Decentralized BTC Stock Market [Goodbye GLBSE]

[Energizer]

This thread is an attempt to answer the following questions, and to mind storm about the possibility of having an open source decentralized BTC stock market protocol/features/design.

• GLBSE is closed, so what is next?
• Is it possible to have a decentralized BTC stock market in the same manner BTC/namecoin operates?
• Is it possible to have a new protocol/block chain where assets "instead of coins" can be created by the asset issuer instead of mining?
• Is it possible that such block chain handles multiple different kinds of assets instead of one kind of coins?

It seems that the most challenging problem is in the exchange mechanism between assets and e-currencies such as BTC. For that such decentralized stock market has to operate on top of other block chain "if not on top of multiple block chains", where BTC or LTC message signing can confirm assets movement "buy/sell orders" between different accounts.

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[jgarzik]

Search the forums for distributed bonds and colored coins.

[justusranvier]

https://bitcointalk.org/index.php?topic=106373.0
https://bitcointalk.org/index.php?topic=92421.0
https://bitcointalk.org/index.php?topic=52494.0
https://bitcointalk.org/index.php?topic=112007.0

[ShireSilver]

I hope people stop soon with the colored/tainted coins nonsense. There's far too many different uses for the underlying technology for them all to be shared with only 21 million bitcoins (even if you use them as individual satoshis). Its good not just for stocks, but all kinds of other property that needs to have ownership managed.

[PawShaker]

In my opinion the problem is much deeper. Securities, by their definition, are contracts. In other words, they are agreements. They have consequences outside of the virtual domain. For securities to work there has to be some sanction for braking the contract.

Typical conditions for any security is that the management must inform investors honestly. Now, how on earth, we can get a distributed tribunal to judge that? What kind of sanction can be applied in a quasi anonymous habitat where nicks are dime per dozen?

Something like “whoever makes a block with this transaction will be a judge” does not work, because you need some qualifications to be a judge. For instance, judge should not be 12 year old. Please keep in mind that there is no restriction on age of miners.

[jgarzik]

Something like “whoever makes a block with this transaction will be a judge” does not work, because you need some qualifications to be a judge. For instance, judge should not be 12 year old. Please keep in mind that there is no restriction on age of miners.

In the proposed smart property / smartcoin / colored coin designs, the blockchain merely tracks ownership of an abstract digital object.  Nothing more.

It is up to software and -- as you point out -- the real world to attach meaning to the digital object.

[matthewh3]

One thing that would be good is an exchange to trade coloured coins.

[Energizer]

So what would such colored coins be then? and how it would come to existence?

[Energizer]

When I first created this thread, I wasn't aware of the term "colored coins". Thx for everyone who've posted to this thread, your posts were very informative.

It seems that colored coins is going to be used pretty soon in replacing GLBSE. I am personally thinking about moving my asset "Bitnodes" to colored coins. Currently I am examining this solution: https://bitcointalk.org/index.php?topic=117630.0

[matthewh3]

When I first created this thread, I wasn't aware of the term "colored coins". Thx for everyone who've posted to this thread, your posts were very informative.

It seems that colored coins is going to be used pretty soon in replacing GLBSE. I am personally thinking about moving my asset "Bitnodes" to colored coins. Currently I am examining this solution: https://bitcointalk.org/index.php?topic=117630.0

I'm doing the same with my ex-GLBSE asset 'RSM'.  Maybe you could add to my bounty - https://bitcointalk.org/index.php?topic=117630.msg1270041#msg1270041 - there is also another bounty - https://bitcointalk.org/index.php?topic=117630.msg1273753#msg1273753

[Energizer]

When I first created this thread, I wasn't aware of the term "colored coins". Thx for everyone who've posted to this thread, your posts were very informative.

It seems that colored coins is going to be used pretty soon in replacing GLBSE. I am personally thinking about moving my asset "Bitnodes" to colored coins. Currently I am examining this solution: https://bitcointalk.org/index.php?topic=117630.0

I'm doing the same with my ex-GLBSE asset 'RSM'.  Maybe you could add to my bounty - https://bitcointalk.org/index.php?topic=117630.msg1270041#msg1270041 - there is also another bounty - https://bitcointalk.org/index.php?topic=117630.msg1273753#msg1273753

Yes, I am planning to do so soon.

[PawShaker]

I still think we are just scratching the surface of the problem. Coloured coins will only provide a "shareholders registry" service. It will not substitute for "stock exchange". Anyone running an exchange is still vulnerable to charges of offering securities without prospectus to unsophisticated clients. I understand that GLBEX was relying on argumentation that BTC is monopoly money, so “securities” traded on it were not real securities. One can argue on what BTC is, but it is hard to argue that BTC is worthless. Securities can be issued based on anything of value; they may be related to some commodity.

The challenge we face is how to create a decentralised trading platform.

[jgarzik]

I still think we are just scratching the surface of the problem. Coloured coins will only provide a "shareholders registry" service. It will not substitute for "stock exchange".

100% correct

The distributed bond thread describes a separate P2P network and DHT which would be used as a network where traders advertise assets for sale, and make offers.

[casascius]

In my opinion the problem is much deeper. Securities, by their definition, are contracts. In other words, they are agreements. They have consequences outside of the virtual domain. For securities to work there has to be some sanction for braking the contract.

Typical conditions for any security is that the management must inform investors honestly. Now, how on earth, we can get a distributed tribunal to judge that? What kind of sanction can be applied in a quasi anonymous habitat where nicks are dime per dozen?

Something like “whoever makes a block with this transaction will be a judge” does not work, because you need some qualifications to be a judge. For instance, judge should not be 12 year old. Please keep in mind that there is no restriction on age of miners.

+100

Being aware of this, right here, is the shortest way to explain why I stayed miles away from "investing" in any Bitcoin "stocks".  Here at Bitcointalk, we seem keen on showing contempt for the status quo legal framework - the one that lets securities function in any way beyond scamcoins that work on the honor system - and finding brilliant ways to invent our way out of it, without realizing that doing so is about as brilliant as a goldfish inventing its way out of a bowl.

A distributed exchange benefits only scammers.  If one can use distributed technology to evade accountability from the law, one can also use it to evade accountability from their shareholders, effectively negating any and all value inherent in owning shares.  It's a software-based screen-door submarine, it just doesn't work.

Shhh, keep this a secret, the scammers will be upset if everyone figures this out!

[markm]

Maybe what we need then is simply ways for private groups of people who know each other to pool resources.

Are there though any ways of getting to know people that end up with the people being considered a private group whose private pooling of resources is a private matter between them?

It maybe should be pretty much equivalent to my moving coins and notes/bill around from pocket to pocket, except that I happen to be an entity consisting of more than one actual organic lifeform.

-MarkM-

[PawShaker]

[...]
Being aware of this, right here, is the shortest way to explain why I stayed miles away from "investing" in any Bitcoin "stocks".  Here at Bitcointalk, we seem keen on showing contempt for the status quo legal framework - the one that lets securities function in any way beyond scamcoins that work on the honor system - and finding brilliant ways to invent our way out of it, without realizing that doing so is about as brilliant as a goldfish inventing its way out of a bowl.

A distributed exchange benefits only scammers.  If one can use distributed technology to evade accountability from the law, one can also use it to evade accountability from their shareholders, effectively negating any and all value inherent in owning shares.  It's a software-based screen-door submarine, it just doesn't work.

Shhh, keep this a secret, the scammers will be upset if everyone figures this out!

The most amaizing thing about GLBSE was that it actually worked. Practicaly, we wittnessed only one case of dodgy investment instrument. It was under several pass-through labels, but it was the same entity. Vast mayority of people were actually honest (or even plain generous as it came out in case of race horse owners).

If you can recall, Enron went down despite all checks and balances, internal and external audits, etc. All these overheads costed huge amounts of money and in the end it still boiled down to honesty of few individuals.

[odolvlobo]

Like everyone else, I have been considering how a distributed exchange might work. I think it would be better to have a separate block chain. I prefer to leave the bitcoin block chain alone and not weigh it down with other kinds of transactions. The exchange block chain would support merged mining and would not have block rewards, just transaction fees.

[casascius]

The most amaizing thing about GLBSE was that it actually worked.

Securities without accountability is like automobile safety without seatbelts.  If I had to say why I'm not sure I agree, I'd say it's like saying it's amazing that driving without a seatbelt is actually safe, discounting the fact that you are lucky to have never been in an accident.  It's like saying fiat money works because it works today.

[killerstorm]

Typical conditions for any security is that the management must inform investors honestly. Now, how on earth, we can get a distributed tribunal to judge that? What kind of sanction can be applied in a quasi anonymous habitat where nicks are dime per dozen?

I think it is important to decouple trading platform from other stuff like verification/rating/audit. Trading platform must be completely open for everybody: nobody can prevent you from trading, nobody can seize your assets etc.

On the other hand, verification/rating/audit is completely different business. When platform is open and is thus open to all kinds of scammers, legit companies will HAVE to use verification/rating/audit services, otherwise they will get drowned in a crowd of scammers.

Existing centralized exchanges kinda sidestepped this issue: they filtered out obvious scam, so users thought that some level of verification is there, so there was NO urgent need for indepth verification and there was no competition for this service because some service is already bundled with trading platform.

So it is similar to how Microsoft was bundling IE6 with Windows XP and this "feature" poisoned web development for like a decade. Although at the time it was introduced IE6 was actually a good thing..

Anyway... Real demand for verification will create a competition in this area. If some company wants to raise money they have go to some verification/investment banking company and work with them. Perhaps this verification company will demand some accounting to be done in their format, perform audit, check IDs, ask to sign some contracts and so on. For this they can charge some fee, e.g. 5% of IPO.

Verification companies will compete among themselves: if they have a good track record, it's easier to raise money from IPO (since users trust them) so they can get higher commission. OTOH some smaller companies might try to find luck in less demanding verification companies.

Also there is market for insurance: perhaps a trusted insurer will take like 5% out of IPO and will buy back asset in case of default. Of course, they will insure only legit-looking companies.

So there is strong economic incentive to create a working verification system, and I believe that will launch evolutionary. process. Perhaps process will be painful and we'll go through many scams and defaults, but in the end only fittest will survive, and that would be great.

So back to the question:

1. We do not need distributed verification, we need decentralized verification: it will be done not by one, but by several companies, potentially barrier for entry is rather low...

2. In many countries electronic signature is recognized and is binding. So I believe it is possible to make a contract which will recognize blockchain-based asset owner identification and it will be enforceable. I.e. shareholders can sue issuer. I'm not a lawyer, though. But there is a lot of flexibility in this.

Some people say that it is illegal to issue securities... OK. Make contract such that it is structured like IOU, IOUs are likely not illegal. But this contract won't be publically announced, instead it will be submitted to a trusted 3rd party arbitrator. On the other hand public contract will state that it is just play money. If shit hits fan, arbitrator will make IOU contract public. Then each shareholder can legally demand money from issuer personally, via existing law enforcement system.

This structure is a bit similar to bitcoin contracts: https://en.bitcoin.it/wiki/Contracts

[casascius]

Already, I would bet that if I started a corporation, and structured it so its Articles of Incorporation referenced "colored bitcoins" as shareholders, that it would work for a limited time. This would mainly be due to the fact that in the absence of a dispute or problems, the consensus of the shareholders is enough to establish who the shareholders are.

Imagine it works for years. And then somebody sues me for whatever losses he incurs for whatever reason (suppose he gets hacked and disputes his assertion that he transferred his shares or something) and alleges that the whole scheme of using "colored coins" to denote ownership constitutes a scam.

Either it will work wonderfully, or it will be condemned as hocus pocus and considered null and void.  If a lot of people have a stake in the outcome, it will probably be subject to rounds of appeal, making any given decision guiding at best, rather than final.

The only innovation needed to make this sort of ordeal possible is an easily viewed by anyone serial number on each satoshi, and someone with a lot of balls!

[killerstorm]

Already, I would bet that if I started a corporation, and structured it so its Articles of Incorporation referenced "colored bitcoins" as shareholders,

I'd rather formulate it along the lines of "ownership of shares can be verified by a chain of digital signatures which confirm transfer of shares down from issuer and are recorded in a 'blockchain'". I.e. it should probably be several paragraphs of text and it should mention things like digital signatures, public record and verifiable timestamps.

