After that point it will be $1 per BitShare up to a total pre-mining limit of 1,000,000 (about 5% of the ultimate total money supply).  Also remember that owners of BitShares receive dividends equal to 50% of all mining fees so if you *never* sell then you could own a percentage of the total money supply proportional to your initial investment.   In other words, early investors will not be entirely debased by miners. 

Granted a forum post is not a 'contractual obligation', so if you would like more detailed terms and conditions on your investment or pledge then drop me a PM.

What does that ($30k) 3 month budget include? How many paid developers would be working on this?

Once I learn more about your new proposal, I might be very interested in helping on the technical side. What about code submissions for shares?

I thought you had given up on this and returned the investment. What happened?

This is a NEW take at solving the same problem.  This is not the same approach I was talking about in my old thread (though I kept the name the same).

I offered to return the investments and everyone has decided to re-invest in my new approach. 

Old Approach:  Complicated, Depending upon unproven economics and some wishful thinking.  Even I suspected I was missing something and was right.

New Approach:  Using proven 'brokerage structure' with crypto-currency as collateral and block-chain implementing margin requirements, automatic covering, and the exchange.

The new approach is so sound and based upon such a well-known practice in the industry that there are no mysterious forces at play.

I will be offering shares for work contributed as well.    The rule of thumb will be that I will pay 'market-rates' for labor done at my direction, and then convert those 'rates' into BitShares on the same terms as everyone else.  Any labor performed at your own direction you will have to recoup via mining or purchasing shares.

$30K budget is to enable me to quit my high-paying job and still pay child support.  I will be supporting my family of 3 on $1500 / month and paying $2000 / month in child support.  Everything else will be going into legal fees,  bounties, and hiring others to accelerate development.   Needless to say, I am not looking to 'live rich' on other peoples money, I just want to get this thing built.     

Of the $30K, I am holding $15K as reserve and plan on operating on a $5K/month budget.   So in reality I have 6 months of development covered, but my wife insists I only treat it as 3 months because this will take about 6+ months from launch of continuous support, testing, and marketing to realize some return.

If I can raise $100K I will hire additional developers and grow the team as funding permits.

I have a meeting scheduled with a VC firm that is very interesting in my idea as well.  One member of this firm has already invested $5K personally, but he did not have authority to speak for the entire firm. 

The problem as I see it is how do you envision people doing this on any significant scale?  It's rather cumbersome to do face-to-face transactions or some other medium that would be agreeable to by both parties.

Also, this isn't really circumventing or cutting ties to the traditional banking institution.  Lets say you and I meet up to exchange $10k in paper-USD for crypto-USD.  I give you $10k USD and you "transfer" $10K cUSD to me.  The second you deposit those funds into the bank, they're going to file a CTR (currency transaction report).  If it's later questioned where those funds came from, and you say you exchanged cUSD for USD, you're going to need a license or be subject to penalties.  Essentially, you're just transferring the risk from the exchange to all the individuals in the system.  There's no cut ties unless everyone is stashing USD under their mattress.


You realize this is THE #1 red flag/turnoff for VC's, right?  The last thing they want to hear is that you're paying yourself on their dime.  I'm rather surprised you got people to give you $30k to do this (more power to you) but any VC firm worth their salt will stop listening the second you mention you want to pay yourself a salary to further your own project.

I've been following your ideas and find them intriguing, it just seems like you're a bit hasty with your decisions as you seem to be bouncing from one idea to the next rather rapidly.  That's not a bad thing but I think you need to have a solid business plan first before you start seeking out equity investors.

What are your regulatory requirements for opening such an exchange?

sounds to me like you are now thinking: http://en.wikipedia.org/wiki/Foreign_currency_denominated_account
where the "foreign currency" is dollars, gold, etc. and the actual backing account is BitShares (or BTC if you do it centralized).  

The only way in or out it through the crypto-currency.

Pretty interesting...

I wonder how well the dollar denominated crypto-currency, i.e. crypto-USD will track the USD.  Search these forums for "Goxmoney" -- at times during the bubble people seemed to be willing to pay a premium for "USD" located on Mt Gox as opposed to located somewhere else.  Not so much of a premium that is became an issue though.

