I am doubtful, given the number and aptitude of minds working on the various pieces required for a p2p exchange at the moment, that there is anything here that has not already been thought of but just in case... (btw. mods, feel free to move to an appropriate subforum - I didn't think 'just an idea' would fit under 'Projects').
In BriefThe Hot Potato Pound (HPP) is called 'Hot Potato' because whilst the plus is that it is very cheap and easy to use to transact a user either needs to pass it on quickly or redeem it as not to lose too much value. It's 'Pound' because it works for me as a Brit though the same protocol could be used - and may well end up being used first - for other currencies such as USD or EUR.
A decentralised p2p coloured coin issuing/redeeming idea that works on the principle of an issuer's bitcoin deposit (held in escrow by a Open Transactions multi-signature system as described elsewhere) warrantying redemption. The incentive for issuers to redeem on demand is destruction of their bitcoin deposit upon proof of failure to redeem. This could not only solve the trust-in-issuer problem of coloured coins but give us an instrument that has the potential to be in competition with on-line credit card or contactless technology (and M Pesa etc) for cheap, secure, easy transactions in fiat currencies. I can see it working either as the primary means, or in a 'basket' of coloured coins to be used in Open Transactions.
The issuers/redeemers make money because the decaying coin values are worth less on redemption, dependent on duration, than at issue, the difference being the issuer's (minus a redeemer's fee). The rate of decay and the amount of deposit representing each Hot Potato Pound is in flux, determined by supply and demand: The rate of decay is determined by issuers (needs to be sufficient to be worthwhile participating) whilst the total deposit ('reserve'/'backing') is determined by HPP holders (needs to be enough for them to be confident in redemption).
PreambleIt seems like an age since I thoroughly read and participated in fellowtraveler's The Holy Grail thread on a p2p exchange idea (and others linked from there) where ft introduces the idea of combining Open Transactions and Bitmessage for the orderbook and exchange side of things. But what has been grabbing my attention since is the trust issue in relation to coloured coins.
...The weakest link seems to me to be fiat represented by colored coin.
...You are correct that a colored coin issuer is the "weakest link." You do have to trust that the colored coin issuer will ultimately redeem those colored coins back for GBP again.
However…
...
... if the issuer issues the currency first as colored coins, then the issuer cannot be held liable for those coins later being traded on various servers by various users. The issuer becomes totally divorced from the transaction servers. Just the same as the Federal Reserve being completely innocent of whatever their dollars are used for, once those dollars enter circulation beyond their reach.
--- Of course, the issuer still needs to provide bank wires in/out as a redemption of last resort, and he will need to follow KYC / AML for those wires, but as long as he does, most people will be able to get in/out of the system by buying/selling the colored coins from each other instead of having to go directly through the issuer. This is very powerful! Therefore I believe that colored coins are very important. Kudos to J.R. Willett!
--- This allows the issuer to operate legally, without any involvement in the operations of the servers themselves.
--- After that, I suggest using OT's basket currencies to distribute the risk of a single currency across multiple issuers, using jurisdictional arbitrage. For example, if there are 20 issuers in various jurisdictions who issue a GBP-based currency, we can combine those on OT into a single basket, such that no one is risking all their money with a single issuer.
--- I'm sure the recent victims of the Liberty Reserve heist, who just had all their money stolen, wish they had considered such possibilities, as I have been for the past few years.
As I mentioned above a lot of water has flowed under the bridge since then and these issues may already have been resolved but if not I think I have a means of solving it. There will be flaws and one or more may be insurmountable but even if useless in and of itself an element of it might be useful for someone else's ideas. So feel free to respond as critically as you like
I think the best way of explaining it is to illustrate how I envision it working:
In PracticeLet's say I start this thing, become the first Issuer/Redeemer (call me I/D1) and decide to deposit 100 bitcoins which I do by locking it into an Open Transactions escrow system as described in the aforementioned thread. I am going to secretly set a minimum decay percentage acceptable to me personally but will publicly offer the first customer an extreme 10% per week decay (just to illustrate the example). My first customer comes along with £500. The customer sets up his HPP wallet and sees what £500 worth of HPP would be backed by. He sees 100 bitcoin, is satisfied and sets on the wallet his own minimum deposit he'd be happy with to 'back' his HPPs (or equivalent £ value which would update with exchange rates*). I accept the £500 cash and ensure an appropriate 'receipt' is created (steps taken with timestamped proof of handover of cash or of bank transfer etc.). I issue an HPP coloured bitcoin worth £500 at time of issue. The whole of my 100 bitcoins are 'locked in' at this stage against a mere £500. However I have £500 cash to do as I wish with providing I remember always to have access to £500 at any time to redeem to anyone who should demand it on risk of my bitcoin being destroyed. The ratio agreed at the time of this deal (10:1) becomes the Current Valid Deposit Ratio (CVDR).