Fundamentally it is a same thing as bearer stock certificates. Of course there might be some legal problem, for example, a digital signature of an anonymous entity won't be accepted.

he gets hacked and disputes his assertion that he transferred his shares or something) and alleges that the whole scheme of using "colored coins" to denote ownership constitutes a scam.

If that's a problem, ownership via colored coins will be just a verbal agreement, and your liability to shareholders will be represented via a separate contract which will be hidden until 'shit hits fan'. This way you can avoid any legal problems before there is really a problem.

If a lot of people have a stake in the outcome, it will probably be subject to rounds of appeal, making any given decision guiding at best, rather than final.

Same is true for Bitcoin in general, right?

The only innovation needed to make this sort of ordeal possible is an easily viewed by anyone serial number on each satoshi, and someone with a lot of balls!

Proof that someone owns shares is a chain of signatures and blockchain-based timestamps.

E.g. issuer's signature proves that ownership is transferred to Anonymous1, Anonymous1's signature proves that Anonymous2 is now owner. Then John Doe will prove that he is Anonymous2 by signing a message with his private key.

Although we don't know who was Anonymous1, we know that 1) he was owner of shares; 2) he transferred them to John Doe. I think it's a solid proof that John Doe is now the owner.

All this can be done manually, but specialized software will make it more convenient.

[justusranvier]

Securities without accountability is like automobile safety without seatbelts.

There's a phenomenon called risk compensation where it's been noted that humans have a certain amount of risk tolerance and if you change their environment to make it safer in one aspect they'll change their behaviors in other ways to nullify the benefit.

People wearing seat belts drive faster, and more aggressively, and are more dangerous to pedestrians than when they aren't wearing them. This is precisely because they feel more secure with the seat belt on.

[casascius]

Already, I would bet that if I started a corporation, and structured it so its Articles of Incorporation referenced "colored bitcoins" as shareholders,

I'd rather formulate it along the lines of...

Of course, I would formulate it differently too... "Referenced colored bitcoins" isn't the actual language, it's just an abstract description so you know what I'm talking about.

Fundamentally it is a same thing as bearer stock certificates. Of course there might be some legal problem, for example, a digital signature of an anonymous entity won't be accepted.

This is indeed its best shot at plausible legitimacy.  One would have to ask what would be the business purpose of doing it this way instead of just the old fashioned way, the benefit that comes from doing it a new way.  In my view, its bigger challenges would have less to do with digital signatures and more the facilitation of anonymous transfers of centrally stored value.  At least with Bitcoin, there is a palpable demand by honest folks for honest money, because many have a legitimate philosophical objection to the way fiat currency is being (mis)managed.  But the public isn't demanding new places to invest their money with less regulation and less protection (it's arguably bad enough as it is), so the idea that a new decentralized stock exchange serves some legitimate societal purpose is going to seen by much of the world as questionable.

It would end up walking and quacking like another E-Gold, if used as a way for criminals to store and launder wealth (you can guess it invariably would), it would be a centralized target to be seized and shut down.

he gets hacked and disputes his assertion that he transferred his shares or something) and alleges that the whole scheme of using "colored coins" to denote ownership constitutes a scam.

If that's a problem, ownership via colored coins will be just a verbal agreement, and your liability to shareholders will be represented via a separate contract which will be hidden until 'shit hits fan'. This way you can avoid any legal problems before there is really a problem.

I don't see it working that way.  The anticipated legal problems would come as a direct result of such an agreement, not due to the lack of it.  The legal problems inherent in starting such a thing is the risk of having the assets seized if the powers that be didn't like what you're doing.  It would be like starting a centralized E-Gold.  A secret piece of paper in the back pocket of the E-Gold founder wouldn't have kept him out of trouble and wouldn't help here either.

If a lot of people have a stake in the outcome, it will probably be subject to rounds of appeal, making any given decision guiding at best, rather than final.

Same is true for Bitcoin in general, right?

Not at all.  Bitcoin is totally decentralized and is not based on anybody promising anything.  It derives its value from its demand as a commodity, and not because it represents a promise that, if unfulfilled, is worthless.  Bitcoin can't be shut down unless you get rid of the whole network and the whole community of people willing to exchange goods and services for it.  On the other hand, XYZ Decentralized Shareholders Corp can easily be shut down because the shareholders are decentralized but the corp and its assets are not!

The only innovation needed to make this sort of ordeal possible is an easily viewed by anyone serial number on each satoshi, and someone with a lot of balls!

Proof that someone owns shares is a chain of signatures and blockchain-based timestamps.

Equivalent.

[killerstorm]

This is indeed its best shot at plausible legitimacy.  One would have to ask what would be the business purpose of doing it this way instead of just the old fashioned way, the benefit that comes from doing it a new way.  In my view, its bigger challenges would have less to do with digital signatures and more the facilitation of anonymous transfers of centrally stored value.

Sure, such private currencies might be a big thing, but I thought we were talking about "decentralized BTC stock market".

The business purpose of doing it this way is that you can tap new capital markets which can work on micro-scale, are ready to accept rather informal agreements and so on.

But the public isn't demanding new places to invest their money with less regulation and less protection

Why do you think so? GLBSE and LitecoinGlobal are counter-examples.

I'll give you an example: one guy was able to borrow ~$6000 on LitecoinGlobal to purchase new servers for his offshore hosting business. He was offering ~66% per year interest rate when bonds were originally sold.

For him it works like this: server costs $2500, he gets $450 per month per server from customers and pays something like $130 to bond holders. So apparently he gets $320 per month per server which is probably enough to cover his expenses and whatnot. And LitecoinGlobal people get a sweet ~60% per year interest rate from a rather reputable entity.

So, well, both parties are happy.

I don't know what is the size of this market, but apparently it exists.

so the idea that a new decentralized stock exchange serves some legitimate societal purpose is going to seen by much of the world as questionable.

For "much of the world" Bitcoin in general is questionable, and? Bitcoin, among other things, enables business which could not exist otherwise. And so does hypothetical decentralized exchange.

[killerstorm]

The legal problems inherent in starting such a thing is the risk of having the assets seized if the powers that be didn't like what you're doing.  It would be like starting a centralized E-Gold.

We can put intermediaries between issuer and anonymous decentralized market.

Suppose you want to borrow money by selling bonds, but you aren't legally allowed to trade anonymously. You can sell bonds to some offshore intermediary which will then sell them on market. Effectively you will borrow money from that intermediary. which is likely not illegal.

Intermediary does not need to be trusted neither by issuer nor by market participants. It just needs to be legal to borrow money from it.

Likewise, buyback can be done through intermediary too.

I don't see it working that way.  The anticipated legal problems would come as a direct result of such an agreement, not due to the lack of it.  ... A secret piece of paper in the back pocket of the E-Gold founder wouldn't have kept him out of trouble and wouldn't help here either.

The whole point is that agreement won't be public. You can deny connection with what happens on decentralized market: you just borrowed money from some offshore company, and that's all.

If that offshore company in its turn borrowed from some decentralized market is none of your business, you can't be liable for it.

Agreement will only be made public once you default.

[casascius]

The business purpose of doing it this way is that you can tap new capital markets which can work on micro-scale, are ready to accept rather informal agreements and so on.

That's good for the person tapping the market, but so not good for the market being tapped.  Business is only good for society when both sides come out a winner.  Informal agreements are no good for society either if it means they're unenforceable.  But they're great scam tools.

But the public isn't demanding new places to invest their money with less regulation and less protection

Why do you think so? GLBSE and LitecoinGlobal are counter-examples.

I'll give you an example: ... He was offering ~66% per year interest rate when bonds were originally sold.

Right.  Nobody said "Please give me a place to invest my money where it's more likely to disappear without any recourse", but they did respond to the promised 66% interest rate.  As is typical of most scams.

For "much of the world" Bitcoin in general is questionable, and? Bitcoin, among other things, enables business which could not exist otherwise. And so does hypothetical decentralized exchange.

Bitcoin gives mankind an alternative to government fiat currency, which is a major breakthrough.  On the other hand, the only kind of business that a decentralized exchange facilitates is scams.  They are really nothing the same, even if they could both be described as questionable to a lot of people.

Plain and simple, a security is a contract, and you cannot have a contract worth anything more than the paper it's printed on without a means to enforce it. This is sort of like one of those immutable laws that cannot be ignored nor explained away with examples where someone had an unenforceable contract but still got something out of it.

[CharlesPonzi]

Cascascius speaks the truth. Companies who have a physical prescence are still limited by what their local government allows. And they arent allowed to issue equity to the general public.

It is an awesome tool for scammers to extract wealth though 

[jgarzik]

Cascascius speaks the truth. Companies who have a physical prescence are still limited by what their local government allows. And they arent allowed to issue equity to the general public.

Not true in the United States, with the JOBS Act.

[jgarzik]

Bitcoin gives mankind an alternative to government fiat currency, which is a major breakthrough.  On the other hand, the only kind of business that a decentralized exchange facilitates is scams.  They are really nothing the same, even if they could both be described as questionable to a lot of people.

Plain and simple, a security is a contract, and you cannot have a contract worth anything more than the paper it's printed on without a means to enforce it. This is sort of like one of those immutable laws that cannot be ignored nor explained away with examples where someone had an unenforceable contract but still got something out of it.

It is difficult to follow your logic here, and this is vague conflation of different concepts.

1) A decentralized exchange for smart property mirrors the real world today.  If you can buy a car for cash today, a decentralized exchange protocol would enable person-to-person property transfers.

2) A decentralized exchange is nothing but a secure ownership transfer and registry mechanism.  It doesn't automatically attach legal meaning, and is not a contract of any sort.

Legal meaning is attached from the real world to a smart property token, just like legal meaning today is attached to stock certificates which are managed by stock transfer agents in an owner-neutral, automated, electronic manner.

3) Functionally speaking, this sort of system would provide (a) pseudonymous ownership exchange and (b) issuer->holder payment tracking.  This is a subscriber list, in essence.  Where payments to subscribers may be publicly inspected and audited.

None of that automatically suggests scams.  In fact, the opposite:  it is very elegant to swap a bitcoin car payment for a digital ownership token that unlocks a car.  Or for the familiar mining bonds, it makes it easy to send publicly audited payments to holders.

Condemning decentralized exchanges whole cloth is nothing less than condemning all digital property.

A future world where the authorities control all exchange of digital property would be a depressing world.

[DoomDumas]

I hope people stop soon with the colored/tainted coins nonsense. There's far too many different uses for the underlying technology for them all to be shared with only 21 million bitcoins (even if you use them as individual satoshis). Its good not just for stocks, but all kinds of other property that needs to have ownership managed.

I still dont understand the need for those "bonds" like in GLBSE !  Coloured/tainted coin ?  Why, bitcoin are bitcoin, and they are very fine as they are.. can someone explain me why then need for other stuff ?  In everyday life, I'm bond to dollars, not a choice, but those dollars made it, no need for those derived financial product that makes money out of money, it's non-sense to me.. please someone light my lantern !

thanks

[killerstorm]

I still dont understand the need for those "bonds" like in GLBSE !  Coloured/tainted coin ?  Why, bitcoin are bitcoin, and they are very fine as they are.. can someone explain me why then need for other stuff ?  In everyday life, I'm bond to dollars, not a choice, but those dollars made it, no need for those derived financial product that makes money out of money, it's non-sense to me.. please someone light my lantern !

Just because you don't want something does not mean that others do not want it too. GLBSE and other exchanges have demonstrated that there are people in Bitcoin community who want to participate in capital markets, and crypto markets are likely strictly superior to centralized ones.

For example, people who aren't gamblers might say that they do not want SatoshiDice to exist, or people who do not buy stuff do not want SR. But these services use Bitcoin blockchain in same way as everybody else, and so they do not need to ask for approval... They exist just because there is demand and it's possible to provide such service.

Likewise smart property/colored coins are just another another uses for Bitcoin blockchain.  Fundamentally they aren't any better or worse than any other use. Blockchain is just a commodity service, and community just doesn't look good when it tries to shun certain uses.


