This phrase is a self-contraction. If you don't see it that way, that's because you don't truly understand what free market means.
Hint: free market != market. The former is just a subset of the latter.
Ex: an assassination market doesn't belong in free markets.
Same thing for governments. Their coercive nature is incompatible with the premises of free markets.

If something is really liquid, I can't understand how it won't affect the money supply in a way or another.
The only reason to hold money is because we expect to be able to exchange it for something else. If there's something almost as liquid as money and which also happens to be a stable form of investment (think reputable bonds), then people might hold some of this asset instead of "raw money".

You don't even need fractional reserves as is to have monetary aggregates higher than the monetary base.

Imagine some bitcoin bank one day becomes famous, and many people start using its services. Among such services, there's the possibility of converting part of your bitcoin balance to bitcoin quoted bonds offered by the bank. You configure to have 50% of your account on bonds, and the bank automatically sells/buys them every time some money leaves or enters your account. Aren't you using bonds as money after all? And if eventually you make a transfer to somebody else in the same bank who also has his account configured to have a percentage of its balance in bonds, the bank doesn't even need to actually sell and buy back again, it can just transfer the bonds at current market price.
There you have it: a very liquid asset being used as money. A monetary aggregate. And that's not fractional reserves.

So, answering OP, yeah, I do think some level of monetary aggregates will eventually appear someday, if bitcoin succeeds. Fractional reserves or not. And of course, that should push the price of bitcoin down (or prevent it from going upper) to some extent. You might want to change your investment strategy from that moment on. But let's not forget though: monetary aggregates can't expand infinitely like the monetary base of fiat currencies can. And since the monetary base of bitcoins is capped, I think we can expect monetary aggregates on top of it to be limited too.

When I was in Frankfurt some years ago, I went to a night club that was on the same building of the ECB. It'd be the perfect spot for such a party.

Bumping this thread to ask if there's a copy of OP's text somewhere else?
BitInstant blog is no longer up.

Thanks.

Thank you again for your detailed explanation.


Ok, so here there's no BitUSD inflation, as the amount given to Mr. L is the same amount that will be destroyed.


Are the 1000 BitUSD destroyed too?

In this case, no new BitUSD remain. There's only BitUSD in circulation while there are open short positions. The supply of BitUSD is proportional to the amount of people willing to hold short positions in BitUSD.


This all sounds weird to me. Price is a function of supply and demand. I can understand how currency boards peg their currencies because they manipulate the supply. Here you have a supply that's linked to the number and appetite of speculators betting against the asset. Why would such a supply adjust itself to the demand in order to maintain a peg is something that goes beyond my understanding of financial instruments. I guess I'll just have to follow and see how it works out.

I keep my suggestion though: please consider implementing the possibility of setting up a currency-board-like structure in your development. You have an interesting set of features there, this one would add nicely.

Thank you for your answer.

Just bear with me a few more, please. Let me see if I got how this works.

• Mr S believes the price of BitUSD (not USD!) will fall in relation to BitShares. Mr L believes the opposite.
• They settle for a short vs long agreement. Let's suppose there's no leverage (can there be?). Let's also suppose the agreed price is 1 BTS = 1 BitUSD.
• Each one puts in 1k BTS, so a 2k BTS reserve in total, which, if I understood correctly, is the short collateral.
• Is Mr L now granted the right to issue 1k BitUSD? Would he be able to issue (X*Y)k BitUSD if the agreed price was 1BTS = X BitUSD and leverage was Y:1?
• If the price of BitUSD goes down, then MrL is already losing money as his stash is going down. But how much exactly will Mr S win? Can Mr L force the collateral to be used when selling his position? Let's say by selling his 1k BitUSD against the collateral, he recovers 800 BTS. Mr S now has 1,2k BTS, and Mr L only 800BTS. That's how it works? What happens to the sold BitUSD, goes on to circulate on the open market? There's our inflation of BitUSD? Wouldn't that make the supply of BitUSD proportional to the volume of short vs long positions made on the system?
• If the price of BitUSD goes up in relation to BTS then Mr L is already a winner as his stash will be worth more than before. The collateral of MrS would have to be sold in order to buy BitUSD in the open market you say. What happens to the BitUSD bought? Is it destroyed, to account for the previous issuance? Or is it given to MrL? The fact that the collateral was twice the money MrS had put himself would give him an advantage, unless of course we assume his leverage to be twice as large. I'm a bit lost here.

