ChromaWallet (colored coins): issue and trade private currencies/stocks/bonds/..

[killerstorm]

I understand the coloring part, but I don't get how this paves the way for distributed exchanges. What am I missing?

It really doesn't pave the way.  But don't worry, the guys over at Mastercoin have already solved that and they have their distributed exchange up and running.  It is not just a pipe dream - it is actual software which executes.

We implemented decentralized exchange back in January. It worked, people made transactions with it.

I've described the difference between colored coins and Mastercoin approaches here: https://bitcointalk.org/index.php?topic=265488.msg3487339#msg3487339

[1713530757]

1713530757

[EskimoBob]

sign me up for testing.

[murfshake]

I understand the coloring part, but I don't get how this paves the way for distributed exchanges. What am I missing?

It really doesn't pave the way.  But don't worry, the guys over at Mastercoin have already solved that and they have their distributed exchange up and running.  It is not just a pipe dream - it is actual software which executes.

We implemented decentralized exchange back in January. It worked, people made transactions with it.

I've described the difference between colored coins and Mastercoin approaches here: https://bitcointalk.org/index.php?topic=265488.msg3487339#msg3487339

I am still trying to wrap my head around how we get cash $ into and out of  a decentralized exchange.  If someone can help me there I would really appreciate it.

[justusranvier]

I am still trying to wrap my head around how we get cash $ into and out of  a decentralized exchange.  If someone can help me there I would really appreciate it.

It's a difficult problem, which I have not yet seen anyone address properly.

[R160K]

I am still trying to wrap my head around how we get cash $ into and out of  a decentralized exchange.  If someone can help me there I would really appreciate it.

It's a difficult problem, which I have not yet seen anyone address properly.

I have heard of four (attempted) solutions to this, and none of them is perfect:

1. Gateways (à la Ripple)
Though exchanges themselves are decentralised, the "coloured coins" they exchanged need to be issued by a trusted (centralised) authority who will exchange for example 10EUR/USD for 10cEUR/cUSD which can THEN be exchanged for BTC or other currencies.

2. IOUs (à la Ripple)
Rather than trading actual currencies, people make interest-free "loans" and trade the debt. For example, you give me 1BTC for a 150GBP "IOU", which you can trade on to other people with the promise that I (or others trading IOUs in the same currency) will buy it back for 150GBP worth of BTC/some other currency. Of course this relies on people having confidence they will be able to trade the IOUs back to Bitcoins.

3. Magic (à la Harry Potter)
Some sort of coloured coins are distributed that by convention just happen to be pegged exactly to EUR/USD/GBP or whatever, and eventually the convention becomes so universal that people stop distinguishing between cEUR and EUR.

4. Automatic "monetary policy" (à la Mastercoin)
One suggestion I have seen, I think it might have been for Mastercoin but I'm not 100% sure, was that some sort of decentralised "system address" would hold an excess of for example cEUR, and when the BTC value of cEUR started to climb above EUR more cEUR would be released into the market, and if the value was below EUR then the system would buy back some cEUR for BTC to bring the value back up. How the system would track the value of the EUR however I don't know. Presumably it would be a mathematical system not relying on external feedback, so would try to approximate a certain value that was equal to the value of the EUR at the time of implementation, which obviously could change over time and the correlation become broken.

[justusranvier]

I have heard of four (attempted) solutions to this, and none of them is perfect:

1. Gateways (à la Ripple)
Though exchanges themselves are decentralised, the "coloured coins" they exchanged need to be issued by a trusted (centralised) authority who will exchange for example 10EUR/USD for 10cEUR/cUSD which can THEN be exchanged for BTC or other currencies.

2. IOUs (à la Ripple)
Rather than trading actual currencies, people make interest-free "loans" and trade the debt. For example, you give me 1BTC for a 150GBP "IOU", which you can trade on to other people with the promise that I (or others trading IOUs in the same currency) will buy it back for 150GBP worth of BTC/some other currency. Of course this relies on people having confidence they will be able to trade the IOUs back to Bitcoins.

3. Magic (à la Harry Potter)
Some sort of coloured coins are distributed that by convention just happen to be pegged exactly to EUR/USD/GBP or whatever, and eventually the convention becomes so universal that people stop distinguishing between cEUR and EUR.