Ask your lawyer if there's some loophole where "dollar-denominated" does not count as actual dollars, therefore (in Canada at least) its all "play-dough" crypto-currencies and so not actually transmitting money...

All,
   Here is the list of block-chain rules under active development.  I will payout a 0.5 BTC bounty each time someone finds an 'attack' on this rule set that results in me changing the rules.  Note, I may change the rules at any time in response to my own efforts at finding bugs.    I will then kindly request that everyone who finds bugs re-invest their 0.5 BTC bounty into the project and receive 500 BitShares instead.

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. (actual collateral requirements subject to change)

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.

In what country? 

If you were to do it centralized (behind a Tor node) then I suspect you would be subject to all SEC regulations regarding naked shorting unless the crypto-currency was considered 'play-money' in which case it would just be an advanced "just-for-fun" betting system.   

The reality is they will make what ever regulations they want apply to the system.

Here is how it works, you can send money via the banks, dwolla, or any other system.  You could use gold/silver if you like.  The point is the exchange does not depend upon it.  Keeping money in the exchange will actually yield a higher return and because businesses no longer have to worry about 'exchange risk' they will be far more likely to accept it.   The end result is that the existing banking system will become increasingly irrelevant.




Here is the deal, I can pay someone else to do the work and keep my current job.  I can give the idea away and let the VC pay someone else to do it.  Unfortunately, I am not independently wealthy and have to eat.   So the question is am I paying myself above market rates for the work I am doing?   The answer is no, I would have been my self 50% less than I am currently making.  

Note:  most of what I post on this forum is based upon me being very open and honest about the development process.  I have nothing to hide and often 'brainstorm in public' so that we can generate new ideas.   I am posting bugs, airing incomplete ideas, and seeking investment all at the same time because I want to encourage everyone to join in the process of creating an amazing new system and *not* because I want to get rich off of investors money.  I would be happy to be an early miner on this new chain.

    Any investor who wants concrete terms can negotiate it and the result would be a signed contract between people.   Clearly before any *serious* money poors in there will be a new business started which will handle all of the invested funds.  I have been talking with some legal experts on how to handle this in the safest manner possible.   In the mean time, this is more of a kick-starter idea.

   Join have fun, and earn some pre-mined BitShares.   If you want to accelerate the process donations are welcome!

I'm not sure if you mean that in the literal kickstarter (dot com) sense, but when I read this thread that is the first thing I thought of - I would guess it could work there.

Good luck with the project, regardless.

I understand how you would send money, I'm just skeptical people would use these methods on any significant scale.  I know I can wire anyone on this forum money, that doesn't mean I'm going to do it.  The issue here is trust, you need to trust someone that the exchange will happen and they won't walk away with your money.  I get that there's no parameters on how the money will be exchanged, but on the flip side, that also means there are no parameters (or guarantees) that you will not get scammed.

As for businesses, wouldn't exchange risk be substituted with counterparty risk?  In this essence it sounds very much like Ripple.  Essentially what you have is an exchange built upon leverage (margin accounts) and trust (off exchange, USD <--> cUSD transfers).


I understand where you're coming from but this is the way all entrepreneurs think.  As someone who is familiar with VC firms, it has been my experience that they tend to stop listening to you once you bring this up because even if you are taking a pay cut, it is your decision to do so, they couldn't care less if it's only a fraction of your old salary.  I'm glad you found a workaround, it was more or less just a bit of advice based on experience.  I commend you for thinking outside the box and being transparent with the community.  IMHO, I wouldn't even mention anything about paying yourself from investors as they're just going to counter with the "sweat equity" adage.

Say two people want to use your exchange: Dave - the cUSD dealer, and Bob the cUSD buyer.

• Dave deposits $150 worth of Bitshares to act as collateral and gets $100 worth of cUSD
• Dave sells the cUSD to Bob for cash and then ceases trading & withdraws the excess $50 worth of Bitshare collateral.
• At this moment Bob's cUSD is backed by $100 worth of Bitshares, since the USD/Bitshare exchange rate has been stable.

