My toughs about the current exchange problem

[cedivad]

I just inserted this as a reddit post, but since that it's my first time as a reddit user, i will crosspost it here. Just to be sure that i spent time to write something people will read

http://www.reddit.com/r/Bitcoin/comments/1cbm4q/my_toughs_about_the_current_exchange_problem/

• we can't create a distributed exchange, so we need a distribution of exchanges
• theoretically, we need something like 100 exchanges, geographically distributed, each one doing 1% of the volume. Exchanges doing more than 5% should stop accepting new accounts, increase the trading fees for their actual customers and be boycotted by the community.
• each exchange should be running something like the Buttercoin-whatever trading engine, what's important is that they all share some compatible APIs, and that they don't have scaling issues with php-based trading engines
• since that the liquidity is shared among these exchanges, established exchanges should cooperate to provide additional liquidity for the single user of the single exchange. This should be made easier using the same base platform. Theoretically, the user of a little exchange with 1% of the volume should be able to do a market sell or buy for 10% of the daily volume without any problem, taking bids and asks from the remaining 99 exchanges. The exchanges would regulate themselves the fiat and btc payments during the following 24 hours, since that they trust each other. Something like a common bank account used for escrow should be possible to guarantee exchanges against each other.

As many of you, i tough about this for a while (well, not really that much, like, before sleeping for a few days) and this is the best solution that come to my mind.

It doesn't have a single point of failure, it should be scalable to the infinity and beyond, the final users can access to the whole (or big majority) of the market, maybe even doing cash deposits to the exchange whose HQ is 100km away from their homes.

The downsides are:

• the exchanges should trust each another for fiat and/or have common bank accounts, i think that this should be possible
• since that this way forces to a decentralization of the trading, existing exchanges won't have any incentive to migrate to the new platform, hence, this project (if feasible, i'm asking for your opinion about this), will probably never take off.

[JorgePasada]

The downsides are:

• the exchanges should trust each another for fiat and/or have common bank accounts, i think that this should be possible
• since that this way forces to a decentralization of the trading, existing exchanges won't have any incentive to migrate to the new platform, hence, this project (if feasible, i'm asking for your opinion about this), will probably never take off.

I'd like to address your first whole half with the question "Where is the incentive?" and this half with the same question.

I'll also note that your downsides noted here are not simply something that can be assumed away. The're very real problems and they can't be dealt with by wishing them away.

Even if all of these problems get solved in the manner you've proposed (which they won't there's no incentive to solve them in such a manner) and the exchanges magically trust eachother, it's not the exchanges I'm worried about. It's people with guns and in control of armies. Solve that one.

Many centralized exchanges are still the crux of the issue here... centralized. I suggest you re-examine your first assertation that we can't create a decentralized exchange and work on solving the problem at that level.

[btcmind]

A distributed algorithmic cash exchange? Define geo-locations where you can exchange fiat for BTC with some system. You can't get around cash regulations though. If banks refuse to deal with BTC, what then?

Don't forget the profit motive. Exchanges want to make money. Especially for the risk involved. If only one country accepts bitcoins people could travel there to exchange fiat for BTC slowly but surely.

[inge]

Well, a prefixed market quote is not really what I would call a “free market” solution. Ok, MtGox has having problems right now, but it seems it is working on it. If the Bitcoins market will keep growing at the same rate of the last weeks, new exchanges will eventually entry the market. But we cannot expect to reach “free market” equilibrium in a few days.

Regards, Inge

[Nagle]

Exchange lock-in works by making withdrawals slow and difficult. The Bitcoin exchanges have no "fail to deliver"penalties against the exchange. (US brokerages pay big penalties if they can't pay out on demand.)

Arbitrage should lock the prices on all the exchanges closely together. It doesn't, though. Right now, there's about an 8% difference between exchanges.  That should be exploited in seconds by an arbitrage 'bot. But that's not happening.  Probably because the people doing that can't get their cash out of one exchange and into another fast enough. 

[teodor87]

Grow up. No country is going to accept BTC. For a decision like that a Country has to ask permission from the IMF. The IMF will never accept this and might block transations between centralized and decentralized currency, and therefore it's impossible. It would be a national suicide.

The less involvement of governments and banks - the better!

[MGUK]

Grow up. No country is going to accept BTC. For a decision like that a Country has to ask permission from the IMF. The IMF will never accept this and might block transations between centralized and decentralized currency, and therefore it's impossible. It would be a national suicide.

The less involvement of governments and banks - the better!

Erm... either I misunderstood, or you did.

He's not suggesting any country "accept BTC." I think he's suggesting they agree on a single fiat currency to hold currency in the banks, and maybe have a shared account.

The country doesn't have to "accept BTC" for there to be an exchange there. Bitstamp is based in the UK with slovenian banks. MtGox is based in Japan. As far as I'm aware, Japan know about MtGox, and they didn't have to contact IMF or anything similar.

The bigger issue wouldn't be the countries acceptance of Bitcoin, but more the individuals banks acceptance of Bitcoin business as that tends to be the thing that leads to exchanges shutting down. On a country level, as long as you play by the regulations (of which I'm not aware of any countries that totally "ban" Bitcoin or Bitcoin related business) then it shouldn't be a problem.