4. Automatic "monetary policy" (à la Mastercoin)
One suggestion I have seen, I think it might have been for Mastercoin but I'm not 100% sure, was that some sort of decentralised "system address" would hold an excess of for example cEUR, and when the BTC value of cEUR started to climb above EUR more cEUR would be released into the market, and if the value was below EUR then the system would buy back some cEUR for BTC to bring the value back up. How the system would track the value of the EUR however I don't know. Presumably it would be a mathematical system not relying on external feedback, so would try to approximate a certain value that was equal to the value of the EUR at the time of implementation, which obviously could change over time and the correlation become broken.

Imagine if there existed a low-friction, cross-border, P2P system for insuring arbitrary contracts via performance bonds.

It would make number 2 a lot easier to achieve in practise, wouldn't it?

[R160K]

I have heard of four (attempted) solutions to this, and none of them is perfect:

1. Gateways (à la Ripple)
Though exchanges themselves are decentralised, the "coloured coins" they exchanged need to be issued by a trusted (centralised) authority who will exchange for example 10EUR/USD for 10cEUR/cUSD which can THEN be exchanged for BTC or other currencies.

2. IOUs (à la Ripple)
Rather than trading actual currencies, people make interest-free "loans" and trade the debt. For example, you give me 1BTC for a 150GBP "IOU", which you can trade on to other people with the promise that I (or others trading IOUs in the same currency) will buy it back for 150GBP worth of BTC/some other currency. Of course this relies on people having confidence they will be able to trade the IOUs back to Bitcoins.

3. Magic (à la Harry Potter)
Some sort of coloured coins are distributed that by convention just happen to be pegged exactly to EUR/USD/GBP or whatever, and eventually the convention becomes so universal that people stop distinguishing between cEUR and EUR.

4. Automatic "monetary policy" (à la Mastercoin)
One suggestion I have seen, I think it might have been for Mastercoin but I'm not 100% sure, was that some sort of decentralised "system address" would hold an excess of for example cEUR, and when the BTC value of cEUR started to climb above EUR more cEUR would be released into the market, and if the value was below EUR then the system would buy back some cEUR for BTC to bring the value back up. How the system would track the value of the EUR however I don't know. Presumably it would be a mathematical system not relying on external feedback, so would try to approximate a certain value that was equal to the value of the EUR at the time of implementation, which obviously could change over time and the correlation become broken.

Imagine if there existed a low-friction, cross-border, P2P system for insuring arbitrary contracts via performance bonds.

It would make number 2 a lot easier to achieve in practise, wouldn't it?

I think the main issue with number 2 is this:
Person A issues 150cGBP for 1BTC to person B. EITHER cGBP can ONLY be traded back to A for bitcoins, in which case A is a centralised exchanger, OR multiple exchangers agree to accept each other's cGBP, in which case there is nothing to stop person C1 issuing 1500cGBP to their other account C2 for 1 satoshi, then trying to exchange those 1500cGBP to person A for 10BTC.

With a performance bond in the latter scenario, there will always be situations in which people can make a profit from being dishonest larger than the performance bond. There could be a rating system attached to it, but then either everyone is given a fair chance before their rating goes down in which case scams will still happen, or else everyone starts at zero in which case they will never be accepted into the system and the same few trusted players will control the market.

In the former scenario, where each issuer is a "centralised" exchanger, and for example A issues caGBP, C issues ccGBP etc., then the equivalence of those "currencies" will be purely circumstantial; value will depend both on the BTC price being offered by each exchanger, and on the trustworthiness of each exchanger; for example, A and C might both be selling 150caGBP/ccGBP for 1BTC, but if there is more confidence in A's ability to redeem the IOU then there will be more demand for caGBP in secondary markets and thus a higher price. Besides, these currencies would only correlate to real GBP by coincidence, rather than having any strong equivalence. In this scenario, how a "performance bond" would work I'm unsure, for how can you say that A is acting in a manner "truer to GBP" than C?

Perhaps the cGBP issue transaction could be backed by some sort of proof-of-stake/proof-of-burn, to ensure it was purchased for the "correct" number of BTC (but how that would be calculated I don't know).