But two days later the market crashes and the collateral behind the cUSD is now only worth $10.

Who is responsible for pumping in more collateral when the dollar price of a Bitshare falls?

What have I missed?

This system does not replace escrow for exchanges of fiat.  You even need escrow for exchanges of Bitcoin.  

This system replaces the need to use a 'bank' to actually store your money and gives you freedom of movement without the need to worry about exchange rate changes.

Dave has $150 worth of BS and then short-sells cUSD worth $75 (100% initial margin requirement).  The network will not allow him to spend his $150 worth of BS.   When the exchange rate changes and now his BS is only worth $100 and thus no longer has sufficient backing for $75 cUSD, the exchange will purchase cUSD on his behalf converting his cUSD short position and leaving Dave with BS worth $100.

If the market crashes by more than the available margin, then the 'longs' will get to split the collateral.   There is *nothing* I could ever code that would insulate people from market crashes beyond a certain point.   

Lets get one thing straight, what would have to crash in value would be BitShares and not $USD.   Ultimately Long's are still trusting in BitShares they just don't have to worry about the volatility.  If BitShares appreciates like Bitcoin does then there is no problem.   The one way to mitigate this risk of 'crash' is to have early adopters post more collateral.  You could actually have  cUSDx2  cUSDx3 and cUSDx4 depending upon how much collateral the various cUSD had backing them.   The cUSDx4 would pay much higher interest rate and thus command a premium price in exchange for USD compared to cUSDx2 which might trade closer to actual USD if not at a slight 'discount' depending upon whether the interest rate justified the risk or not.   

Welcome to the new thread!   I am not sure what that wiki link has to do with with this design.     

Like I stated in my other thread, premiums above / below parity are to be expected based upon the relative demand for deposits and withdraws.  I am fairly certain that the nature of interest-bearing USD deposits will cause there to be a slight premium over actual USD, but perhaps the 'market' will factor that into the exchange rate between cUSD and BS. 

I am looking forward to your attacks on this new design!     

I see that there are collateral requirements for opening a position and that the position needs to be well maintained with Bitshare collateral, otherwise it will be automatically closed.

But since Dave is a dealer of cUSD, and cares little for speculation. He just needs a way to transfer $75 of cUSD to Bob upon receipt of $75 in paper money.

So I don't quite get how transfers of fiat balances will work. Who takes on responsibility for the ongoing maintenance of the cUSD collateral?

If the price of Bitshares halves then we will need double the amount of Bitshare collateral backing up all the cUSD.

I think im not really understanding things!

Ok, I dug deeper into wikipedia and have concluded that your analogy is very apt and much appreciated.    

There are many ways in or out.   You could only ever deal with $USD and cUSD provided you could trade with people who have cUSD balances.  

If the value of Bitshares falls in half, then all cUSD will bid up in a short-squeeze.   This will causes holders of cUSD to sell for BS and take a profit.  New players will come on the market and short at the short-squeeze high and provide the new collateral.  They will then profit when the price falls back to parity where they may cover their position in order to free up their collateral.

Yes, I am responding to myself... I couldn't help but notice how beautiful and elegant these market forces are!  Because shorts are forced to automatically cover once their margin reaches 50% this short squeeze could result in the price of cUSD being bid UP by up to 50% creating a huge selling opportunity.   Shorts would then anticipate this squeeze and thus provide additional collateral to avoid taking a loss during the squeeze!   Elegant!

Given that bytemaster has offered a bounty for attacks on his exchange system, I'd like to mention briefly here that he has met his commitments on the 10 BTC bounty that he offered for the prior system.

I haven't had time to really digest this new system, but in glancing over them I exceeded myself and had what I think is actually a constructive idea :) so I thought I'd share it:

Maybe the system should comprise 2 independent block-chains that none-the-less work together.  First,  a bid/ask (offer) chain with much lower difficulty (blocks found every minute, say), and a slower chain that handles filled transactions and "normal" block-chain transfers.