If you are simply asking how it can be useful to you, if you do not want to play with capital market (which isn't that much different from gambling), you might find private currencies useful. Suppose you hold all your savings in Bitcoins. But Bitcoins are very volatile and nobody knows where exchange rate is heading. (Since it is not backed by anything it is simply supply & demand: changes to supply or changes to demand directly affects exchange rates.) You might want to diversify your assets by purchasing private currencies denominated in fiat currencies, gold, other commodities. Of course, you need to trust issuer. But issuer needs to do very little to keep currency alive, so you probably can issuers which exist for a while.

[jtimon]

I hope people stop soon with the colored/tainted coins nonsense. There's far too many different uses for the underlying technology for them all to be shared with only 21 million bitcoins (even if you use them as individual satoshis). Its good not just for stocks, but all kinds of other property that needs to have ownership managed.
 

 If satoshis aren't enough, we need a change in the protocol or a fork to remove this limitation. That's basically the idea behind ripplecoin (sorry, we discussed a lot about the concept but there's no formal design for it). I must say that I've learned a lot about the bitcoin protocol since that early discussion, so don't pay much attention to protocol messages described there (if there's any).

 There's a little summary here (in the third link, but you may need to read the others first):

http://ripple-project.org/Protocol/Protocol
http://ripple-project.org/Protocol/BlockChainCommitMethod
http://ripple-project.org/Protocol/AtomicTradesOfRippleIOUsForChainCoins

 I'm happy that there's people working on colored coins though.

 It's the right time to learn git and python () and put my fingers where my mouth is, the problem is that I've put my mouth in various different places...But at least there's not another project holding me anymore. I got no excuse now (well, there's still my job, but that doesn't count...).

[killerstorm]

That's good for the person tapping the market, but so not good for the market being tapped.

If market exists it wants to be tapped. By definition.

Business is only good for society when both sides come out a winner.

I have given you examples where both sides win.

Informal agreements are no good for society either if it means they're unenforceable.

This is simply bullshit.

Informal agreements are often honored. (See: pretty much all Bitcoin trade.) And formal, enforceable agreements are often violated.

Very few cases are resolved with help of law enforcement because use of law enforcement has very high overhead.

So those formal, legalese, enforceable agreements usually simply act as a deterrent.

But it isn't the only possible deterrent:

• A lot of people are simply naturally honest, they just do whatever they are used to do without trying to maximize their profit at all cost. Their conscience acts as a deterrent for dishonest behaviour
• Quite often there is an economic incentive for staying honest. You can run away with a little sum or you can continue to get profit from your business.
• Likewise people might simply enjoy running a business and getting money out of it more than they enjoy sitting on their ass and looking at pile of money they extracted from investors.
• People might be afraid of punishment. If somebody knows your identity (which isn't that hard) and you defrauded him, him might make your life non-comfortable, even miserable. Even without use of law enforcement, you know

Are you familiar with how collection agencies work? They usually have all required papers, but they won't use police officers to extract money. Instead they prefer to harass people until they give them money. Apparently it is more effective.

Of course things are a bit different when we talk about large amounts of money... But even then, formal papers and legalese bullshit gives little protection to investors: a lot of companies go bankrupt in such a way that creditors and shareholders get almost nothing.

Right.  Nobody said "Please give me a place to invest my money where it's more likely to disappear without any recourse", but they did respond to the promised 66% interest rate.  As is typical of most scams.

Hello? People were trading on LitecoinGlobal. Apparently they wanted to try some unusual investments. This site has a disclaimer:

This is a virtual stock exchange using virtual currency called Litecoin. Virtual goods utilized on this site are for entertainment and educational purposes only.

Apparently all investors know that there is a risk, yet they came to trade on LitecoinGlobal, which means that they are OK with it, and so there is a demand for such thing. You cannot deny it, it is a fact.

I personally traded there a bit simply for entertainment value. I made some good profit (relative to tiny investment, of course) so apparently it was good for me... If my entertainment helps someone to run a business I'm all for it.

Also I think you vastly underestimate risks associated with traditional investments. E.g. AIG's stock price dropped 60% in one day. It is a huge, reputable company, which is full of lawyers and is regulated. And still you can lose pretty much everything, without even a default being triggered.

AIG shares' price was around 1000 is spring of 2008 and it was about 30 by the end of year. If somebody held this stock in that period of time he lost everything.

So I'm not convinced that cryptocurrency markets are that much more risky than traditional ones. Sure, it is possible that cryptocurrency stock markets will get more risky as more money will be involved, but we don't know...

It is also possible that with more money being involved people will also use better ways to identify and verify issuers.

Bitcoin gives mankind an alternative to government fiat currency, which is a major breakthrough.

Decentralized market gives mankind an alternative to government-regulated markets, which is a major breakthrough.

On the other hand, the only kind of business that a decentralized exchange facilitates is scams.

This isn't true. There are legitimate companies which sold their shares and bonds on GLBSE and other Bitcoin stock exchanges, and there is no reason to believe it would be any different on a decentralized exchange.

Plain and simple, a security is a contract, and you cannot have a contract worth anything more than the paper it's printed on without a means to enforce it.

This is bullshit. See above.

Also, there is a way to enforce contracts. Or, rather, punish people who violate contracts. It is a same thing.

It is just that we don't need enforcement for small things, arbitration can be much more effective.

This is sort of like one of those immutable laws that cannot be ignored nor explained away with examples where someone had an unenforceable contract but still got something out of it.

If you beliefs are independent on facts it is called a religion.

You seem to believe that legalese contracts have some magic powers.

[jtimon]

Informal agreements are no good for society either if it means they're unenforceable.  But they're great scam tools.

This money is not a scam and is based on not enforceable agreements: http://en.wikipedia.org/wiki/LETS
The same applies to Ripple (which is in fact inspired on LETS).
There's trust beyond legal contracts...

[casascius]

That's good for the person tapping the market, but so not good for the market being tapped.

If market exists it wants to be tapped. By definition.

So everyone who wanted to be scammed by Zhou Tong and Pirate wanted to be scammed, and their scams have brought good to our community.

This is a virtual stock exchange using virtual currency called Litecoin. Virtual goods utilized on this site are for entertainment and educational purposes only.

Right, just like all products from quack medicine stores are "not intended to cure or prevent any disease", and "bath salts" and "salvia" (where sold online) are for aromatherapy purposes only.

Are you familiar with how collection agencies work? They usually have all required papers, but they won't use police officers to extract money. Instead they prefer to harass people until they give them money. Apparently it is more effective.

No.  This is because police agencies aren't in the debt collection business and aren't willing to do this.  Defaulting on debt is not illegal and not a law enforcement matter.

Plain and simple, a security is a contract, and you cannot have a contract worth anything more than the paper it's printed on without a means to enforce it.

This is bullshit. See above.

If this is an attempt to earn my respect, it is not working.

This is sort of like one of those immutable laws that cannot be ignored nor explained away with examples where someone had an unenforceable contract but still got something out of it.

If you beliefs are independent on facts it is called a religion.

You seem to believe that legalese contracts have some magic powers.

The powers that legal (not legalese) contracts have is that they are enforceable through the court system.  You can get a binding judgment and go after the assets of the person who breaches the contract.  This isn't magic or religion, this is just the law.  I live in a country (US) that has separation of state and religion in its constitution, and the application of law falls clearly within the realm of the state.  Arbitration only gets its teeth because courts and the law are willing to recognize the outcome of arbitration as another form of contract and issue a judgment accordingly.  Without it, arbitration would have no value beyond "entertainment value".

[casascius]

It is difficult to follow your logic here, and this is vague conflation of different concepts.

1) A decentralized exchange for smart property mirrors the real world today.  If you can buy a car for cash today, a decentralized exchange protocol would enable person-to-person property transfers.

It indeed mirrors the world, and to the extent it does, it's great.  To the extent it doesn't, that's the sticky part.  Most legal frameworks already have a system that deals for determining the ownership of cars, and by and large, the laws are more sensible than what a decentralized exchange could offer.

If ownership of a car were determined by a decentralized exchange, and I were visiting you and able to get on your computer while you were out getting a cup of coffee because you left it unlocked, and I transferred ownership of your car to me, then you'd be in a position where I own your car, and at best, I'm liable to you for fraud or theft.  Meanwhile, you purportedly don't have the right to drive your "own" car anymore because you don't own it anymore, the decentralized exchange says so, and no judge or jury can take it back.  You can't drive to work tomorrow because your car isn't yours anymore.  That would be nonsensical and bad public policy.

2) A decentralized exchange is nothing but a secure ownership transfer and registry mechanism.  It doesn't automatically attach legal meaning, and is not a contract of any sort.

Legal meaning is attached from the real world to a smart property token, just like legal meaning today is attached to stock certificates which are managed by stock transfer agents in an owner-neutral, automated, electronic manner.

I agree with you in this sense, and point out that stock transfer agents have the legal authority to do what they do.  The problem I point out is more the fact that the legal recognition has to come first before the electronic records have any significance with respect to property rights as defined and upheld by the law.

3) Functionally speaking, this sort of system would provide (a) pseudonymous ownership exchange and (b) issuer->holder payment tracking.  This is a subscriber list, in essence.  Where payments to subscribers may be publicly inspected and audited.

None of that automatically suggests scams.

I am sure many endeavors start out with the best of intentions - Pirate and Zhou Tong may have meant well and hoped for the best when they first started their respective gigs.  When they start out with party A with all the control, and party B holding all of the risk, and party A has no accountability to party B, it's a recipe for a total loss for party B, regardless of whether party A's initial intent was to take the money and run.  Since a major feature of a decentralized exchange is to isolate party A from any sort of accountability, having people lose their money with no recourse is naturally going to be a recurring thing.

Condemning decentralized exchanges whole cloth is nothing less than condemning all digital property.

Decentralized exchanges work whenever there is a de-facto recognition that the digital record of ownership is authoritative.  It works for bitcoins, it works for virtual swords, but it does not work for houses, cars, and business entities.

A decentralized "exchange" used as a distributed recordkeeping tool whose primary purpose was to ensure transparency and irreversibility of records, on the other hand, would be a huge asset to society.  Such a tool would still need to give the law the last word (for example, if someone dies, the legal system needs to be able to exercise its legitimate authority to reassign the ownership of the deceased's property, even if the private keys went to the grave).  This is where this technology and present legal systems are more likely to have a first meeting of the mind.

A future world where the authorities control all exchange of digital property would be a depressing world.

A country without property rights would have much in common with a third world country.  Even Ron Paul believes enforcing property rights is a legitimate role of government.  "Authorities control" sounds like an extreme way to say "laws govern", as clearly no government agency aspires or has the resources to "control" every transaction in the literal sense of the word.

A world where houses or cars or businesses and the ownership of them became forever lost in limbo because access to the digital private keys controlling them was lost would be fraught with problems all its own.

[jtimon]

Plain and simple, a security is a contract, and you cannot have a contract worth anything more than the paper it's printed on without a means to enforce it.

Well, this is true for some use cases, but not for all. As said many times, you can link the crypto-assets to legal contracts through a public or a private electronic ID certificate provider for the use cases where legal liability is an strict requirement (probably future contracts and shares need them, for example).
But first we need the crypto-assets infrastructure.

[casascius]

Plain and simple, a security is a contract, and you cannot have a contract worth anything more than the paper it's printed on without a means to enforce it.

Well, this is true for some use cases, but not for all. As said many times, you can link the crypto-assets to legal contracts through a public or a private electronic ID certificate provider for the use cases where legal liability is an strict requirement (probably future contracts and shares need them, for example).
But first we need the crypto-assets infrastructure.

You can do exactly that, but the first time that the legal system disagrees with the records of the "crypto-assets infrastructure" or finds that a legal contract written in support of it is unenforceable or in conflict with existing law, you'll find the legal system disregarding what the system says and substituting its own judgment.  If the "crypto-assets infrastructure" offers no way for the legal system to amend the record to include decisions it considers binding, it will dismiss the whole system as a poorly-designed joke.

The real-world structure that enforces property rights obeys the legal system and not the crypto record (bitcoins themselves being a notable exception, since the crypto record and their existence is the same by definition).  This fact cannot be changed with software, any more than a screen door submarine can be made to function with software no matter how brilliant.

[killerstorm]

The powers that legal (not legalese) contracts have is that they are enforceable through the court system.  You can get a binding judgment and go after the assets of the person who breaches the contract.