EDIT:
There is another scenario, sort of like a hybrid of 2 and 3. The currency STARTS OFF being issued by a centralised exchanger (A) for say 1BTC = 150cGBP. These cGBP are traded around at roughly the same rate because everyone is confident that A will redeem them for bitcoins again. One day A vanishes, but so many of his cGBP have been in circulation for so long that people have been buying them for 1GBP worth of BTC by convention, and they continue to be traded at this value.

[cunicula]

I am still trying to wrap my head around how we get cash $ into and out of  a decentralized exchange.  If someone can help me there I would really appreciate it.

It's a difficult problem, which I have not yet seen anyone address properly.

I have heard of four (attempted) solutions to this, and none of them is perfect:

1. Gateways (à la Ripple)
Though exchanges themselves are decentralised, the "coloured coins" they exchanged need to be issued by a trusted (centralised) authority who will exchange for example 10EUR/USD for 10cEUR/cUSD which can THEN be exchanged for BTC or other currencies.

2. IOUs (à la Ripple)
Rather than trading actual currencies, people make interest-free "loans" and trade the debt. For example, you give me 1BTC for a 150GBP "IOU", which you can trade on to other people with the promise that I (or others trading IOUs in the same currency) will buy it back for 150GBP worth of BTC/some other currency. Of course this relies on people having confidence they will be able to trade the IOUs back to Bitcoins.

3. Magic (à la Harry Potter)
Some sort of coloured coins are distributed that by convention just happen to be pegged exactly to EUR/USD/GBP or whatever, and eventually the convention becomes so universal that people stop distinguishing between cEUR and EUR.

4. Automatic "monetary policy" (à la Mastercoin)
One suggestion I have seen, I think it might have been for Mastercoin but I'm not 100% sure, was that some sort of decentralised "system address" would hold an excess of for example cEUR, and when the BTC value of cEUR started to climb above EUR more cEUR would be released into the market, and if the value was below EUR then the system would buy back some cEUR for BTC to bring the value back up. How the system would track the value of the EUR however I don't know. Presumably it would be a mathematical system not relying on external feedback, so would try to approximate a certain value that was equal to the value of the EUR at the time of implementation, which obviously could change over time and the correlation become broken.

Ripple is not really comparable. (3) and (4) aim for fungible currency units. RippleUSD do not aim for fungibility.

You should look at my own proposal for this:
https://bitcointalk.org/index.php?topic=297147.msg3187938#msg3187938

3 will not work. Bitshares is a version of 3.

4 could work, monetary policy can be completely automated (just ask Milton Freidman) AND countries can sustainably peg their exchange rates using monetary policy (if they can commit to not spending beyond their means). The system just needs a source of feedback about current exchange rates and variable interest rates. Mastercoin could work if properly designed, but i don't think the Mastercoin guys know how to properly design it at this point.

My system is a version of 4 which is based in the standard theory of international finance. I have been meaning to describe my system in terms that are intelligible for a regular audience, but have not had the spare time or energy recently.

I am lecturing the undergrads about a related topic next week. I'm hoping to make a powerpoint animation which can simultaneously explain hopUSD and also be used as an instructional tool to teach undergrads some very basic international finance via animations.

[If anyone knows a nice free tool for making basic animations let me know.]

[Sukrim]

I agree that Ripple rather aims for making trading different USD so easy against each other, that they are practically fungible. It does not aim to make them fungible by default.

I have heard of a mechanism to stabilize monetary supply, amount and potentially prices (needs game theoretical analysis though) on the german board:
Create and distribute (by whatever means) e.g. 1 million coins. Implement demurrage, meaning per month you will loose e.g. 2% of all the coins you hold. There is a twist however: You can commit to freeze your funds for a pre-announced period of time. During this time, you do not loose funds but actually earn interest (e.g. the same 2% a month that demurrage would have cost you). This interest however is NOT paid from demurrage alone and demurrage also just means coins are destroyed. In the end this means there can be more than 1 million coins over time, if a lot of people freeze their funds or a lot less if lots of people keep them active for trade.
This means that people wil have a high interest of keeping the value relatively stable (+/-2%) as any deviation from this would lead to funds being frozen and monetary supply being increased or money not being frozen, which destroys currency.

I am not too sure how this then would end up in trading value against BTC or USD, but I find it a relatively interesting concept of allowing inflation and deflation without an external regulator but by rules of the system.

[cunicula]

I agree that Ripple rather aims for making trading different USD so easy against each other, that they are practically fungible. It does not aim to make them fungible by default.

