Bitcoin Forum

I have finally completed my long-awaited whitepaper for a distributed exchange named DEX. Thank you all for your patience.

Whitepaper for DEX Distributed Exchange (http://distributedexchange.org/DEX.pdf) (.pdf format, 22 pages)

DEX is a complete solution, designed to be the simplest way possible to turn fiat into cryptocurrency & back without any kind of central authority or even bottlenecks. Everything about DEX is trustless with person-to-person exchange only, yet offers real time trading with graphs like MtGox does!

DEX is also noob-friendly, provides financial incentives just to simply download and open the software, and of course allows for trading between any type of currency we can imagine. (Coins, National fiat, BitShares, future cryptosecurities, etc... Totally agnostic.)

But most importantly, DEX's unique solution to the fiat replacement problem, called a "Cryptobond," actually moves value as easily as we move bitcoins, follows all of the rules that make money desirable, and at the same time represents national currencies better than any other solutions presented here to date.

So please download and read over DEX before asking questions or sharing your thoughts & opinions below. Please save your improvement ideas, voluntary offers, and any other kind of help for the Development thread instead:

PROJ DEV: THE DEX DEV THREAD (https://bitcointalk.org/index.php?topic=236909)


To our financial freedom!
-BTCLuke

I get a response:
"500 Can't connect to distributedexchange.org:80 (Bad hostname)"

Wow, working great for me.

It must be because the site is so new and the DNS propogation hasn't fully matured yet. Sorry about that!

Basically you just want to try again later until it's available at distributedexchange.org/DEX.pdf

Does the Distributedexchange.org (http://distributedexchange.org) website come up for you yet? If so try from that link too.

Nope.

Not from a proxy either:
 - http://hidemyass.com/

Here's a mirror of the dex whitepaper for people having issues accessing it.

Copy and paste this link, clicking it is broken and I can't seem fix it with url tags.

https://mega.co.nz/#!U1owhKKK!aW74vXfVlyO4QB5c8TkHg2hfXg5uNp9Cpkb7l9IyE7M

Creating these "cryptobonds" (=fiat IOUs) is VERY likely a regulated activity in most countries and not suitable for anyone without an e-money issuance license.

Also I don't really get the backing aspect - cryptobonds have BTC values attached to them (how do you ensure there's no copy of the private key at the issuer? trust?) that are dependend on the current BTC/USD valuation, e.g. today there are 100 USD for 1 BTC, so I attach ~0.01 BTC to a 1 USD note. Then BTC crashes to 10 USD per BTC - my note now still says 1 USD but is only backed by 0.1 USD in BTC.
As said above this is only true in a rising market, and in that case it makes more sense to redeem the coin rather than redeem the USD value. The NashX project tried to circumvent this by requiring actually higher than 1:1 backing (e.g. 1 USD note needs to have 2 USD in BTC attached to it, or even more) to ensure that not allowing someone to redeem the USD also hurts the issuer more. Still as BTC floats freely and there have been plunges from high to low values that were quite significant, it would be quite expensive to issue USD that way (requiring ~1:10 backing) and you open up other problems like people destroying bonds/keeping them indefinitely (already in your example the issuer risks 102 USD in BTC for issuing 100 USD - he wins if nobody redeems and BTC go down, so he is going short on BTC and he looses if people redeem when BTC go down, so he is also long USD).

All in all fully (or even "overfull" e.g. more than 1:1) backed USD bonds are going to be issued by bears, lower than 1:1 backed USD bonds would be issued by bulls.


Another issue:
How does one verify that one encrypted piece of data attached to a bond actually contains the private key? Chaumian blinding (e.g. encrypting + signing hundreds of private keys, then opening randomly most of them and trusting that the remaining ones are also ok)? Then I have to trust the person that verified the signatures again or create bonds with an issuer myself... but then nobody else would trust me that I did check these signatures properly and not collude with the issuer!

About "ratings will force issuers/merchants to keep honest": pirateat40s OTC profile was spotless, on SilkRoad afaik one merchant took off after being one of the highest rated and highest volume merchants, in the "real world" banks can fail... I don't believe in trust systems keeping people honest or that past performance does mean in any way that this entity is honest, doing good business or will pay out in the future.

Last but not least, I'd love to see a chapter about comparing your system to the current implementation of OpenCoin Ripple, where do you differ (e.g. attaching collateral to IOUs), what are your main benefits over their approach with an integrated native currency and so on. To me the only real difference seems to be that you still want to do mining and attach collateral to IOUs. On the other hand, Ripple is designed to be a payment system, not just a BTC market place, so there might be some benefit to your more focussed approach that I don't see yet.