Why do you think it's going to help you? They might not have any valuable assets at that point. Or valuable assets might be shielded in limited liability company.

And how often does it happen? Have you personally seized someone's assets?

As I already mentioned, it's largely just a deterrent: if someone is dishonest, he might get into a problem.

Also, how exactly would it work for shareholders? Suppose company is bankrupt, goes through liquidation, shareholders get nothing... And? Whose assets are you going to seize?

Suppose you know that CEO was an asshole who mis-managed company. Can you go and seize his assets?

Same thing can happen to bondholders. If company is mismanaged, it will go bankrupt and you'll get nothing. You cannot go after owners or managers because of a limited liability.

You think that contract somehow protects shareholders/bondholders, but in reality it does very little. What protects them is due diligence.

For this reason public companies are forced to provide all sorts of information. Everybody realizes that investments on capital markets carry a lot of risk and best way to protect shareholders is to provide all relevant information for them to make decisions. It's not very different from gambling...

In same way a mature bond market requires rating agencies: bondholders can lose a lot of money even if contract is all valid...

So it looks like there are two necessary components:

1. Investors should be able to get all relevant information.
2. There should be some deterrent for pure scam.

Can't we have this in decentralized exchange? Information verification shouldn't be hard.
As for deterrent, we don't really need to do it exactly the same way as it is done traditionally.

It's just enough to punish dishonest issuer.

We can probably do it better than traditional system: make issuer personally liable.

And it doesn't really need to be related to anonymous investors. It can be done by some arbitrator.

Let's do a recap:

1. "Going after assets" rarely ever helps shareholders/bondholders.
2. What helps them, though, is that defrauding people is PITA.

This means that if we decouple punishment (i.e. creating PITA for dishonest issuers) from asset ownership.

So, once again... Issuer wants to borrow money from anonymous bond market. But instead of making contract which makes him liable to those anonymous parties (which might be illegal and inconvenient), he makes a contract which says that he owes money to certain collection agency. This contract, however, isn't revealed to public or to collection agency, it is revealed only to arbitrator.

Arbitrator's duty is to monitor how issuer interacts with anonymous bondholders. If he finds out that issuer defaults, contract will be sent to collection agency.

Now collection agency can enforce this contract through the court system, get a binding judgement and go after his assets. After that, perhaps it will distribute what it get to anonymous bondholders.

What problems do you see with this construct?

[casascius]

The powers that legal (not legalese) contracts have is that they are enforceable through the court system.  You can get a binding judgment and go after the assets of the person who breaches the contract.

Why do you think it's going to help you? They might not have any valuable assets at that point. Or valuable assets might be shielded in limited liability company.

You are exactly right: much of the time, it's not worth suing for.  Other times, that's not the case.  Regardless, the person might be held accountable in some other way, like being prosecuted for fraud.  "Limited liability" is contingent on the officers of the company following the law and making honest representations to their stakeholders.  If someone who owns a limited liability company defrauds you, they risk unlimited personal liability, and their stake (shares) in that or any other company they own are an asset that can be taken from them.

The fact that the stock market favors only wealthy entities offering securities is actually a good thing, because as an investor, you want the party offering the securities to have some skin in the game and something to go after if they are found to be blatantly misrepresenting themselves.  Having anyone able to create a "security" at the click of a button without any need for assets of their own, let alone identifying themselves, is not a breakthrough that will bring positive benefits to society.

And how often does it happen? Have you personally seized someone's assets?

You're the one who asked if I knew how debt collection works, right?  So you should know that judgments, garnishments, writs of execution, and such are routine daily business.  And no, I've never seized anyone's assets nor had any of mine seized.

As I already mentioned, it's largely just a deterrent: if someone is dishonest, he might get into a problem.

Exactly - that's precisely how it's supposed to work.  Just like the bouncer at the nightclub is there to whoop your ass if you try something, and as a result, you don't.  His job is done just by being there and handling the few that cross the line.

Also, how exactly would it work for shareholders? Suppose company is bankrupt, goes through liquidation, shareholders get nothing... And? Whose assets are you going to seize?  Suppose you know that CEO was an asshole who mis-managed company. Can you go and seize his assets?

In the real world, someone who mismanaged his company would absolutely be liable for the losses of others if "mismanagement" meant misrepresenting or concealing risks, misrepresenting financial health, or a number of many other things that the law requires issuers of securities to do.  The "powers that be" limit the issuance of securities to the wealthy, and this is a good thing: it cuts down the number of insolvent issuers of worthless securities who have already spent the proceeds of their empty promises.  A decentralized exchange doesn't solve this problem, it exacerbates it.

We can probably do it better than traditional system: make issuer personally liable.

Yes, you are 100% right about this.  Now, the hard part is actually doing that.

This is where the screen door submarine analogy fits.  "Make screen door submarine watertight" makes for a nice sound bite but isn't a plan.  Same goes for politicians saying "we're going to create jobs".

And it doesn't really need to be related to anonymous investors. It can be done by some arbitrator.

...who, of course, needs a legal framework for his decisions to have any enforceability.

Have you ever wondered why you can't just pick yourself up by your own feet and lift yourself off the floor, the way you can pick up other objects and lift them?  It sounds like it should be such a wonderful idea, other than the pesky detail that something has to be supporting everything or else it falls.  The same is true in dispute resolution.

Arbitration works because of the legal system, not in spite of it.  When you go into arbitration, all parties sign a contract legally binding them to the outcome of the arbitration.  That contract, of course, is enforceable in a regular court of law, and becomes a regular judgment if you blow it off as entertainment.  It's the "support" that lifts arbitration off the floor and into the air.  Without the contract, it is nothing more than entertainment value - a private pundit's armchair opinion.

Because of this, someone outside of the reach of the legal system is also outside the reach of arbitration.

[killerstorm]

As for the question about why we might want "decentralized BTC stock market" in general: largely to escape regulations and limitations. It is hard to argue that all regulation are absolutely necessary, isn't it?

Making a public company is a hard and costly process, due to all those regulations and legalese crap. You probably need to hire some staff just to do required paperwork. It isn't efficient to do that for small companies.

So if you need funding for a small company, you are at mercy of private investors. You need to meet and court them personally, which is again rather slow and ineffective process.

People want to make it more direct and effective. See: crowdfunding, kickstarter.

But kickstarter isn't perfect: wouldn't it be better if they gave shares instead of t-shorts and stickers? Even if those shares aren't valuable, it still kinda makes sense, just in case... But, stupid regulations...

Limitations also exist on buyer's side. For example, I live in ex-USSR country and am not officially allowed to invest into anything abroad unless I get some license which is really hard to get. But even when it's legal, buying shares is quite a bit harder and more expensive than simply buying some product, which prevents masses from doing that.

So traditional system is inefficient. For this reason we have, on one hand, kickstarter and similar crowdfunding establishments.

On the other hand, we have a lot of web trading platforms which give user a thrill of trading on markets without formally making him an owner. Relevant:

http://www.sec.gov/answers/street.htm "This means your brokerage firm will hold your securities in its name or another nominee and not in your name, but your firm will keep records showing you as the real or "beneficial owner.""

So the question is: is it possible to make it more effective with help of modern technologies?

[casascius]

Issuer wants to borrow money from anonymous bond market. But instead of making contract which makes him liable to those anonymous parties (which might be illegal and inconvenient), he makes a contract which says that he owes money to certain collection agency. This contract, however, isn't revealed to public or to collection agency, it is revealed only to arbitrator.

Arbitrator's duty is to monitor how issuer interacts with anonymous bondholders. If he finds out that issuer defaults, contract will be sent to collection agency.

Now collection agency can enforce this contract through the court system, get a binding judgement and go after his assets. After that, perhaps it will distribute what it get to anonymous bondholders.

What problems do you see with this construct?

This construct, first of all, ceases to be an issuance of securities, and becomes more like an unsecured loan to a known individual, "underwritten" in some way by some known entity.  How exactly does a decentralized stock market fit in at this point or help with this purpose?

Who pays the arbitrator and collection agency?  Who is their client?  What incentive do they have to "monitor" anything and sue someone for nonperformance?  Who holds them accountable to make a good faith effort to pursue recovery?  What exactly do they promise to their anonymous clients?  They can't really promise anything, because if they did, their anonymous clients would be suing the agency in the likely event the agency is unwilling to collect from the issuer.

Some of these "pirate pass throughs" have a lot of fundamentals in common with this agency.  They have the distinction of being treated as conspirators as though there's a presumption they knew or should have known by helping to make people feel secure about a bad risk, they themselves were perpetrating a scam.

In a nutshell, this arrangement amounts to requiring an agency that takes all of the risks, fights all of the battles, and delivers all the loot back to the good guys.  Fantasies like this make good scripts for movies and stories, but these superheroes don't actually exist in the real world.

[killerstorm]

In the real world, someone who mismanaged his company would absolutely be liable for the losses of others if "mismanagement" meant misrepresenting or concealing risks, misrepresenting financial health, or a number of many other things that the law requires issuers of securities to do.

OK, how many officers were held liable for financial crisis of 2008?

AIG lost 96% of its value due to dubious investments on derivative market. (While their core business wasn't derivative trading! It was mostly insurance company.)

Lehman Brothers defaulted, shareholders got nothing. (IIRC.) And so on...

Then there was a lot of scandals associated with mortgages: apparently a lot of people were able to get mortgages without being eligible, not even passing basic sanity check; robo-signing, lack of proper documentation, illegal foreclosures...

I'm sure a lot of people went to jail to for this. Right? Right?

Or... all these things were just honest mistakes?

Somehow I was well aware of US real estate bubble back in the middle of 2000s, and I'm not even living in USA, I just read a couple of forum threads. But CEOs of investment banks didn't know, and neither did risk managers... Maybe they should start reading same forum...

Anyway, all articles I read about financial markets make me think that shareholders are cattle which has very few rights.

But, hey, maybe you can show me an example where wealthy CEO dude who gets like $10M salary actually paid shareholders something after an incredible fuck up which almost killed this company? All I can find is that in such cases CEOs can just retire with a severance packages...

[killerstorm]

This construct, first of all, ceases to be an issuance of securities, and becomes more like an unsecured loan to a known individual, "underwritten" in some way by some known entity.  How exactly does a decentralized stock market fit in at this point or help with this purpose?

I've just outlined the general idea, there are many ways to do it... Perhaps, the most straightforward way:

Issuer and collection agency sign a contract which says that issuer owes collection agency money. But only if collector can demonstrate that he owns colored coins which represent bonds. (E.g. he needs to buy bonds on market before he can demand anything from issuer.)

But contract won't mention that these colored coins are bonds, of course. It can just say that collector's identity must be verified via a chain of digital signatures. Or something like that.

From the perspective of decentralized market it looks like this: issuer defaults or just looks shoddy, bonds are dumped, collector buys them for cheap and then tries to extract money through the court system. Difference between price he bought bonds for and whatever he can collect is his premium, so he is interested in doing this.

You don't need to put all trust on one collector, for example, if there are several collectors each one will be given a contract for a fraction of a total sum. E.g. each of three collectors operating on market will get a contract for 30% of loan amount conditional on owning 30% of bonds.

There are many possible tweaks... For example, perhaps it should go through a mandatory arbitration first (I'm talking about traditional arbitration in this case, not bitcoin specific), for two reasons:

• arbitrator will be more tech savvy to verify colored coin ownership (you can probably check whether they dig it beforehands), and court will simply trust arbitrator's decision
• to shield issuer from abuse from collector's side

If you do it correctly, court will simply think that 'colored coins' are just some weird and redundant way to identify a party, and won't consider it seriously. On the other hand arbitrator who has more expertise will understand that this clause is very important.

As for shares, we can say that it's like a preferred stock, so it's both equity and debt instrument, and we already know how to "enforce" debt instruments.

[justusranvier]

Have you ever wondered why you can't just pick yourself up by your own feet and lift yourself off the floor, the way you can pick up other objects and lift them?  It sounds like it should be such a wonderful idea, other than the pesky detail that something has to be supporting everything or else it falls.  The same is true in dispute resolution.

Arbitration works because of the legal system, not in spite of it.  When you go into arbitration, all parties sign a contract legally binding them to the outcome of the arbitration.  That contract, of course, is enforceable in a regular court of law, and becomes a regular judgment if you blow it off as entertainment.  It's the "support" that lifts arbitration off the floor and into the air.  Without the contract, it is nothing more than entertainment value - a private pundit's armchair opinion.