The advantages are:

1. The complete history of unfilled bid/asks is unimportant.  So the bid/ask chain could be checkpointed every few days and old data deleted.
2. The system would be more useful if bids/asks changed faster then the transactions.

I think that any block chain will be too slow for high-speed trades and the two chains would have to be synchronized.   The marginal improvement of having a separate bid/ask chain would still not yield a system with enough performance to justify the cost.

So here is a challenge, how can a group of people decide in a decentralized manner what currencies are represented by what crypto-Currency?

Lets start with a simplifying assumption:  the first version of the client only enables support for a dozen well known currencies.  These currencies are
hard-coded into the client and therefore everyone knows what they should represent.

The first users of the system would have to establish precedent by buying and selling USD, Gold, and Silver.  Theses early adopters would be taking
some risks, but these risks could be mitigated by observing the bid/ask spread prior to placing their bid.   For example, the first 'bid' might be extremely low, and
the first ask would be very high.  Eventually the market will negotiate a price because it is in everyones interest to reach a consensus.  Every party
to the exchange "wants" consensus that crypto-USD represents an agreement to pay USD.   No one wants to 'go first', but then again someone, like me,
might just go first because I know the market will eventually converge on an understanding.  I also know that there are out-standing bid/asks that would
allow me to reverse my position at a "known" loss.   

The real question is this:  how would the participants of the system sabotage the consensus building effort?  Do they place a bid out-of-line with the
USD or Gold label?   Do they bid too low and no one accepts?   Do they bid too high only to risk losing money?  They would have to 'bet' the market would
do something other than come to an agreement.   There are only two safe ways to 'play' this market:  assume it will reach consensus *or* assume no one will
try to reach consensus.   

Fortunately, this consensus building effort would probably settle out within the first day or two of operation, if not almost immediately.  Once it has momentum,
every party will be investing according to what they thing everyone else will do.  There is only one *safe* assumption and that is to assume everyone else will bid
according to the actual exchange rate.

Here is a basic video that introduces the concept:  http://www.youtube.com/watch?v=-8ZJ3xTDwbI 

The target audience is people who do not even know bitcoin so it includes a minute or introduction to Bitcoin that you may just skip.

More to come.

Why did you abandon your original DS Share thread (https://bitcointalk.org/index.php?topic=213588)?

Why are you trying to peg the value of shares to specific currencies? For that, CV Tokens (https://bitcointalk.org/index.php?topic=197799.0) would work much better, assuming they are possible to implement. (Croesus says he was just anthropomorphising the network to avoid confusing the economic side of things.)

Your DS shares have value in themselves if they allow you to "short" the value of bitcoin.

BTW, I don't think any decentralized coloured coin proposals will work: they essentially try to get people to value bit-dust.

To answer your question why nobody can explain to you in simple terms why your ideas won't work: You don't appear to clearly explain your ideas. In an effort to make sure I was understanding your DS share concept correctly, I walked through a contrived example (https://bitcointalk.org/index.php?topic=213588.msg2251345#msg2251345). When the results were not what you expected, you claimed I was mis-understanding the concept and opened an new thread that appeared to tack on CV-Tokens (poorly).

What concerns me is that this latest proposal appears more complex than the last. I hope the extra rules follow logically from a sound design, rather than being bugfixes that may introduced new unexpected behavior.

The DS proposal was a bad first step forward and was complex and flawed.  I have suffered from having a hard time explaining my original ideas.

This new idea is simple to explain and is not 'bug fixes' on the old idea... if it were merely 'bug fixes' I would not have paid out 10 BTC to TheZerg.   The new design is based entirely upon the model used by traditional brokerages and simply uses a crypto-currency as backing. 

I am moving forward with a team of people who have come to understand the idea and will attempt to explain it to anyone who will listen. 

I have flushed out many new 'rules' for the block-chain based upon vectors of attack identified by TheZerg in the prior chain.  The economics behind the new system is essentially the same as a brokerage that allows people to 'naked-short' with collateral.    Naked-shorting is generally considered bad in traditional markets because those engaged in the naked shorting have a license to print the USD backing that position and therefore can manipulate the price of gold/silver without limit.   Under BitShares there is significant opportunity cost for holding a short position AND the backing of that position cannot be printed out of thin air.   