I have heard of a mechanism to stabilize monetary supply, amount and potentially prices (needs game theoretical analysis though) on the german board:
Create and distribute (by whatever means) e.g. 1 million coins. Implement demurrage, meaning per month you will loose e.g. 2% of all the coins you hold. There is a twist however: You can commit to freeze your funds for a pre-announced period of time. During this time, you do not loose funds but actually earn interest (e.g. the same 2% a month that demurrage would have cost you). This interest however is NOT paid from demurrage alone and demurrage also just means coins are destroyed. In the end this means there can be more than 1 million coins over time, if a lot of people freeze their funds or a lot less if lots of people keep them active for trade.
This means that people wil have a high interest of keeping the value relatively stable (+/-2%) as any deviation from this would lead to funds being frozen and monetary supply being increased or money not being frozen, which destroys currency.

I am not too sure how this then would end up in trading value against BTC or USD, but I find it a relatively interesting concept of allowing inflation and deflation without an external regulator but by rules of the system.

Can't completely understand what you are saying. Might be easier in bullet points.

This system cannot work to maintain a peg in theory (or in practice). 2% is a magic number and in this case it is a very important magic number. The interest rate needs to be floating. You can't peg your currency to the Zimbabwe Dollar and the Euro using the same interest rate. Similarly, you can't peg your currency to the current Euro and the Euro 10 years from now using the same interest rate.

However, looking at this again, it seems like an attempt to stabilize fluctuations, not an attempt to maintain a peg. Hmm... still not understanding. Maybe it is because we are playing telephone.

[Sukrim]

The idea is to create an incentive to keep the value of a currency stable by self-regulating the amount that exists and also self-regulating the amount that is available for trading.

2% is definitely a magic constant and it could be larger or smaller. I'll try again, in bullet points:

* Issue and distribute initial amount of currency.
* Currency not "blocked" can be transferred and thus traded, but will loose x % of value per timeframe (demurrage)
* Currency can be "blocked" by signing a special transaction, making it inaccessible until a pre-announced time. For the time is is being blocked, it actually receives interest of x % per timeframe.
* All in all the amount of currency should balance itself around a value that is useful compared to its trading value - if it is traded a lot, the value would go up and the amount goes down (as demurrage destroys coins), if it is traded very little, the value would go down and the amount would go up (since people rather freeze the money and earn interest).

It is hard to guess where this value will end up since as you said, it is not possible to peg it. It is however potentially more stable in trading value, as it has incentives in two directions instead of just one by gaining value either through trading/transfering or explicitly NOT trading/transfering.

[killerstorm]

I have heard of four (attempted) solutions to this, and none of them is perfect:

Nice summary, thanks!

1. Gateways (à la Ripple)
Though exchanges themselves are decentralised, the "coloured coins" they exchanged need to be issued by a trusted (centralised) authority who will exchange for example 10EUR/USD for 10cEUR/cUSD which can THEN be exchanged for BTC or other currencies.

I think this is the most promising approach IF we can get truly serious player involved in this.

Ideally, a company which owns underlying assets should be 100% isolated from trading and other activities. Basically, it should be a trust (ETF-like) which simply owns USD and does nothing. Companies responsible for market making are not crucial to back the currency.

Then we can add an insurance layer: if both market makers and trust fail, insurance company will step in and compensate.

4. Automatic "monetary policy" (à la Mastercoin)
One suggestion I have seen, I think it might have been for Mastercoin but I'm not 100% sure, was that some sort of decentralised "system address" would hold an excess of for example cEUR, and when the BTC value of cEUR started to climb above EUR more cEUR would be released into the market, and if the value was below EUR then the system would buy back some cEUR for BTC to bring the value back up. How the system would track the value of the EUR however I don't know. Presumably it would be a mathematical system not relying on external feedback, so would try to approximate a certain value that was equal to the value of the EUR at the time of implementation, which obviously could change over time and the correlation become broken.

I believe it can be done using derivatives. Recently Vitalik Buterin described a way to implement trustless CFDs within Mastercoin, and people understood that it is actually superior to "escrow fund".

Something like that can be done using colored coins as well, but it is really complex and currently there are no plans to implement it.

[justusranvier]

I believe it can be done using derivatives.

Then you don't understand the problem.