Thanks for your input Sukrim! I'll try to cover all your points in line below...

These collateralized fiat IOUs would certainly be regulated if they were regulateable. Vendors are anonymous, and all transactions are done person to person with no official businesses involved.


Cryptobonds have actual wallets INSIDE them, so it's actually more like gold than an IOU. But the question of the issuer not stealing the gold is valid, so every DEX client that has a cryptobond in it, will constantly watch those wallet's values to ensure that there is the proper amount of BTC at that address.

It's not trust, it's verification... And the penalty on vendors for failing to verify is high.


I wrote a series of reasons in the whitepaper why Vendors would still redeem at a loss. The most important one of course will be the Rating, but you should also consider that many or even most DEX users will be buying cryptobonds to cash them out, making their lifetimes very short. This means that a very high percentage of cryptobonds will be created and redeemed within the same day or thereabouts, and therefore the price won't have much time to fall.

It's not that vendors will always expect this; but they won't have control over what happens to their cryptobonds out in the DEX network and therefore they had better be ready to sell 100 today, redeem 65 of them tomorrow, and redeem the rest randomly over the next few years.



I had considered this option, but having the issuer put up so much money is unsustainable for business. It's nearly impossible to grow business that fast.

The fact that every cryptobond ONLY has $1 or so inside of it makes them seem Ridiculous to risk losing his rating over.

That's what the bond aftermarket is there for. Whichever bonds the vendors feel are no longer desirable, they can dump at the bond aftermarket for their desired price. Meanwhile speculators are always able to buy them there, speculating that the market will go up.


They get paid a fee up front, and at redemption, to issue 1:1 bonds on any currency. They can trade it away in an aftermarket if they don't like the outcome, either way. I feel it's a suitable balance.


That's up to the original vendor to ensure. He will be labeled a scammer if he issues bad bonds, and lose his business instantly on the day someone tries to redeem one.


It's true, this will happen from time to time, I'm sure.

But in DEX the system doesn't come crumbling down when some vendor takes off into the night. His bonds will become non-redeemable for now, but they don't disappear yet... There is still the chance that he could return one day and recollateralize them, so we don't destroy them, but instead demote them to be sold back to the bond aftermarket somehow. (Still thinking about the details of that part now actually.) 

The main thing is that these bonds will all be mixed as they are traded around the web and no one user is likely to get stuck with hundreds of uncollateralized bonds at once unless he was stupid enough to go buy it from someone in the fiat marketplace with a bad rating.

I think we can set the fiat marketplace to not even show any vendors with a rating less than 9 out of 10 as a default, to keep noobs protected. There are other filters we can use too, and of course this sets the bar high for who will make a good business out of selling cryptobonds.


You just haven't seen it done right yet.

Clearly I have more work to do showing how the vendors will be held accountable. Thanks for bringing up these points, I'll work on addressing them more.


Oy, doing that properly is not going to be easy... More so for us authors than for any 3rd party.

If someone would like to make the comparison on a chart I'll be happy to answer any questions about my system for them. That would be an awesome project for someone who has quite a lot of room in their head. (Way more than I do.)


There isn't a lot of mining in my system... Bitcoin miners are already mining to process safety for the traders in DEX, and vendors process safety for themselves... But I almost didn't use the word mining for that processing because afterall, they create their cryptobonds whenever they feel like it and have collateral to do so.

The most major difference between DEX and all other systems is clearly the incentive structure. Your grandma can get paid to simply download it and let it run.

The second major difference is that it'll be Apple-product easy for your grandma to buy her first bitcoin through it.

Third? Distribution. With anonymous vendors, no government could ever clamp down on any bottlenecks of DEX, and therefore Bitcoin and all alt-coins and all cryptosecurities!

Ripple has two gateways at present. Even if they had thousands though, governments can point a gun directly at every one of them. This is a tragic flaw that wasted ever last second of their work making ripple from the start.

You on the other hand assume that gateways (IOU issuers, bond creators...) in your scenario are going to be running illegally ("These collateralized fiat IOUs would certainly be regulated if they were regulateable.").

How would my grandma now actually buy her first BTC for 100 USD?