I wouldn't normally post a link like this except that I don't get the impression that you've actually done a thorough study on all the theoretical work that's been done in this area and debunked it all, but instead are claiming certainty in the absence of knowledge.

http://lmgtfy.com/?q=stateless+dispute+resolution

[killerstorm]

Alternatively, instead of a "collection agency" we can use a "trust". Issuer and trust will sign a contract which says that issuer owes trust money, but that money can be claimed only after approval of beneficiaries whose identities are concealed. Beneficiaries will signify their approval via digital signatures which can be verified through digital signature chain known as "colored coins".

From decentralized market point of view, these beneficiaries are just bond holders who want their money. If they don't trust the trust, they might ask trustee to sign a contract with each of them, but they won't be anonymous then. Trustee will get a commission from money he extracts from issuer, so he is interested in doing that.

Alternatively, the original contract between issuer and trust/collection agency might say that this claim is done on behalf of beneficiaries who will confirm their identities with digital signatures, i.e. they won't be anonymous anymore. I guess in this case we don't need an additional contract with each bondholder=beneficiary, since contract already says that they should receive payments. Perhaps we can go back to 'collection agency' model, as there will be no anonymous parties at that point... Although there might be a question how exactly did it happen that issuer owes money to those people...

So we see a pattern here: people can trade via blockchain anonymously, but when there is a bad situation and they need to make a claim they need to reveal their identities. People who wish to stay anonymous should sell their bonds to people who can show their identity to get  money.


We can also work with shares via offshore trust: shares which are to be sold on decentralized stock market will be sold to this offshore trust, and offshore trust will hold them for the benefit of anonymous beneficiaries identified via colored coin ownership. So what we need is offshore jurisdiction which allows anonymous beneficiaries. Something tells me they exist.

So this requires a separate offshore trust per company... They don't cost that much, do they?


And finally private currency backed by assets can also be done via offshore trust kind of things: this trust will simply hold a commodity which backs this currency, or perhaps fiat money, and handle withdrawals if needed.

See here: http://en.wikipedia.org/wiki/Unit_investment_trust

 

[jtimon]

Plain and simple, a security is a contract, and you cannot have a contract worth anything more than the paper it's printed on without a means to enforce it.

Well, this is true for some use cases, but not for all. As said many times, you can link the crypto-assets to legal contracts through a public or a private electronic ID certificate provider for the use cases where legal liability is an strict requirement (probably future contracts and shares need them, for example).
But first we need the crypto-assets infrastructure.

You can do exactly that, but the first time that the legal system disagrees with the records of the "crypto-assets infrastructure" or finds that a legal contract written in support of it is unenforceable or in conflict with existing law, you'll find the legal system disregarding what the system says and substituting its own judgment.  If the "crypto-assets infrastructure" offers no way for the legal system to amend the record to include decisions it considers binding, it will dismiss the whole system as a poorly-designed joke.

The real-world structure that enforces property rights obeys the legal system and not the crypto record (bitcoins themselves being a notable exception, since the crypto record and their existence is the same by definition).  This fact cannot be changed with software, any more than a screen door submarine can be made to function with software no matter how brilliant.

Take into account that not all legal systems are based on jurisprudence like the English and the American. Many others are based on roman law.
If I with my eDNI (spanish electronic ID card) digitally sign (which has the same legal value as a regular signature) a document that says that I'm also liable for anything that I sign with a bitcoin keypair and I even describe of the system we're using in that document...What can be the problem? Aren't there private companies that also provide legal digital signature services in other countries?
Not a legal expert but it seems pretty simple and straight forward to me.

[killerstorm]

One more alternative, now without use of collector agency/trust: https://bitcointalk.org/index.php?topic=119073.msg1280595#msg1280595

It also solves this problem:

You can do exactly that, but the first time that the legal system disagrees with the records of the "crypto-assets infrastructure" or finds that a legal contract written in support of it is unenforceable or in conflict with existing law, you'll find the legal system disregarding what the system says and substituting its own judgment.  If the "crypto-assets infrastructure" offers no way for the legal system to amend the record to include decisions it considers binding, it will dismiss the whole system as a poorly-designed joke.

"Meat world" resolution will only be used as a last resort.

Contract will be structured in such a way that if you want to claim your money through court system you have to return your security to issuer first, thus making it meaningless in crypto world.

So from "meat world" perspective cryptosecurity simply confirms identity of creditor and his will to redeem it, but it doesn't really represent ownership.

Think about it: digital signature is simply an evidence of consent. Legal system cannot amend digital signature, but that's OK.

[justusranvier]

@killerstorm  Those are good suggestions. I wonder why so many people are prone to the saying, "There is no way to solve social problems other than the methods in place now" instead of saying "What new solutions can we invent now that previously-applicable constraints have been removed?"

[casascius]

I wouldn't normally post a link like this except that I don't get the impression that you've actually done a thorough study on all the theoretical work that's been done in this area and debunked it all, but instead are claiming certainty in the absence of knowledge.

http://lmgtfy.com/?q=stateless+dispute+resolution

lmgtfy is a site normally used to softly ridicule people who ask questions (which I haven't done), without bothering to search for answers, and the "I'll bet you haven't studied <topic XYZ> thoroughly" is a line normally used by religious zealots to intimidate followers who are starting to question the religion.  I will assume that what you mean is, "Hey, have you ever heard of stateless dispute resolution?  It seems you may not have.  There's been a lot of theoretical work done on the topic, you ought to Google it."

I'll bite.  Maybe it's a great idea.  But I still wonder what is the incentive for a "dispute resolution organization" to exist.  Let's say I'm totally wrong, and my view that they take all the risk and get none of the reward is a little overboard.  Why aren't dispute resolution organizations popping up all over the place?  They sound like a lucrative alternative to costly and ineffective litigation.  There's arbitration firms, of course, but they work exactly as I described, with their outcomes binding because the parties sign contracts enforceable in a government-run court.

One of the most highly ranked links in that Google search was for nocoercion.com.  The article there provides a simple example: Let us say that I pay you $15,000 to landscape my garden, but you never show up to do the work. Ideally, I would like my $15,000 back, as well as another few thousand dollars for my inconvenience.

It went on to suggest that the DRO would be able to make an assessment as to the risk of default, and charge a fee accordingly.

If this is so lucrative and so much better than litigation, why isn't there a section in the phone book for DRO's?  Why aren't they displacing the back covers of the yellow pages that are normally occupied by ambulance-chasing personal injury lawyers?

Further, for a DRO to make a decision so precise as this article suggests, would require a massive data collection and mining effort that would make Google look like a saint.  A merchant being able to swipe your credit card and being told you're a bad credit risk?  At a hotel?  At a grocery store?  Serious?  What if it's a mistake?  Isn't being "declined" embarrassing enough without a positively negative claim?  Is this theoretical society a free-for-all for privacy violations and digital defamation on the display of a credit card machine?  How do the fees charged by this "DRO" for every nickel and dime transaction (which only a company as big and bad as Google could qualify to be) compare to the fees charged coercively by taxation for the same service provided through violence by men with guns?

Anyway, my original core point is that a security is a promise, an unenforceable promise is a worthless security, and a decentralized exchange of securities is a hotbed of likely scams because it is a marketplace for overpriced unenforceable promises.  I will take an active interest if I learn that a "DRO" actually works  sustainably for the cause of "non-violent contracts" on any sort of unaccredited exchange (doesn't even have to be distributed!) and is actually something more than a mere "pirate passthrough" consisting of somebody interested in a leveraged gamble on a likely scam searching for a counterparty to make it work.

[jtimon]

...an unenforceable promise is a worthless security, ...

No. Well, maybe...
It all depends on your definitions. If my friend defaults on an IOU to me, he may lose my friendship. He would certainly lose my credit line.

Mike's smart car can be used as collateral without legal intervention.

There can be negative consequences for the people who fail with their promises beyond law.

And again, ¡¡¡ SMART PROPERTY BASED CONTRACTS CAN BE MADE LEGALLY ENFORCEABLE !!!

[casascius]

No. Well, maybe...
It all depends on your definitions. If my friend defaults on an IOU to me, he may lose my friendship. He would certainly lose my credit line.

I define "security" in this case, of course, as issuing instruments like stocks and bonds on a market like the one referenced in the subject of the OP, not so much loaning money to friends.

[killerstorm]

overboard.  Why aren't dispute resolution organizations popping up all over the place?  They sound like a lucrative alternative to costly and ineffective litigation.

Have you ever heard about credit default swaps? It is essentially a same model as "DRO":

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event.

It is not really an alternative: litigation likely won't help you in case issue defaults, but CDS can.

And just like in that "DRO" example, CDS are monitored, and if they are through the roof that means that company or country is likely to default.

[justusranvier]

But I still wonder what is the incentive for a "dispute resolution organization" to exist.  Let's say I'm totally wrong, and my view that they take all the risk and get none of the reward is a little overboard.  Why aren't dispute resolution organizations popping up all over the place?  They sound like a lucrative alternative to costly and ineffective litigation.

Are you asking why private competition doesn't spontaneously arise in the presence of a state-enforced monopoly?

Some authors have proposed a DRO model as a possible solution to the problem of how to respond to contract disputes, but at this point it's just an idea. The important part is to recognize the need for solutions that don't involve recourse to the state.

This problem has to be solved statelessly one way or another for Bitcoin to be successful. We now have the capability to send payments instantly across international borders, but if you rely on government court systems for dispute resolution you'll quickly run into the problem of mutually incompatible legal systems, or one or more parties residing in countries where the legal system is corrupt, slow, non-existent or otherwise unavailable.

Saying that there is no solution other than relying on the courts is not a solution, it's a method of avoiding the need to look for one. To make the commerce Bitcoin makes possible actually work you need to change the parameters of the problem space. Take recourse to the court system off the table since it's not available to all participants and search for alternatives.

I think the solution set is going to fall into two basic categories: 1) preventing disputes from happening in the first place, and 2) designing systems where the participants have more economic incentive to cooperate than to cheat.

This probably means that viable Bitcoin business models look nothing like their traditional equivalents, since those models were built under a different set of assumptions.

[jtimon]

I define "security" in this case, of course, as issuing instruments like stocks and bonds on a market like the one referenced in the subject of the OP, not so much loaning money to friends.

Ok, then I'd go with the "linking certificates" explained above.

[casascius]

overboard.  Why aren't dispute resolution organizations popping up all over the place?  They sound like a lucrative alternative to costly and ineffective litigation.

Have you ever heard about credit default swaps? It is essentially a same model as "DRO":

Can I buy a credit default swap to guarantee the performance of my landscaper?  the guy remodeling my kitchen?  my magazine subscriptions?  my cell phone?  Will making a claim on it be any less arduous than trying to make an insurance claim on a lost U.P.S. parcel?

I can see how this might help with high-value transactions like long-term loans and overseas consignments of goods, but is totally impractical for the vast majority of daily consumer transactions that are ordinarily protected through contracts enforceable in court.

Are you asking why private competition doesn't spontaneously arise in the presence of a state-enforced monopoly?

No, not really - arbitration firms seem to be doing just fine - I thought the issue was that the state's dispute resolution process is coercive and based on men with guns violating others' fundamental rights, not that it's a monopoly.

Saying that there is no solution other than relying on the courts is not a solution, it's a method of avoiding the need to look for one. To make the commerce Bitcoin makes possible actually work you need to change the parameters of the problem space. Take recourse to the court system off the table since it's not available to all participants and search for alternatives.

I agree, problem exists where recourse to the court system does not exist (e.g. international trade), just that in the vast majority of small-scale transactions, the court system is the power foundation of most functional dispute resolution systems including private arbitration, and that the idea of "DRO's" on the surface appear to be economically unviable alternatives.

[jl2012]

If the "crypto-assets infrastructure" offers no way for the legal system to amend the record to include decisions it considers binding, it will dismiss the whole system as a poorly-designed joke.

This is also true for the bitcoin system. No chargeback possible. Is bitcoin a poorly-designed joke?

(For "crypto-assets infrastructure", the court may simply declare that a colored coin decolorized if there is a fraud.)