Fiat liquidity in a P2P exchange means that I can take my digital representation of dollars and reliably and consistently turn those into a physical $100 bill in my hands to put gas in my car and buy groceries.

Solving this problem means coordinating actions in meatspace; a complete solution requires very little coding and a lot of HR.

[cunicula]

I believe it can be done using derivatives.

Then you don't understand the problem.

Fiat liquidity in a P2P exchange means that I can take my digital representation of dollars and reliably and consistently turn those into a physical $100 bill in my hands to put gas in my car and buy groceries.

Solving this problem means coordinating actions in meatspace; a complete solution requires very little coding and a lot of HR.

No, you are confused. I am located here in Singapore.

The Brunei dollar is pegged to the Singapore dollar, but printed by the gov't of Brunei. Maintaining this peg requires matching Singapore's monetary policy, so that you receive the same interest regardless of whether you deposit your money in a Brunei bank or a Singapore bank. (or likewise pay the same interest rate regardless of whether you borrow from a Brunei bank or a Singapore bank). It also requires maintaining a stable fiscal policy, since otherwise the Brunei gov't will turn to the printing press and this lowers interest rates.

If Brunei offers a higher interest rate, then money will flow into Brunei until paying back the accumulated inflows becomes unsustainable. At this point, everyone with money in Brunei will suddenly race for the exits, causing a sudden collapse. This is what happened with Pirate. This is also what happened in Cyprus (8% Euro interest for some sketchy Russians) and extremely high risk lending and speculation to support it. Extremely unstable, yet a worthwhile risk for Cyprus because a) they are booger-sized nation and can gain a lot from international capital inflows (much like Singapore) and b) expect a bailout from the Eurozone (unlike Singapore).

First and foremost, the system depends on a flexible interest rate policy. This can be implemented by adjusting the interest rate itself or adjusting the money supply.

As far as I know, no one involved in Mastercoin understands this. Until they do, all attempts to set up MastercoinUSD will ultimately fail. The key thing is that they will fail from ignorance not because it is actually impossible (see Brunei). They will also most likely fail through sudden collapse rather than through a gradual process.


  

[killerstorm]

I believe it can be done using derivatives.

Then you don't understand the problem.

Fiat liquidity in a P2P exchange means that I can take my digital representation of dollars and reliably and consistently turn those into a physical $100 bill in my hands to put gas in my car and buy groceries.

Solving this problem means coordinating actions in meatspace; a complete solution requires very little coding and a lot of HR.

I understand the problem. It consists of two parts:

• 1. we need some kind of digital tokens exist in the blokchain and have their value pegged to the value of asset they represent
• 2. an ability to exchange tokens for the asset

it is important to understand that these are two separate issues. You focus on the second one, but I believe it isn't particularly interesting: something similar to LocalBitcoins can be used here.

Basically, once you have digital tokens with stable value, the rest of the system is inherently decentralized as people can simply trade these tokens with each other... Of course, there will be people who will do this professionally, and there will be companies which provide this kind of service.

We already know that it works. This approach is/was used by a number of digital currencies such as LibertyReserve, WebMoney, e-gold etc. For example, there are several WebMoney exchangers in my city (it is kinda popular here), so getting money in/out of WebMoney isn't a problem, at all.

If this kind of exchange is profitable, people will do it. Consider it solved.

Wait a bit, why do we need this mumbo-jumbo with USD-coins, can't people exchange bitcoins directly?!

Of course, they can, but volatility make is extremely risky. It isn't an exchange business, it is a daytrader business.

Moreover, price discovery doesn't work very well within these peer-to-peer trading networks. Please check this chart: http://bitcoinity.org/markets/localbitcoins/USD

It just fluctuates wildly.

Now, again, suppose we have some kind of trustworthy USD-coins. Their price is certain, so there is no need for price discovery. Maybe you will pay 1.05 USD for 1 USD-coin, but if somebody wants 2 USD for it, it's an obvious rip-off (cf. LocalBitcoins: high: 500.15      low: 173.91).

If they are sufficiently trustworthy, local exchangers will be glad to work with them, as it is very simple business: they earn their commission and do not need to worry about price fluctuations.

Price discovery can happen on a decentralized exchange for digital tokens. Basically, we can make a global order book, and if it works properly, it will have one price.

So we need to focus on implementing digital tokens with stable value, as they can be used for buying/selling bitcoins.