She fires up your client and requests a deposit of 100 USD. Then she gets bank account data from some "vendor" and already there somebody is not anonymous any more. Anyways, she transfers the money to that bank account and never receives the 100 USD bonds, because this "vendor" did (even though he had a good rating so far) decide he now wants some money for himself. How would she now go about to give him a bad rating, with no money and being 100 USD down? Why would anyone believe HER and not the reputable 1000+goldstarwithshiningglitter rated vendor account who claims this is just a shill account created randomly to give him a bad rating? Who would then resolve this conflict and how?

Illegal in which country? This is just like bitcoin.

In times like ours, only the illegal can be honest.

• Step 1: She opens DEX, goes into the fiat marketplace, and a wizard walks her through the rest.
• Step 2: The wizard tells her to only choose a vendor that takes her payment choice, has the very best ratings, and to avoid vendors with too much Volume. Apple-product ease.
• Step 3: She chooses one, inputs her desired amount into the only blank on the screen, and that starts the process in the background tying the vendor to this purchase. From then on it's his rating he has to protect.
• Step 4: She sends the money, person to person, and he receives it while the clock is ticking.
• Step 5: He creates the bonds (Or did so while waiting) and sends them to her DEX clientID directly. The moment her client receives them, DEX checks them to ensure the collateral is there, and the clock stops ticking. The vendor then gets a +1 rating score.

At that point grandma has her cash that just looks like regular dollars to her, and can trade them on a mt-gox like interface there. Another wizard could guide noobs too.
  

It's person to person though. The data she receives will instruct her to send it normally, be that paypal or whatever, so it's again not perfect but good enough.

Bytemaster already asked elsewhere what if cops try to sting a vendor. This was my reply:



This situation is easily avoidable by the way ratings are Automatically generated. Basically the vendor has to agree that he's entered into the trade at the time of her order.

Update: I'm told by the host that the domain name has now propagated globally.

Please let me know if anyone still can't get to the whitepaper download (http://distributedexchange.org/DEX.pdf) or the DistributedExchange.org (http://distributedexchange.org) website now.

Thanks for the questions, keep them coming!

In the end issuing fiat IOUs is a regulated activity in most countries probably (as this is quite close to operating a bank) and has VERY high fines and risks involved if you try to do this illegally. There are by the way less than 250 countries recognized by the UN...
Bitcoin is not (yet?) illegal; issuing fiat IOUs, no matter if backed by BTC or not, most definitely is - and it has been already for at least decades.

This won't be a matter for "cops" to "sting" a few people randomly. Taking part in something that you described without following regulations is along the lines of busting a money laundering operation (which it essentially is) and will be marketed and dealt with at the same intensity.

Can users select their dealer (aka. vendor)? If yes, then it is easy to fake ratings by selling to yourself. If not, then it is easy to rip off people every once in a while.
If ratings are that important then how would you deal with "latecomers" e.g. someone discovers this already existing thing and wants to join too. She can only start with a 0 rating and has to do at least a few 100 deals until the algorithm even suggests her to random users?


Anyways, in the grandma example, the vendor agreed that he enters at the trade, after receiving money (she is not a very threatening person) he however just took it, laughed and went away without acknowledging the deal. How does she now still get the bonds or "automatically" give a bad rating? As far as I understood, he has a certain amount of time to complete the deal (e.g. 24 hours). What happens after that? A negative rating? Then I can blackmail vendors by threatening to never show up or just act as if I want to buy lots and lots of USD bonds (I don't have to put up collateral on my end anyways for that) and let the clocks expire. How will they force me to show up somewhere and actually hand over money? The other choice would be that nothing happens. Then this scammer got away with ripping off my grandma.

Also if they need to meet in person anyways, why can't the vendors sell Bitcoins directly for cash?

I am still not convinced at all and still stand behind my belief that rating systems and web of trust mechanisms don't, can't and won't work.

Something that might be interesting for you is to look at the Glicko rating algorithm and instead of player strength estimate scam probability + deviation. This still won't work, since until I scam I never scam but it might work better with negative ratings from time to time from newies. On the other hand this gives again incentive to rip off newies.

Well I admit this will scare some would-be vendors away, and everything we can do to protect them via adding layers of additional anonymity to the software should be taken. I never, for instance, said that it was necessary for buyers to see the actual contact details of a vendor at payment time... Perhaps we can find a way to mask it totally somehow.

Otherwise, it could be a game of vendors wanting to "stay small" in each of their accounts, by not issuing too much volume at any one time. (Which is good practice anyway.)

A perfect example of why you shouldn't give the UN any credit.


Still a country by country matter.

False, collateral must be issued.