[casascius]

If the "crypto-assets infrastructure" offers no way for the legal system to amend the record to include decisions it considers binding, it will dismiss the whole system as a poorly-designed joke.

This is also true for the bitcoin system. No chargeback possible. Is bitcoin a poorly-designed joke?

Yes, and the joke is on the system of banking and central banks.  Oh, and it's not poorly designed, but of course it will need a lot of maturation to evolve and scale to their size and a lot of work to become usable in the minds of the customers they serve.

(For "crypto-assets infrastructure", the court may simply declare that a colored coin decolorized if there is a fraud.)

...which of course would defeat the purpose of a decentralized stock exchange, because you'd need a centralized database to keep track of which colored coins are really colored.

tl;dr: Bitcoin - viable.  Decentralized stock exchange - fundamentally flawed.

[killerstorm]

tl;dr: Bitcoin - viable.  Decentralized stock exchange - fundamentally flawed.

Double think is strong in this one. Ignorance is strength.

[jl2012]

If the "crypto-assets infrastructure" offers no way for the legal system to amend the record to include decisions it considers binding, it will dismiss the whole system as a poorly-designed joke.

This is also true for the bitcoin system. No chargeback possible. Is bitcoin a poorly-designed joke?

Yes, and the joke is on the system of banking and central banks.  Oh, and it's not poorly designed, but of course it will need a lot of maturation to evolve and scale to their size and a lot of work to become usable in the minds of the customers they serve.

(For "crypto-assets infrastructure", the court may simply declare that a colored coin decolorized if there is a fraud.)

...which of course would defeat the purpose of a decentralized stock exchange, because you'd need a centralized database to keep track of which colored coins are really colored.

tl;dr: Bitcoin - viable.  Decentralized stock exchange - fundamentally flawed.

The court will sign a message, declaring a coin decolorized, and send it to the blockchain. You don't need a centralized database.

You have a big mistake here: you compare decentralized stock exchange with a real stock exchange. However, the right comparison should be decentralized stock exchange vs. GLBSE. A decentralized exchange does everything GLBSE does, without the extra risk of hacking etc.

[odolvlobo]

tl;dr: Bitcoin - viable.  Decentralized stock exchange - fundamentally flawed.

Double think is strong in this one. Ignorance is strength.

I tend to agree here. The implementation of distributed arbitration in the bitcoin protocol is simply genius. Likewise, distributed arbitration for other transactions could be implemented for securities, somehow. It might be difficult or non-intuitive, but you can't just claim that it would be impossible.

BTW, there is a major problem with using bitcoins (e.g. colorized bitcoins) to represent securities. There is a limited number of bitcoins, but a potentially unlimited number of securities. The solution is to create a separate block chain for securities with no limit on the number of securities that can be created.

[casascius]

The court will sign a message, declaring a coin decolorized, and send it to the blockchain. You don't need a centralized database.

And the nodes maintaining the blockchain will accept it why?  Because the court clerk controls the majority of CPU power on the network?  Because the court holds a special private key that gives it an elevated status over the rest of the network like RealSolid and his SolidCoins?  What will ensure that a duly authorized court can do this, but not you or I?  What happens if a court misuses its discretion, misapplies the law, or simply fat-fingers an entry and signs something it totally shouldn't have? (something today's courts manage through the judicial review process, i.e. appellate courts etc.)

How about when two different courts with equal ability to simply "sign" and "send" things into the blockchain staunchly disagree on an outcome and see no reason to stop "signing" it into the blockchain in a back-and-forth tug-of-war?  Imagine people edit warring on a hypothetical Wikipedia with no 3RR (3-revert-rule) and no administrators, when does it end?

You have a big mistake here: you compare decentralized stock exchange with a real stock exchange. However, the right comparison should be decentralized stock exchange vs. GLBSE. A decentralized exchange does everything GLBSE does, without the extra risk of hacking etc.

...and of course, without any meaningful accountability imposed on the issuers of security for the benefit of their shareholders either.  By pointing out the differences between GLBSE and a decentralized exchange, you suggest your understanding is that I am describing a fundamentally technological problem and meanwhile I am describing a fundamentally sociological one that would affect GLBSE and a decentralized exchange equally.

[casascius]

tl;dr: Bitcoin - viable.  Decentralized stock exchange - fundamentally flawed.

Double think is strong in this one. Ignorance is strength.

Go ahead and create it then, and let me know how it works out.  Neither of us are presently in a position to convince the other, so I'm letting it go.  To paraphrase a saying commonly applied to bitcoin: if I don't think it'll work, then I should come back in a few years and either say "told-ya-so", or start using what should be by then a more mature and robust decentralized stock exchange complete with safeguards that ensure that issuers are accountable to their shareholders for their statements and actions.

[phelix]

[...]

You have a big mistake here: you compare decentralized stock exchange with a real stock exchange. However, the right comparison should be decentralized stock exchange vs. GLBSE. A decentralized exchange does everything GLBSE does, without the extra risk of hacking etc.

...and of course, without any meaningful accountability imposed on the issuers of security for the benefit of their shareholders either.  By pointing out the differences between GLBSE and a decentralized exchange, you suggest your understanding is that I am describing a fundamentally technological problem and meanwhile I am describing a fundamentally sociological one that would affect GLBSE and a decentralized exchange equally.

What about the stock issuer making himself accountable on his own?

What about separation into a decentralized exchange and (several) third party IDing and stuff?

[molecular]

hey guys, interesting discussion!

For me the situation presents itself as follows: we need 3 things:

• decentralized ownership-tracking (e.g. by using colored coins in blockchain) and way to proove ownership (for voting purposes, for example)
• decentralized exchange (order matching)
• accountability / link to real world of asset issuer

I think the first 2 points can be solved satisfactorally given enough resources.

3rd point is the hard part (I agree with casascius that if there is no real-world-link of the colored coin to some enforcable contract, this whole idea probably only makes it easier for scammers. I acknowledge the possibility of independant private dispute resolution as a service)

To solve "link to real world" problem, let me suggest a market for centralized agencies which offer the following services:

• Make accessible a list of "colored coins"/assets in existance
• Record the identity of the real-world person issuing some asset and offer disclosure to a court in case of dispute
• Safely store (in a legally binding manner the contracts associated with the respective assets and ensure these are legally usable in case of problems. Offer relevant services to courts (identify asset issuers, provide means of asset holder to proove ownership of asset at certain point in time)

I think this could solve casascius' "accountability"-objection, no?

Maybe the service would have to have the issuers actually real-world-sign some contract in which they agree to subject ownership of the asset to the mechanics of ownership-transfer using colored-coins / smart property.

[jl2012]

And the nodes maintaining the blockchain will accept it why?  Because the court clerk controls the majority of CPU power on the network?  Because the court holds a special private key that gives it an elevated status over the rest of the network like RealSolid and his SolidCoins?  What will ensure that a duly authorized court can do this, but not you or I?  What happens if a court misuses its discretion, misapplies the law, or simply fat-fingers an entry and signs something it totally shouldn't have? (something today's courts manage through the judicial review process, i.e. appellate courts etc.)

If the message is embedded in a standard and valid transaction, I can't see why miners will refuse to include it in a block. If many miners do so just because they don't like the message, they would also refuse anyone's transaction because they don't like him/her. If many miners do so, that's simply 51% attack and bitcoin is fucked up

How about when two different courts with equal ability to simply "sign" and "send" things into the blockchain staunchly disagree on an outcome and see no reason to stop "signing" it into the blockchain in a back-and-forth tug-of-war?  Imagine people edit warring on a hypothetical Wikipedia with no 3RR (3-revert-rule) and no administrators, when does it end?

The terms of the agreement could indicate which jurisdiction it is bound to.

You have a big mistake here: you compare decentralized stock exchange with a real stock exchange. However, the right comparison should be decentralized stock exchange vs. GLBSE. A decentralized exchange does everything GLBSE does, without the extra risk of hacking etc.

...and of course, without any meaningful accountability imposed on the issuers of security for the benefit of their shareholders either.  By pointing out the differences between GLBSE and a decentralized exchange, you suggest your understanding is that I am describing a fundamentally technological problem and meanwhile I am describing a fundamentally sociological one that would affect GLBSE and a decentralized exchange equally.

Technology ALWAYS moves faster than social norms/rules/laws, e.g. contraception, test tube baby, doping in sports, BitTorrent, child porn on TOR, and needless to say: bitcoin. Decentralized exchange (DE) is a technological advance on top of GLBSE. DE reduces the counterparty risk by removing the role of exchange operator, and does equally good (or bad) in enforcing the contract between issuers and shareholders. However, they allow people to invest in something that is otherwise impossible. The investors should balance the risk and benefit

[FreeMoney]

The court will sign a message, declaring a coin decolorized, and send it to the blockchain. You don't need a centralized database.

That's absurd, how will I know which key(s) belong to the court, and why will I care and how will I know who agrees?

[jl2012]

The court will sign a message, declaring a coin decolorized, and send it to the blockchain. You don't need a centralized database.

That's absurd, how will I know which key(s) belong to the court, and why will I care and how will I know who agrees?

All these information could be included in the agreement of the security

[FreeMoney]

The court will sign a message, declaring a coin decolorized, and send it to the blockchain. You don't need a centralized database.

That's absurd, how will I know which key(s) belong to the court, and why will I care and how will I know who agrees?

All these information could be included in the agreement of the security

Oh, doing it voluntarily with complete foreknowledge on a case by case basis seems fine. And leaves room for people to do whatever they want.

[killerstorm]

That's absurd, how will I know which key(s) belong to the court, and why will I care and how will I know who agrees?

Suppose colored coin represents ownership of property according to some contract. E.g. contract says "I owe money to bearer of that coin", basically.

Court might simply announce that it won't enforce that contract. I.e. for a particular coin contract is invalid.

Then you can still trade that coin, and issuer might pay you. But if you go to that court, it would not accept your claim. Maybe some other court will, who knows...

Anyway, people who trade coins are very interested to listen to these invalidation claims. And it naturally makes sense to publish them in same place where contract is published. Because it becomes pretty much a part of contract.

So it is decentralized: whoever is interested would store this information. It is compatible with uncertainty of court system decision: even if X says contract is invalid, you can go with it to Y.

And it is compatible with colored coin system as you can re-assign different color to invalidated coins, and so your client will not accept them being the same as original.

It is ugly, though, but legal system in general is ugly.

So there is a theoretic framework to do this, but I'm not saying that it should be done. It's more like "our system supports this feature too, if you really want that".

[killerstorm]

For me the situation presents itself as follows: we need 3 things:

• decentralized ownership-tracking (e.g. by using colored coins in blockchain) and way to proove ownership (for voting purposes, for example)
• decentralized exchange (order matching)
• accountability / link to real world of asset issuer

Yes. This is what I was talking about from the start. Let's decouple it into many things and let each part to evolution independently.

3rd point is the hard part...

To solve "link to real world" problem, let me suggest a market for centralized agencies which offer the following services:

• Make accessible a list of "colored coins"/assets in existance
• Record the identity of the real-world person issuing some asset and offer disclosure to a court in case of dispute
• Safely store (in a legally binding manner the contracts associated with the respective assets and ensure these are legally usable in case of problems. Offer relevant services to courts (identify asset issuers, provide means of asset holder to proove ownership of asset at certain point in time)

Yes, this is what I was talking about. I don't think it's particularly hard, it is just a bit expensive, maybe more expensive than size of the market would support now... Essentially you need a bunch of lawyers (I assume ones which now do tax planning, offshore companies, investment banking perhaps) and a little bit of tech. The only problem is that high-end lawyer won't be interested in doing this if he gets lavish salaries on the Wall Street.

We have a lot of passionate tech guys here, but not enough passionate lawyers/investment banker

Anyway, it can work exactly like investment banking works in real world: to issue shares or debt you need to go to investment banking guys and they'll arrange it for you.

But of course different such companies will offer different level of service. Underwriting debt for a large company is different from personal loan or small startup crowdfunding.

[jtimon]

• accountability / link to real world of asset issuer

3rd point is the hard part (I agree with casascius that if there is no real-world-link of the colored coin to some enforcable contract, this whole idea probably only makes it easier for scammers. I acknowledge the possibility of independant private dispute resolution as a service)

I will try it again, but I feel I'm being ignored.