Investors:

      I have decided to no-longer pre-mine the shares because I believe it will undermine trust.  I have also decided to stop taking direct investment and only seek to work with those who value the idea on its own merits.   Everyone will have equal opportunity to profit from this when it goes live.   

     So, instead I would encourage everyone who wants this to succeed to help find bugs and/or fund bounties and development for its own sake and not for pre-mined shares. 

     Those who have already invested I will personally mine the required shares for you.

      Bounty still exists for bugs in algorithm.

I checked out this link, read the first post carefully and skimmed the others.  All I see there is wishful thinking along the lines of "AtiP is a particle that repels matter.  This is what we could build with it.  Whitepaper forthcoming..." 

Just because you can define it does not mean that you can DO it.

Operationally, I think you should edit your first post and put the latest rules up there.  Also provide a basic summary of the bitshares system & dividend rules before getting into the exchange rules.

Some questions (assuming cUSD crypto-currency that is supposed to track USD):

1. How do you change your collateral?  Either due to a falling USD->BS price or a rising one?  You should certainly be able to bolster the collateral BS so a liquidation does not occur... and if your collateral value rises tremendously it only seems fair to be able to pull some of it out.

2. How is the price of BS->USD (value of the collateral) determined?

I have created a much more complete white paper that should answer your questions: http://the-iland.net/static/downloads/BitSharesWhitePaper.pdf

You can update your collateral at any time by creating a transaction that takes your position + extra collateral and generates an output with additional collateral.

From the white paper:
Economics of BitShares
   BitShares attempts to arrange for all actors to act proactively to ensure that collateral requirements are met even during the most extreme market fluctuations.  To illustrate how these market forces will interact with the BitShare block-chain rules lets consider some example market situations.


Rapid Fall in BitShare Value
   If the value of a BitShare starts to fall rapidly against crypto-Gold, then all shorts in the system will be faced with a ‘squeeze’ which will force them to buy proactively before their margin is called.  If their margin is hit, then they will suffer a 5% fee or worse, complete loss of their collateral.   The result of this short-squeeze is that the value of ‘crypto-Gold’ would rise dramatically above market value causing even more shorts to face margin calls.  This would create an opportunity for new shorts to enter market with full collateral backing their new position.  These new shorts would profit when the price settles down after the short-squeeze is over.    As a result all market participants will be pro-active about monitoring the price and their collateral which should result in the minimal amount of volatility. 

Rapid Rise in BitShare Value
   If the value of BitShares rises rapidly against crypto-Gold, then all shorts would have an opportunity to cover their positions at a profit.  If they fail to cover their position then the result will be opportunity costs associated with maintaining more than the required margin and crypto-Gold paying even higher dividends.


Connecting Gold to Crypto-Gold Price
  All market participants have something to gain if a common understanding can be reached that crypto-Gold is an IOU for a 1oz gold coin.  However, initially there will be no ‘trust’ in what crypto-Gold actually means.  As a result market participants will start out placing orders with a wide spread.  As the market depth increases the spread will also decrease until a price is reached that has market consensus and is near parity with gold. 

What happens if a sub-currency goes ‘no-bid’?
  The first thing that must be understood is that a sub-currency always has value proportional to the dividends backing it.  Therefore, the short-position incurs a constant opportunity-cost by not covering.   Likewise, the long is still receiving a revenue stream that has value independent of the value of a BitShare and therefore ‘above-market’ interest rates will attract new buyers to that sub-currency which means that all sub-currencies are always ‘liquid’ based solely on relative interest rates.   As a result no sub-currency will ever go ‘no-bid’. 
   For this reason the early adopters face limited (if any) risk in being the first to purchase crypto-Gold.  They would be trading BitShares at 10% APR for crypto-Gold that paid twice the BitShares-per-block and therefore profit even if they are the only buyer.  When it comes time to ‘unwind’ this one trade, the price will be determined by whom ever wants the liquidity more.  If the short wants to stop the bleeding opportunity cost, they will be forced to buy back at a higher price.  If the long wants to convert to another asset then they may sell at a lower price.   Either way, it is unlikely that there would ever only be two players in any given sub-currency market based only on the opportunity to ‘profit’ from higher interest rates.