I've got two ideas for this; one is of course just earning trust by your peers on a forum like John K did here. If you earn it here or on the bond aftermarket board then you can ask prospective clients to order cryptobonds from you by finding your biz name specifically in the fiat marketplace. (Search by vendor name)

The other idea is more elaborate, having to do with a tiered marketplace. I haven't finalized that yet but if needs be I'll publish that too.


If the time to complete the deal passes and her DEX client does not see both the cryptobonds present and the collateral in place, Negative penalties are automatically applied to his vendor profile.

No humans will have the ability to adjust anyone elses' ratings manually, but there can be a separate & optional reviewing ability, amazon reviews style. -But I'm leaning against doing that at all. Emotions cloud financial decisions.


This is going to come down to the technical sequence we use to make the purchase. Clearly it can't be too simple, and if all else fails, 3rd-party escrow may even be needed. (Which if done right could provide that vendor anonymity we spoke of above.)


How's your belief that the FED, IMF, and FINCen all have your best interests at heart?

I didn't say that ratings systems and a WOT is a perfect solution, but if done well they can make DEX possible with minimum thievery. Meanwhile the FED is slowly but absolutely thieving from every last one of us daily through inflation, higher fees, and of course loss of freedom to invest in whatever we want to.

So it's either a lot of a small thefts by what we've got now, or it's few larger thefts by the few scoundrels that get through the cracks in DEX... But with DEX there is a whole lot more financial freedom.

But let's cut to the real issue here, shall we?

Here's where bitcoin stands today: Central Points of Failure called exchanges act as the only 'on ramp' to the bitcoin network. WHEN governments get desperate enough, the exchanges will be shut down one way or another, and we all find that our bitcoins can't buy a penny anymore.

Here's everyone else's solution to solve this problem: Make alternative central points of failure that are still public and governments can still shut them down.

I'm sick of this epic stupidity! The gateways MUST be anonymous, or bitcoin dies!




I'll have a look at it, thanks!

Well, you asked for my thoughts and opinions. How you derive from "I don't like your web of trust idea and it won't get better if you add layers" that I am blindly trusting some financial organizations on another continent is not clear to me.

Simple question:
How is a fiat transaction made anonymous in your system? I get it that it might be the case that vendor and user don't know/see each other because a mutually trusted 3rd party escrow is implemented, still then the vendor in some point of time HAS to receive fiat money anonymously somehow - either from the escrow agent, the buyer or somehow else. How is this done without contact details?!

Again by adding a new layer (e.g. thrid party escrow) you just move the trust issue a bit up the chain. This just means that instead of trusting that a user will pay within 24 hours and not crash my rating for free, I as vendor have to trust that the user is not colluding with an escrow agent. If agents can be manually selected it is not guaranteed at all that this is not the case and if escrow agents are assigned automatically by the system it's just a matter of setting up enough escrow agent accounts yourself.

Which brings me to another point:
How will you ensure (btw: will you even need to insure?) that there is only 1 account per person? As I understand it, this is implicit, because your ratings are so precious. As it is supposed to be anonymous though, you can never know if you are not just trading with yourself for a while to push your rating. How much collateral do I issue and who holds it when doing a trade and how does this influence the fact that I say "I am user X, I will buy 100 USD bonds from vendor X" and then do any step necessary to do so successfully, then redeem these bonds again after some time and repeat? The requirement for the vendor account holding ~1 BTC which I get back anyways upon redemption (that I can guarantee as I am both parties)?

Anyways, using Elo or the a bit more elaborate Glicko which has a time component to influence uncertainty too, you could calculate a global score that is not influenced by the amount of trades done before but rather the amount of trades with people who also already did a high amount of trades. Still it is possible to "circle jerk" and rate yourself plus the system suffers from rating inflation if more and more people join, still it might be better than a simple "+X, -Y" type of score.

Well, try to implement this system or any other rating system similar to it, make it really anonymous and I'll post a detailled guide on how to push ratings, fake accounts and scam people for fiat, BTC or both with ease... no matter which kind of rating, escrow, market tiers or other layer you add.

You can get bitcoins easily in other ways too by the way, I never bought any of my coins on any exchange (I traded them there from time to time but never sent money to buy coins).

Can you give us some information to back this up?

I'm aware there are some risks.   Isnt this what Ripple is based on?

What about store coupons?  Can I be arrested for using them?

You aren't blindly following the Fed and the IMF... You just don't have a choice... Not until bitcoin, and they are going to destroy bitcoin by attacking the CPOF exchanges.

So the fact is you are either accepting of them, or you're for a decentralized exchange. I don't pretend that mine is the only possible exchange that could survive their attack, but so far no one has ever proposed an exchange that can survive it because they have all made the same mistake of identifying their gateways.