I still don't see why would the price of BitUSD track that of USD though. That would only happen if people on the open market would be willing to trade 1 USD for an amount of BitUSD that's almost always the same (no need for parity but you need a almost-fixed exchange rate), but where does this guarantee come from?
And how would BitUSD be bootstrapped? If it can only be issued when there's a long vs short position, which would be the price reference of the very first position?

Thank you for your patience.

Using the main bitcoin blockchain has its advantages, mainly being able to count with the high quality development effort/team that Bitcoin has, not to mention its strong chain security.
But it has some disadvantages too, namely the fact that you might end up having to pay more expensively for you transactions. A multi-chain approach like this BitShares also make scalability much more easier, you only need to handle the chains you wish to work with. It's an interesting approach.


As an experienced bitcoiner, you should know that being illegal doesn't prevent some things to thrive. And you might find some jurisdictions in which it would be accepted.


Currency boards do exist and do manage to keep their pegging for decades. The "only" constraint is keeping large reserves. In the case of mastercoin, these reserves would need to be quite high. But besides that, what are the "fundamental economic flaws" you see?

I was going to suggest you implement the same currency-board-like thing in your system, it would make it richer.


You don't NEED with capital letters like that. But it's a good plus to have.


I'm still trying to understand that. If I understand well, when you go long on an asset, it's basically as if you were using borrowed money to buy larger volumes of that asset than you'd be able to do with your money. If this asset goes up in price, you are able to pay your debt and also make a larger absolute gain. But if it goes down, your "reserve" will be burn out quite quickly. For ex. in a 10:1 leverage, a -10% oscillation would force your position to be liquidated so your debts could be payed.

Now back to BitUSD.... how is that a long position in USD? Isn't that a coin issued by someone? Anybody can issue more BitUSD as long as they deposit the necessary reserves in BitShares? So, let's say I believe the price of USD will go up in relation to BitShares, how do I proceed? I set aside, say, $1k worth of BitShares on a 10:1 long position and then I can issue myself 10k BitUSD? If the value of the USD goes near 10% down in relation to BitShares, miners would be able to confiscate my reserves of BitShares and destroy the corresponding BitUSD, I assume. But how would miners decide which is the "protocol-official" price of USD in relation to BitShares? Do you intend to create some price publishing mechanism like those in Mastercoin, and each BitWhatever issuers would decide which publish(er) to use?

I'm not sure I follow how you intend to track the price of arbitrary assets.

I see only two ways (which are similar when you think about it) of doing such a thing:

• Contractual backing: I, the issuer of currency C, am contractually bound to give you a certain amount of asset A in exchange for a certain amount of C. C is just a substitute for A.
• "Currency board" way: I, issuer of currency C, keep large reserves of asset A, whose price I want C to track. I sell A to buy C whenever C's price goes below the price of A ('deleting' the C bought), and I issue more C and buy more A with it when the price of C goes above the price of A

The currency board isn't contractually obliged to redeem your currency, but in the end it's as if it was doing it indirectly. And for it to be speculation-proof, it has to hold 100% reserves.

Colored-coins and OpenTransactions go the first way.
Mastercoin goes the second way, with an interesting particularity: The reserve is in Mastercoin, not in the asset whose price is being tracked. That introduces extra risks, because if the price of mastercoin goes down, so does the value of the reserve. If the reserve goes below 100%, it's subject to speculative attacks. So, in order for it to be safe, the reserve must be kept much above 100%. The great advantage is that you can track arbitrary prices in a fully decentralized, pseudonymous and transparent way. The protocol can ensure the reserve won't be stolen, how much is held in reserve is a public data, the reserves can't be seized by desperate governments etc. The disadvantage is that the one holding the reserves would be paying a high opportunity cost. Why would you put so much money aside? There needs to be some gain opportunity for private individuals to voluntary issue currencies in this scheme.