1) The only thing needed is to trust the issuer of the asset.

2) Legal binding may be necessary for that trust to exist in some cases.

3) Digital signatures can be legally liable.

4) You can just bind the digital signature used on colored coins to a legal contract.

So I see the 3rd part as really simple technically speaking. You only need to explain this to a lawyer so that he writes such a legal contract and voi la: you're legally liable for the assets you issue with colored coins, (or ripplecoin or two-phase distributed ripple).

By the way, I still see "not having to modify the current chain protocol" as the only advantage that colored coins have over ripplecoin.
Having to represent the assets with underlaying satoshis is just an artificial limitation for the system.

[casascius]

I will try it again, but I feel I'm being ignored.

I don't think you are being ignored, with all due respect, I think you are simply wrong and don't yet understand why.

1) The only thing needed is to trust the issuer of the asset.

Yes, that's correct, especially if the goal is to get scammed.  Finding people to trust issuers isn't the problem, there's a long line of those just waiting to be separated from their money by scammers, even here on the forums.  Just because you trust something doesn't mean it's trustworthy.

2) Legal binding may be necessary for that trust to exist in some cases.

No.  This is wrong.  Legal binding is necessary in all cases (except when the goal is to get scammed).

Without it, any issuer can simply say "OK everybody, bend over, you're screwed" and there's absolutely nothing you can do.  They can do that even if that's not what they originally planned when they started, before ever being tempted by an actual opportunity to grab lots of money and run wild and free.  That's not security.

The fact that some people still get their money back despite the lack of legal protection has nothing to do with whether it's necessary.  You can also close your eyes and drive through a red light and sometimes nothing will happen and you'll get where you're going earlier than normal, that doesn't mean stopping for red lights is unnecessary.  In the case of ponzi schemes, scammers deliberately pay some people back plus generous profit to attract more investors/victims with the illusion that everyone will be paid back with generous profit.

3) Digital signatures can be legally liable.

Not if you can't identify the person who made it, nor prove that the private key belongs to them and only to them.  Even then, if the person denies making the signature, the cost of proving otherwise is not insignificant, and the person/people making the decision (judge/jury) will likely know nothing about PGP or cryptography.  You'll need to pay an independent third party expert to testify to the authenticity of that signature for it to be believed.

4) You can just bind the digital signature used on colored coins to a legal contract.

If the legal system disagrees with the conclusion of ownership represented by the colored coins, the legal system will disregard the meaning of the colored coins and substitute its own judgment, rendering the colored coins meaningless.  We don't need to wait for the future to find out if this is for real: lawyers and the legal system can already tell you this today if you ask.

So I see the 3rd part as really simple technically speaking. You only need to explain this to a lawyer so that he writes such a legal contract and voi la: you're legally liable for the assets you issue with colored coins, (or ripplecoin or two-phase distributed ripple).

And then, since you've clearly identified yourself, you're also on the hook for selling unregistered securities to the public and become a takedown target - exactly the reason why the decentralized exchange would be invented in the first place.

[jtimon]

1) The only thing needed is to trust the issuer of the asset.

Yes, that's correct, especially if the goal is to get scammed.  Finding people to trust issuers isn't the problem, there's a long line of those just waiting to be separated from their money by scammers, even here on the forums.  Just because you trust something doesn't mean it's trustworthy.

2) Legal binding may be necessary for that trust to exist in some cases.

No.  This is wrong.  Legal binding is necessary in all cases (except when the goal is to get scammed).

It depends on the asset. Ripplepay, villages, LETS, CES and other mutual credit systems IOUs work perfectly without legal liability.
Not sure other private currencies like miles or linden dollars are linked to a legal contract, yet people accept them.
For stocks you're probably right, you need legal liability to be able to trust the issuer.

3) Digital signatures can be legally liable.

Not if you can't identify the person who made it, nor prove that the private key belongs to them and only to them.  
...
You'll need to pay an independent third party expert to testify to the authenticity of that signature for it to be believed.

Obviously the legal contract needs to identify the liable actor. That independent third party can operate really cheaply, it only needs legal digital signatures. In some cases it can be the state itself. As said, in Spain all citizens have and ID card that enables digital signature and is legally binding.

4) You can just bind the digital signature used on colored coins to a legal contract.

If the legal system disagrees with the conclusion of ownership represented by the colored coins, the legal system will disregard the meaning of the colored coins and substitute its own judgment, rendering the colored coins meaningless.  We don't need to wait for the future to find out if this is for real: lawyers and the legal system can already tell you this today if you ask.

I'm talking about a legal contract that makes colored coins MEANINGFUL AS OWNERSHIP CERTIFICATE. I don't need to ask any lawyer, without that legal contract, there's no legal ownership. What we need to ask lawyers is what should such a contract contain.

So I see the 3rd part as really simple technically speaking. You only need to explain this to a lawyer so that he writes such a legal contract and voi la: you're legally liable for the assets you issue with colored coins, (or ripplecoin or two-phase distributed ripple).

And then, since you've clearly identified yourself, you're also on the hook for selling unregistered securities to the public and become a takedown target - exactly the reason why the decentralized exchange would be invented in the first place.

Yes, you can't have both. Either you're legally liable or anonymous.
But the great thing is that the market gets decentralized. But as always you need to trust the issuer. This is not like bitcoin where the issuer is the chain itself.

[casascius]

I'm talking about a legal contract that makes colored coins MEANINGFUL AS OWNERSHIP CERTIFICATE. I don't need to ask any lawyer, without that legal contract, there's no legal ownership. What we need to ask lawyers is what should such a contract contain.

I hear you and agree with you, but then have to ask what is the purpose of the decentralized colored coins?  The purpose is defeated if the ownership certificate defines the ownership and not the colored coins.

The apparent purpose of the decentralized colored coins is to allow the asset to be exchanged and owned anonymously.  If you've followed E-Gold, the powers that be don't like that, which you may be aware of, since that's why you'd be discussing inventing a decentralized exchange.

Suppose I announced, "hey everybody, my name is Mike Caldwell, and I have X ounces of gold here in Sandy, Utah, USA.  All Satoshis numbered <insert list here> are hereby colored and represent legally binding claims on my gold... PGP signed, me.  Happy trading."  Then I'd have a functioning system exactly as you suggest.  And then someone from the government would be kicking down my door and taking the gold and wiring me with a smart ankle bracelet for the same reasons they did the same to E-Gold.

http://en.wikipedia.org/wiki/E-gold

[jtimon]

It would be something more like...

my name is Mike Caldwell, and I have X ounces of gold here in Sandy, Utah, USA.  All Satoshis numbered <insert list here> coming from this bitcoin public address Addr1 are hereby colored and represent legally binding claims on my gold... PGP signed, me.  Happy trading.

It seems the US is not the "freest country in the world" anymore though. You should issue your eGold somewhere else.

The powers that be may launch a rainbow bomb if we win on the internet, but should we stop writing free software with that fear in mind?

[Energizer]

I am currently experimenting/designing a new asset exchange protocol that will take place on top of the block chain for assets issuing/buying/selling/...

My design is radically different from any current colored coins design. In colored coins the asset starts being tracked from a root transaction where all coins in such transaction is considered to be colored. In my design there is no such a thing called colored coins.

The protocol will treat btc addresses as nodes in a network. Where transactions are gonna be used as network events being sent from one node to another "BTC address to BTC address". All communication is going to go through a single point of interaction which is the "issuer's BTC address". The history of all transactions made to the issuer's BTC address will be parsed as issuing/ask/bid/buy/sell/motion/buyback, in a manner that after parsing the whole transactions history made to and from the issuer's BTC address the application can determine which btc addresses owns how many shares, which btc address is selling shares and @ what price and so on. In simple words the design will relay on tiny payments being sent to the issuer address as protocol events/service fee. The payments made to the issuer's address are gonna be treaded as messages/events where the issuer can benifit from it as operation fees. There will be no worries about assets being mixed "multiple colored coins transfered in one transaction". Cause the design by its nature will hook all the asset activities to one BTC address "the issuer's". In fact there will be no colored coins at all. A BTC address can hold 1000 shares of an asset where its btc balance is = to zero.

[jtimon]

I am currently experimenting/designing a new asset exchange protocol that will take place on top of the block chain for assets issuing/buying/selling/...

My design is radically different from any current colored coins design. In colored coins the asset starts being tracked from a root transaction where all coins in such transaction is considered to be colored. In my design there is no such a thing called colored coins.

The protocol will treat btc addresses as nodes in a network. Where transactions are gonna be used as network events being sent from one node to another "BTC address to BTC address".

I was assuming colored coins did exactly that all along.

There will be no worries about assets being mixed "multiple colored coins transfered in one transaction". Cause the design by its nature will hook all the asset activities to one BTC address "the issuer's".

I don't think it is really important. You only mix colors if you want, and that's just stupid.

In fact there will be no colored coins at all. A BTC address can hold 1000 shares of an asset where its btc balance is = to zero.

Mhhmm. Without modifying the protocol?
Can you elaborate on this?
That sounds basically like ripplecoin.

[killerstorm]

By the way, I still see "not having to modify the current chain protocol" as the only advantage that colored coins have over ripplecoin.
Having to represent the assets with underlaying satoshis is just an artificial limitation for the system.

Well, another advantage is that it is easier to implement atomic coin swaps in one blockchain than implement cross-blockchain trade.

Atomic coin swapping can be implemented with today-enabled features and it is inherently 100% secure.

Cross-blockchain trade requires support for 'contracts' and non-traditional scripts, and it has different security considerations:

1. You want 'the payment' to get several confirmations before you finalize the trade. Otherwise counterparty can pull off a double-spend. So it is inherently slower, i.e. you need at least 10 minutes for the trade.

2. If counter-party did not finalize the trade, your money will hang until time-out expires. So a sort of DoS attack is possible where attacker would make many trades without finalizing them, thus paralyzing counterparty funds for some time.

3. Since it depends on timeout, there are probably some sorts of race condition attacks. For example, attacker might finalize the trade around the timeout, so he will get counter-party's funds via the trade and his funds back via timeout.

But in a long term, I guess, we would want a separate chain just for colored coins, and perhaps it should follow ripplecoin semantics. But we don't know yet all requirements for "colored coin chain", so it's better to wait with it.

There is no reason why several implementation can't work in parallel: e.g. Colored Bitcoins for those who want to trade in Bitcoins, and Colored Ripplecoin for wider spectrum of things.

[killerstorm]

No.  This is wrong.  Legal binding is necessary in all cases (except when the goal is to get scammed).

This is bullshit. The fact that many agreements are honored without legally binding contacts prove that legally binding contracts are not necessary.

Maybe you're saying that statistically people have better luck with legally binding contracts than they have without them, but then you need to show us this statistic, otherwise it is simply unfounded claim.

I don't know any such statistics either, but from personal experience, I never had problems with informal agreements. I work mainly as a contractor, and whenever clients agree to pay me for work they do. I never had any single client which didn't pay, and I never signed anything in advance. Likewise a lot of my friends work in a similar fashion and have no problems either.

I was scammed just once in my whole life, and ironically I even had an IOU from this person: that person was a criminal, as it turned out, and I didn't want to get beaten.

Without it, any issuer can simply say "OK everybody, bend over, you're screwed" and there's absolutely nothing you can do.

That's the problem with your reasoning: there will be consequences for issuer. At very least nobody will trust him again.

In the worst case... Have you ever heard about internet lynch mob? If somebody knows your real name and you've pissed them off it might be very, very bad for you.

Maybe it doesn't happen in your alternative reality, but it happens in the real world.

I'm not saying that it is a right way to resolve conflicts, but it surely is a possibility, and you have to acknowledge it.

The fact that some people still get their money back despite the lack of legal protection has nothing to do with whether it's necessary.
  You can also close your eyes and drive through a red light and sometimes nothing will happen and you'll get where you're going earlier than normal, that doesn't mean stopping for red lights is unnecessary.

But here we know that being careful and following the rules is statistically much safer than doing otherwise.

But it's far from certain in case with legally binding contracts since people lose their money despite these contracts ALL THE TIME.

It has been demonstrated that sometimes removing traffic lights is better for everybody, both in terms of security and in terms of convenience: http://www.youtube.com/watch?v=lwHfibl1AoI

It would be foolish to simply abolish all rules, everywhere. But sometimes experiments make sense and they produce positive results.