What happens if there is a market crash that causes margins to be insufficient?
  In this event the longs will be paid out via dividends with the capital from the defaulted short positions.  The market would then re-establish at the lower price with new collateral.   Only the most severe crash in the value of BitShares could trigger such an event as it is unlikely that any other asset class could ‘rise in value‘ relative to a stable BitShare value that fast.   Market participants will select margin requirements based upon their estimate of volatility and as a result receive sufficient interest to justify their risk.

  If BitShares lose all value it would be a complete collapse of the entire system and everyone would lose.  This would be a very unlikely event barring an breach in the block-chain algorithm or encryption.    Early adopters would receive higher interest rates due to the smaller monetary base and therefore be compensated for taking a greater risk.   Those who come later will have much more confidence in the algorithm and therefore receive a lower dividend rate.

How can they (the exchange owners) check whether the fiat money was transferred? This is the key. If the BTC seller denies receiving the money, and is lying, he gets to keep the BTC and the fiat.

Is offer still available?

Yes the bounty is still good.

First of all, the exchange does not deal in "dollars" but "dollar IOUs"  that are backed by BitShares with a 2x margin.   Therefore, when someone 'shorts' dollars they 'owe the network' the dollars and so long as they do not cover they are incurring opportunity cost in lost dividends.   Likewise, if the exchange rate moves against them the network will automatically cover their position. 

The end result is that the exchange never has to confirm any fiat transfers. 

The 'fiat' is exchanged for crypto-USD either in-person, via Nash X, via OTC, or via Escrow.  The *purpose* of this exchange is not to facilitate actual fiat transfers so much as to create crypto-USD that tracks the value of USD and thus enables people to exchange it without risk and thus increase the viability of 'local-bitshares' as well as the demand for the currency.   Once you have crypto-USD you can trade it for crypto-Gold, BitShares and BitCoin.

I want to clarify how this works:  Why you short crypto-USD you are 'creating' crypto-USD.  To 'cover' you must buy back crypto-USD with BitShares and thus 'destroy' the crypto-USD.   End result, no fiat ever had to exchange hands and yet someone was still able to take a position in USD.    Thus trading paper-fiat is entirely outside the scope of this exchange, but the presence of this exchange makes it easier to trade paper-fiat for crypto-fiat.

Hi bytemaster,

A few questions (quotes from the whitepaper):


So why would anyone ever short (create) crypto-X currency?


This is just stating your opinion that convergence will happen.  I think that you essentially believe that crypto-Gold per BS will converge to be near Gold per BS because people want a crypto-Gold.

But I believe that for convergence to happen you must have a force within the bitshares system that drives the price of crypto-Gold towards that of Gold.  Is there this force (did I miss it)?

Given the 2x backing requirements, wouldn't the value of crypto-Gold be "driven" towards 2oz gold?

I have thought about this recently and from a 'revenue stream' perspective, crypto-gold is worth 2x BitShares, however there is also a risk component and exchange rate fluctuation.     Based upon the 'bid-ask' price used to establish the initial exchange, I would expect it to trade at a slight premium to gold simply because it pays interest.    The point is that the premium fluctuate with the average margin and thus always be 'correlated to gold'.   In effect, any premium is a 'constant' offset and generally predictable.   

You could perform a thought experiment.   Suppose the exchange rate between gold and Bitshares was 100 BS to 1 G, then 1 G would pay dividends equal to 200 BS and if the dividend rate were '10%'  then that means 1G would pay 20 BS  / year.    Now if the exchange rate changes by 20% then the 'risk' of holding 1G vs BS is greater than the dividend advantage.   As a result, I concluded that despite 2x the dividend rate it would not have 2x the value in the market except for those playing short-term trades.   The conclusion I draw is that the dividend advantage would serve to generate liquidity.