[ripper234]

The Brunei dollar is pegged to the Singapore dollar, but printed by the gov't of Brunei. Maintaining this peg requires matching Singapore's monetary policy, so that you receive the same interest regardless of whether you deposit your money in a Brunei bank or a Singapore bank. (or likewise pay the same interest rate regardless of whether you borrow from a Brunei bank or a Singapore bank). It also requires maintaining a stable fiscal policy, since otherwise the Brunei gov't will turn to the printing press and this lowers interest rates.

If Brunei offers a higher interest rate, then money will flow into Brunei until paying back the accumulated inflows becomes unsustainable. At this point, everyone with money in Brunei will suddenly race for the exits, causing a sudden collapse. This is what happened with Pirate. This is also what happened in Cyprus (8% Euro interest for some sketchy Russians) and extremely high risk lending and speculation to support it. Extremely unstable, yet a worthwhile risk for Cyprus because a) they are booger-sized nation and can gain a lot from international capital inflows (much like Singapore) and b) expect a bailout from the Eurozone (unlike Singapore).

First and foremost, the system depends on a flexible interest rate policy. This can be implemented by adjusting the interest rate itself or adjusting the money supply.

As far as I know, no one involved in Mastercoin understands this. Until they do, all attempts to set up MastercoinUSD will ultimately fail. The key thing is that they will fail from ignorance not because it is actually impossible (see Brunei). They will also most likely fail through sudden collapse rather than through a gradual process.

cunicula,

Constructive suggestions on how to implement any form of backed currencies in Mastercoin are always welcome.
FYI we will probably implement CFDs in Mastercoin before backed currencies ... and CFDs might be good enough for many purposes.

(If you have such constructive suggestions, I suggest we take them to a different thread and not go off topic in here.)

[cunicula]

Agreed that I am off topic, my comments are not related to Killerstorm or the (quite worthy) colored coins project.
I will post an explanation of why flexible interest rates are key in a new thread hopefully this weekend.
It is not an easy thing to explain I have found.

[markm]

1. Gateways (à la Ripple)
Though exchanges themselves are decentralised, the "coloured coins" they exchanged need to be issued by a trusted (centralised) authority who will exchange for example 10EUR/USD for 10cEUR/cUSD which can THEN be exchanged for BTC or other currencies.

I think this is the most promising approach IF we can get truly serious player involved in this.

Ideally, a company which owns underlying assets should be 100% isolated from trading and other activities. Basically, it should be a trust (ETF-like) which simply owns USD and does nothing. Companies responsible for market making are not crucial to back the currency.

That is how things like e-Gold work(ed). People tend to regard that as centralisation thus deprecate it (around here where we are supposed to be all about decentralisation).

It is how I have tried to set up my Digitalis Open Transactions server. Ideally I do not want to ever dig up my cold-stored assets that the tokens people are trading represent, my hope is that they stay frozen forever, basically until there is not perceived/anticipated to be any future use for the tokens, that is, until there is no longer going to be any trading in that asset thus no need for tokens representing that asset thus no longer any need for a Fort Knox or Fortress of Solitude or whatever "stone cold frozen" cold storage of that asset. As that point, when trading in that asset is being shut down, maybe centuries into the future, the actual assets would get dug up and handed out to the owners at that time of the tokens that represent them.

This model totally separates the function of permanent storage of hopefully never again to move assets from the function of providing liquidity of the tokens that represent those assets.

That is, like e-Gold did, I want the whole buying and selling of those tokens aka of ownership of portions of those assets, to be a distinct different business, hopefully run by third parties.

One effect of that approach is that it is always at least 100% reserves, and usually more than 100% since only assets in excess of the 100% actually move, the 100% is frozen "forever", only unfrozen when the whole business shuts down aka when there are no plans to enable any more trading of that asset.

For things there is a limited number of in existence, such as bitcoins, this permanent freezing approach should even actually increase the value of any of that asset that has not yet been frozen into our reserves forever so that we could issue tokens representing it. Though if a majority of coins were to be frozen it would probably be best to have many servers/entities operating on these principles but run by different entities so people don't start thinking of the coin as one that is almost wholly owned by one server/token/trading company or entity.