These contact details are obviously shown to the payee at the time of payment, but never made public otherwise.

Yes, that leaves vendors open to a sting operation. But I've discussed above many reasons why that sting would be unlikely because of small individual volumes and of course different jurisdictions.

And yes, it won't be cops stinging them, but FINCen and the like... But what could they do against hundreds of small vendors all popping up doing a few thousand $$ in transactions each? That's kinda silly if you think about it... Liberty Reserve moved over a $Billion across its' network and it took them how many years to bust that one operation?

I therefore maintain that the vendors will be safe from this kind of thing as long as they follow basic protections, which we will clearly outline for them.


There is absolutely no need to ensure that ppl only have one account. Let them have hundreds each, nothing lost. Ratings are ALWAYS automatically generated.

The only way to fake high ratings  in DEX is to actually pay the money to do so, which of course makes them legit ratings afterall.


One other safety the ratings will take into effect is to consider varying sources. He'd have to pay himself from many different clients on IP addresses with different payment sources. He'll see none of this of course, it'll be behind the scenes as part of a google-algorithm-like ratings matrix that takes in many different factors like volumes, speed of return, distances, etc... It would be a major waste of time and effort, dealing in tons of suspicious-looking money transfers to attempt what you're suggesting here.


You lost me here. Could you explain this part better?


Some people just want to watch the world burn.

I, as an anarchist, prefer peace and prosperity for all. But if you insist on doing so, then I doubt you'll sleep well at night knowing that you actually helped the powers that be destroy bitcoin.

Yeah, I know, I know, someone else would if you don't. Still doesn't make it help bitcoin, now does it?

Either way it goes, we'll likely have to keep improving that component of DEX. Your report wouldn't be good for very long... And would only be useful for ppl with large sums of money already to use anyway.

(And generally, if you already have that money, it would be much more profitable to protect DEX and use it to get richer, rather than to bring it down and just make one score.)


How does this solve the problem of ensuring that the masses can always trade for bitcoin on a fully-featured, (desirable) exchange?

Sometimes I think you don't see the objective here: it's a simple, beautiful thing: SAVING BITCOIN.  Why is this something you keep sidetracking from?

Check out DIRECTIVE 2009/110/EC of the EU for example (which then gets legislated locally into all EU member states):
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:267:0007:0017:EN:PDF
http://ec.europa.eu/internal_market/payments/emoney/

For store coupons it depends on if they are electronic or not I guess, talk to a lawyer about that. I guess there's a difference between emitting something that can be redeemed as cash (e.g. "give me this coupon and I give you a 100 EUR note") vs. redeeming in goods only (e.g. "give me this coupon and I sell you electronics for up to 100 EUR in my own prices").

The thing is that I can take a 100 EUR note in my left hand and 1 BTC in my right hand, exchange their contents 100 times and now I did 100 trades with 10k EUR in volume that were executed properly and are rateable...

Instead of left hand and right hand take "newly generated account" instead. Do you see the problem now? Also complex background algorithms are not really useful, IP addresses are not identifiers at all and if someone deals locally a certain locality of IP addresses is also to be expected. Same source also just means to create a new account on one side for each trade. They might raise the bar for simple attacks, but that only means you need to scam for higher amounts in the end.

You said

Who holds this collateral, who is the one putting it up (only vendor, only buyer, both, none) and how does any collateral prevent me from selling to myself to raise my rating, as I can redeem it afterwards anyways? All the system sees is a completely new account popping up, negotiating a trade with my existing vendor account, both do all and any steps necessary to issue bonds and after some time these bonds get redeemed. If there is still some collateral kept after this, why would someone use this system and actually who holds that collateral (as I am both buyer and seller it needs to be someone else on the network?).

Who says this destroys Bitcoin? You do, not I! I would rather argue that creating system that is advertised like this:
and publishing guidelines from the beginning on on how to avoid police raids because you're doing something illegal knowingly will hurt Bitcoin far more than the occassional bank bust because exchanges did not follow AML and KYC guidelines... ::)

Also maybe relevant: http://www.cs.uni.edu/~wallingf/blog/archives/monthly/2010-12.html#e2010-12-01T15_45_40.htm, but that's another issue that doesn't lie within your proposal.

Anyways - prove me wrong, actually build that distributed exchange system number 4 (next to Bitcoin-OTC WOT, localbitcoins and (soon?) OpenCoin Ripple) and let's see how it works out!