Anyways.... how exactly does BitShare sub-currencies intend to track arbitrary asset prices? I was thinking it was going to follow the Mastercoin strategy, since among your principles you list 'no-trust' and 'decentralization'. But I read the part in which supposedly you explain how BitUSD tracks the price of USD and I confess I don't get it. You talk about short and long positions, but what's tracking the price? Can somebody explain me like I'm five?

You want to mimic these anti-ASIC alt currencies? Why? What's the point? This assumption that ASICs lead to centralization is false. How many thousands people are hashing right now, with ASICs?

OTOH, preventing the use of specialized hardware will give more power and profit to botnets. Even if there's never a botnet large enough to overpower the network, the simple fact that these parasites can make more profit is disgusting in itself.
Not to mention that your algo seems much more complicated (and thus, bug prone) than simply hashing with a well-known hash algo.

Anyways... your call. That's not a major problem either, I guess. I'll just keep reading.

Alice is an escrow agent with good reputation but with an unresolved dispute that's taking some time. What's stopping her from creating escrow agent "Bob", sign and publish message saying "Alice == Bob", and then accept new transactions as Bob?

This restriction you want to apply there seems useless, and I don't think the platform should make such decisions in the name of its users. As long as unresolved disputes are public data, it's up to people to decide whether they want to use an escrow which is taking time to resolve its disputes.

BitShare will arbitrarily limit the size of the UTxO set?
That sounds a crippling limitation to me. How can you know the good size? Just look all the discussions the maximum block size limit caused. Arbitrarily limiting the UTxO size is no different. IMHO you should reconsider that.

I'm reading it right now, but haven't gone too far. It's not like colored coins. It seems to have a coin of its own, and the network allows miners to enforce on their own some rules that mean some people will loose or earn money. For example, you short some asset, and then the price goes up to such a point that your reserves must be depleted, a miner can do that without needing you to sign any transaction. You can't do that with Bitcoin, thus you can't do that with colored coin.

It's very interesting, I'll keep reading.

By the way, just a little pedantic correction: an "axiom" is a self-evident truth, something like "the shortest path between two points is a straight line". What you outline as "axioms" for your ideal free market financial system are more like "principles", "objectives" etc, not really axioms. They're not self-evident truths, they're more like something you believe should be respected/followed. And btw, good set of principles. ;-)

EDIT: Oh, and btw, keeping the pedantic observations, you might want to rephrase the "zero-sum" principle. A free-market is not a zero-sum game. When two people trade, they create value for each other. The aggregated value in the system does increase. I do understand what you mean by zero-sum in this context: you mean something like the Lavoisier principle, that is, nothing is created nor destroyed, only transformed ("transferred" in your case )
I would avoid the "zero-sum" expression precisely because the term is used by free-market detractors, in an misguided attempt of portraying free-markets as useless to society as a whole ("for somebody to gain, somebody else has to lose!"). They're dead wrong on that, but by saying your system aims at a "zero-sum" might give them ammunition.

The FBI has control over the site, including its database. They can query it and discover how much money he made on commissions.

OK.


Sure. I just wouldn't call that "AML". The idea of hashing one's IBAN for example, could be enough.


No, that would be theft. Money laundering would be when/if the thief makes the stolen money a fake part of some official, declared income. That normally only needs to happen for large amounts of money, as for anything small, the thief could just spend it under the radar, without having to launder anything.

I'm being pedantic because "money laundering" is increasingly becoming a magic word, like "terrorism", used to justify all sorts of things.

Definitely. I wasn't aware of that.

>3M USD in BTC, not 3M BTC...

Ouch... if you what you quoted is true, I must retreat what I said.

You found that on the >30 pages PDF?

I hope his trial (if he gets one) get lots of media coverage. I mean, TV and all. This was no ordinary drug dealer, just read his quotes. It would be a good opportunity to tell all those truths on mainstream media. AFAIK, he has never hurt anyone, but he will probably end up serving more time in jail than rapers.

EDIT: It seems he was a murderer, what would be horrible if true. And incompatible with many of his quotes on Forbes, by the way.

It was likely the case: http://www.reddit.com/r/Bitcoin/comments/1nl58n/silkroad_domain_states_this_hidden_site_has_been/ccjkjds