The big problem with that whole approach is all the legal mumbo-jumbo vulnerability though if some regime somewhere decides for whatever reason that it wants to confiscate the assets or shut down trading of the assets. An ETF has a certain kind of possibly illusory resistance to such disasters, but then again didn't people in places like Cypress and people who put money in places like Cypress also imagine that having paperwork somehow made their assets safer?

Then we can add an insurance layer: if both market makers and trust fail, insurance company will step in and compensate.

Presumably an insurance layer would kind of amount to additional reserves over and above the 100% reserves? Ideally maybe there would eventually be at least a 100% reserves in the insurance fund over and above the 100% reserves originally and permanently frozen back when the tokens corresponding to that initial frozen reserve was issued. But that would presumably depend upon fees/income of some kind, some of the "profits" that the original frozen-forever reserves are "earning" by means of their existence being an enabler of confidence in the tokens would go into the "insurance" reserves, something like that?

I kind of envisioned maybe other well known people in the community would act as market-makers buying and selling the tokens and that each of them would hopefully, even probably, have at least as much reserves themselves as my original frozen-forever reserves that originally determined and fixed the total number of tokens in existence. Thus that any one of them could if they chose buy the entire total lot of all the tokens that exist. What I ended up with was a realisation that the total number of tokens that exist is basically the bandwidth of a pipeline; you can only transact that much value in any one transaction. So you need velocity, circulation, if lots of trade is to be enabled by just the fixed number of tokens that exist. But the advantage is you don't have hot wallets as part of the "reserves". The "reserves" are totally stone cold dead, our descendants will dig them up some century when they no longer intend to trade in that asset so they dig it up to melt it down or burn it or maybe they just leave it to rot and turn into fossils even.

(The "reserves" are in that way like that big round stone that fell into the ocean but still was useful as money because they could still change who owned it whenever they needed to, the fact no one could actually touch it visit it carry it etc was of no importance it seems. We have submarines and salvage corps now that could raise that stone from the ocean though if someone still after all this time wanted to move it...)

-MarkM-

[Flavien]

I have heard of four (attempted) solutions to this, and none of them is perfect:

1. Gateways (à la Ripple)
Though exchanges themselves are decentralised, the "coloured coins" they exchanged need to be issued by a trusted (centralised) authority who will exchange for example 10EUR/USD for 10cEUR/cUSD which can THEN be exchanged for BTC or other currencies.

2. IOUs (à la Ripple)
Rather than trading actual currencies, people make interest-free "loans" and trade the debt. For example, you give me 1BTC for a 150GBP "IOU", which you can trade on to other people with the promise that I (or others trading IOUs in the same currency) will buy it back for 150GBP worth of BTC/some other currency. Of course this relies on people having confidence they will be able to trade the IOUs back to Bitcoins.

3. Magic (à la Harry Potter)
Some sort of coloured coins are distributed that by convention just happen to be pegged exactly to EUR/USD/GBP or whatever, and eventually the convention becomes so universal that people stop distinguishing between cEUR and EUR.

4. Automatic "monetary policy" (à la Mastercoin)
One suggestion I have seen, I think it might have been for Mastercoin but I'm not 100% sure, was that some sort of decentralised "system address" would hold an excess of for example cEUR, and when the BTC value of cEUR started to climb above EUR more cEUR would be released into the market, and if the value was below EUR then the system would buy back some cEUR for BTC to bring the value back up. How the system would track the value of the EUR however I don't know. Presumably it would be a mathematical system not relying on external feedback, so would try to approximate a certain value that was equal to the value of the EUR at the time of implementation, which obviously could change over time and the correlation become broken.

Perhaps I am missing something, but I cannot see how 2, 3 and 4 can work. The only thing that give a 100 USD colored coin a value is the ability to redeem it for 100 USD. That is only the case if the emitter of the coin (the gateway) agrees to redeem the coin back for 100 USD. Without this, colored coins are mere paper money.

And to me, the only way colored coin will take off is by getting partners willing to emit colored coins by backing them with real assets. Bitstamp for instance could emit USD colored coins, since they already do that with Ripple.

[killerstorm]

And to me, the only way colored coin will take off is by getting partners willing to emit colored coins by backing them with real assets. Bitstamp for instance could emit USD colored coins, since they already do that with Ripple.

Well, currencies isn't the only use case for colored coins. In fact I see more interest for capital market use cases.

But there are also people/companies interested in what you described above.