Someone else who would like some HPP decides to get involved when she mentions it to a friend who has Bitcoin and likes the idea - let's call her I/D2. I/D2 and her customer only want to dip in their toes so even though the customer only wants £10's worth the issuer simply does not want to tie up 2 whole bitcoins. Her customer would be more than happy with 1 bitcoin backing her £10 (and also sets her wallet minimum ratio to 2:1**). The system checks that the proposed 5:1 ratio for this deal is not below any existing minimums set by wallets containing HPP. In this instance, given there has only been the one other transaction and that the first customer's minimum ratio is also lower than that proposed by this deal, upon this transaction being made the Current Valid Deposit Ratio is lowered to 5:1. As a consequence of the new CVDR if we go look at I/D1s position again we'll see now that the £500 HPP is now backed by 50 bitcoins so the Open Transactions escrow system releases half the bitcoin deposit and makes it available to be used by I/D1 against more HPP issuing. In the meantime I/D2's customer is also OK with a decay of 10%/week so the deal goes ahead.
Let's say it's a week since the first deal and the original HPP have ended up in one person's wallet who looking at it sees it is now only worth £450 decides to sell or redeem it. I'm guessing an open market would establish itself but let's say rather than selling it on he goes to redeem it. He finds lets say I/D3. I/D3 who has Bitcoin deposited but has not as of yet issued any HHP. He has however decided to offer pounds of his own so he can offer a redeeming service so he gives the £450 to his client who returns the HPP (with all proofs of the transaction taken care of). Having no immediate customers lined up for the HPP he 'redeems' it with the system which involves I/R1 sending him his £450 + redeemers fee (I have not thought how it would be determined nor of the system of trust involved in 'clearance' between I/Ds).
It is now a week since the second deal and somebody has a decayed £9 worth of HPP. On that day a new HPP issuing deal is going down with a customer who will only go for it if the decay rate is halved. As it happens the minimums of all the I/Ds who have issued HPPs is less than or equal to half the going rate so from this day forward the new customer's HPP
along with all those of all other HPP users will halve (The holder of the £9 will now lose 'only' 5% in the next week).
In the event that we got to a situation where prospective customers were not buying because the amount backed becomes too low (e.g. a halving of GBP/BTC) or the decay rate too high - or the converse where the CVDR or decay rate are insufficient for one or more I/Ds there needs to be a way of 'forcing' minimums/maximums that are holding up everyone else either to accept new rates within a given time or within that time to redeem one's position. For instance if a customer has insisted on a ratio which at the time was fine but given most people accept much lower is limiting the HPP available to be issued the HPP holder would be given the option of redeeming their HPP or accepting the new rate. Rather than this being done by committee the idea is that the rules are built into the protocol. Likewise if as in the example above another halving of GBP/BTC occurred I/Ds would have the option of topping up their bitcoin to cover their positions, of reducing their positions within the network of I/Ds by passing it on to someone else or by redeeming enough to reduce the ratio.
I have many more examples in my head that I think would work and there will be many more others can think of, some of which may not work at all! So rather than me going on and on about it I think I have given enough here for many of you to get the gist of it. I'd be very grateful of any and all feedback
Tf
* assuming a going rate of £50/bitcoin a £500 HPP backed by 100 bitcoins would be the equivalent of .2 bitcoins/per pound (£10) giving us a 10:1 ratio of backing:HPP
** Just to clarify, for this current deal, given the issuer is happy to tie up 1 bitcoin to warranty him £10 (a 5:1 ratio) he accepts this. However he would be happy to accept a minimum of 2:1 and sets his wallet accordingly.