Not if you can't identify the person who made it, nor prove that the private key belongs to them and only to them.

Somehow certification authorities have no problem doing extended validation (http://en.wikipedia.org/wiki/Extended_Validation_Certificate). It's pretty much same thing.

Even then, if the person denies making the signature, the cost of proving otherwise is not insignificant, and the person/people making the decision (judge/jury) will likely know nothing about PGP or cryptography.

Well, hello? People use digital signatures to interact with banks and tax authorities, but for bond market it is a problem?

You'll need to pay an independent third party expert to testify to the authenticity of that signature for it to be believed.

And it is a problem why?

If the legal system disagrees with the conclusion of ownership represented by the colored coins, the legal system will disregard the meaning of the colored coins and substitute its own judgment, rendering the colored coins meaningless.

Legal system can disagree with the conclusion of ownership represented by paper signed contracts, and? Does it make paper signed contracts meaningless in general?

[killerstorm]

Suppose I announced, "hey everybody, my name is Mike Caldwell, and I have X ounces of gold here in Sandy, Utah, USA.  All Satoshis numbered <insert list here> are hereby colored and represent legally binding claims on my gold... PGP signed, me.  Happy trading."  Then I'd have a functioning system exactly as you suggest.  And then someone from the government would be kicking down my door and taking the gold and wiring me with a smart ankle bracelet for the same reasons they did the same to E-Gold.

http://en.wikipedia.org/wiki/E-gold

The difference is that e-gold was actually providing a money-transfer service and was even profiting from it.

If you just issue some securities you won't be directly providing a service. So It would be much harder for authorities to claim that you're facilitating money laundering or something. After all, you can identify people who buy tokens from and who sell you tokens. These tokens can be traded somewhere, but in that sense they are not different from bearer certificates, cash, gold coins etc.

But if you want to do it on a large scale, it would be much better to do it through offshore shell company or something like that.

Also I've outlined a way which would allow to produce personalized final contract only at the last step, and last time I checked IOUs are not illegal.

Maybe authorities would claim that your intent was to create negotiable securities even though contracts do not look like that.

But then again, intent of using an offshore trust is paying less taxes, but it is not illegal. Even US presidential candidate does that, you know.

[jtimon]

By the way, I still see "not having to modify the current chain protocol" as the only advantage that colored coins have over ripplecoin.
Having to represent the assets with underlaying satoshis is just an artificial limitation for the system.

Well, another advantage is that it is easier to implement atomic coin swaps in one blockchain than implement cross-blockchain trade.

Atomic coin swapping can be implemented with today-enabled features and it is inherently 100% secure.

Cross-blockchain trade requires support for 'contracts' and non-traditional scripts, and it has different security considerations:

If the bitcoin protocol were modified, we would use atomic coin swapping too.
If you make it in another chain, you can make atomic coin swapping with the new hostcoin, which you need anyway to incentive miners and pay them tx fees.
Ideally I would prefer to change the bitcoin protocol, but I doubt a consensus on this can be achieved fast. Changing the protocol seems more possible now though. When I first proposed is it was more like "go on and make your fork" for any hard fork proposed. Now people seem more open to extend bitcoin functionality.

To be clear, the difference is that outputs with no inputs would be allowed (issuing) and the "credit assets" would be accounted separately from the bitcoins. Maybe adding the issuing address to outputs (what I think you mean when you say "tagging") would be a necessary optimization...

[killerstorm]

If the bitcoin protocol were modified, we would use atomic coin swapping too.

Sure. But there is a lot of advantages of using the Bitcoin for payments: it is already established, it has a lot of ecosystem around it, exchange rate is not so volatile etc.

If you start a new currency exchange rate can easily change 10000x. It would be rather hard to convince people to use it when it's so volatile. So it will create additional problems for adoption.

Ideally I would prefer to change the bitcoin protocol, but I doubt a consensus on this can be achieved fast.

I'm fairly sure people will tell you to make alt-chain with changed protocol and use cross-chain trade.

To be clear, the difference is that outputs with no inputs would be allowed (issuing) and the "credit assets" would be accounted separately from the bitcoins. Maybe adding the issuing address to outputs (what I think you mean when you say "tagging") would be a necessary optimization...

It is actually possible to have zero-valued inputs/outputs. And it's possible to attach arbitrary messages to it.

But it would be a shitty solution since all duty of validation will be passed onto clients. So you CAN have a situation where erroneous information is on blockchain, you can't have pruning and you can't have thin clients. And you have to pay fees with bitcoin.

So, again, how is that better than simply using colored satoshis?

It only makes sense in alt-chain with alternative rules, but I doubt we can collect all requirements now.

So it's better to start with colored satoshis and then maybe try something else.

[casascius]

What happens when two chains offer "atomic swapping" and then someone attacks one of the chains with a double spend or other attack, invalidating blocks on the other chain?  Nothing good to say the least. This can be mitigated, at the expense of all the benefits of having the other chain separate.

[killerstorm]

What happens when two chains offer "atomic swapping" and then someone attacks one of the chains with a double spend or other attack, invalidating blocks on the other chain?  Nothing good to say the least. This can be mitigated, at the expense of all the benefits of having the other chain separate.

Atomic swapping works only within one chain, not between two chains. To trade between chains one needs to use contracts.

Trade between blockchains is indeed vulnerable to double spends. Just like with accepting Bitcoin transactions, one needs to wait for a certain number of transactions before he ships goods -- in this case, finalizes the trade.

But it opens no vulnerabilities for blockchain itself: contracts are just transactions.

[jtimon]

To be clear, the difference is that outputs with no inputs would be allowed (issuing) and the "credit assets" would be accounted separately from the bitcoins. Maybe adding the issuing address to outputs (what I think you mean when you say "tagging") would be a necessary optimization...

It is actually possible to have zero-valued inputs/outputs. And it's possible to attach arbitrary messages to it.

But it would be a shitty solution since all duty of validation will be passed onto clients. So you CAN have a situation where erroneous information is on blockchain, you can't have pruning and you can't have thin clients. And you have to pay fees with bitcoin.

So, again, how is that better than simply using colored satoshis?

I meant with with valued inputs/outputs (those outputs just don't represent bitcoins) and the protocol validating the movements.

It only makes sense in alt-chain with alternative rules, but I doubt we can collect all requirements now.

So it's better to start with colored satoshis and then maybe try something else.

Yes, this is probably the best way to start, I'm not denying that. I'm only saying that not needing satoshis would be preferable later, and a more elegant solution. Jeff, for example, disagrees here.

I'm biased anyway. First because I proposed ripplecoin and also because the colored coins solution is unpractical for freicoin, in which satoshis disappear with time.

[markm]

If satoshis are in short supply you could use DeVCoin, lots of satoshis there and no ever-decreasing minting of them.

-MarkM-

[jl2012]

If satoshis are in short supply you could use DeVCoin, lots of satoshis there and no ever-decreasing minting of them.

-MarkM-

There are about 1,000,000,000 shares for Apple Inc. With 1 satoshi representing 1 share, it takes only 10BTC. I don't think this would become a real problem in the near future

[Energizer]

I am currently experimenting/designing a new asset exchange protocol that will take place on top of the block chain for assets issuing/buying/selling/...

My design is radically different from any current colored coins design. In colored coins the asset starts being tracked from a root transaction where all coins in such transaction is considered to be colored. In my design there is no such a thing called colored coins.

The protocol will treat btc addresses as nodes in a network. Where transactions are gonna be used as network events being sent from one node to another "BTC address to BTC address".

I was assuming colored coins did exactly that all along.

There will be no worries about assets being mixed "multiple colored coins transfered in one transaction". Cause the design by its nature will hook all the asset activities to one BTC address "the issuer's".

I don't think it is really important. You only mix colors if you want, and that's just stupid.

In fact there will be no colored coins at all. A BTC address can hold 1000 shares of an asset where its btc balance is = to zero.

Mhhmm. Without modifying the protocol?
Can you elaborate on this?
That sounds basically like ripplecoin.

There is no decentralized mechanism for exchange in all current colored coins protocol designs. That is the main issue that motivated me to work on a new design. If shares ownership relies on the issuer/share holder to transferring their shares to another shareholder, there would be no roam for any sort of a decentralized exchange mechanism within such protocol. It is that particular point that forced me to redesign the protocol in a manager that shares ownership wouldn't be related to any sort of colored coins. In order to create a mechanism for a decentralized exchange, share holding should come as reflection/output to such exchange. So shares movement from one node to another should take place on multiple stages:

1- Node ["A"] broadcasts a sell "ASK" order and a BTC address to receive payment on
2- Node ["B"] broadcasts buying the shares broadcasted by ["A"] "or portion of it"
3- Node ["B"] sends the requested BTC amount to node ["A"]'s BTC address
4- The application automatically parses steps (1,2,3) and moves ownership for the shares bought on (3) from node ["A"] to node ["B"]

The broadcast mechanism will take place as transactions sent to the issuer's BTC address, while all nodes are monitoring all transactions send/received by the issuer's BTC address. That would result in a real time messaging protocol on top of the block chain. Transactions sent to the issuer's address will be parsed as binary protocol events. Where the last "one or two number" will be parsed as an event id: {"0.00000001:issue","0.00000002:buy","0.00000003:sell","0.00000004:ask",...}. The most challenging part now is optimizing the operations/transactions to its minimum.

Your feedback is more than welcome.

[killerstorm]

There is no decentralized mechanism for exchange in all current colored coins protocol designs.

This isn't true. There are at least two exchange mechanism proposals.

You might not like that, but that doesn't mean that you can say that they don't exist.

[Energizer]

There is no decentralized mechanism for exchange in all current colored coins protocol designs.

This isn't true. There are at least two exchange mechanism proposals.

You might not like that, but that doesn't mean that you can say that they don't exist.

Could you please post the links?

[jgarzik]

Atomic coin swapping can be implemented with today-enabled features and it is inherently 100% secure.

Cross-blockchain trade requires support for 'contracts' and non-traditional scripts, and it has different security considerations:

If the bitcoin protocol were modified, we would use atomic coin swapping too.
If you make it in another chain, you can make atomic coin swapping with the new hostcoin, which you need anyway to incentive miners and pay them tx fees.

I definitely think that a "smart property chain" separate from the main bitcoin chain should be pursued.  It helps separate purposes (currency vs. property registry) and keep property registry data out of the mainnet chain.

The main practical obstacle is getting the smart property chain into the common merged-mining merkle root that pools obtain from the merged-mining daemon.

If people are interested in working on a smart property chain The Right Way, let me know and we can coordinate.

My smartcoin (formerly pybond) project will include some cross-chain trading support for precisely this purpose.  In fact, I am seriously thinking that cross-chain trading should be prioritized over making a solution that works in the main bitcoin chain.

[jl2012]

Atomic coin swapping can be implemented with today-enabled features and it is inherently 100% secure.

Cross-blockchain trade requires support for 'contracts' and non-traditional scripts, and it has different security considerations:

If the bitcoin protocol were modified, we would use atomic coin swapping too.
If you make it in another chain, you can make atomic coin swapping with the new hostcoin, which you need anyway to incentive miners and pay them tx fees.

I definitely think that a "smart property chain" separate from the main bitcoin chain should be pursued.  It helps separate purposes (currency vs. property registry) and keep property registry data out of the mainnet chain.

The main practical obstacle is getting the smart property chain into the common merged-mining merkle root that pools obtain from the merged-mining daemon.

If people are interested in working on a smart property chain The Right Way, let me know and we can coordinate.

My smartcoin (formerly pybond) project will include some cross-chain trading support for precisely this purpose.  In fact, I am seriously thinking that cross-chain trading should be prioritized over making a solution that works in the main bitcoin chain.

How could you prevent double spend attack with cross-chain trading?

[killerstorm]

Could you please post the links?

https://github.com/jgarzik/smartcoin: node.py: financial P2P network and DHT client

Description of how it's going to be used: https://bitcointalk.org/index.php?topic=92421.0


My plan is to use HTTP to post/retrieve orders and to exchange pieces of transactions. It can work in centralized way (one HTTP server) and in decentralized way (many HTTP servers).

I can publish a more detailed description if somebody's interested...

[jgarzik]

How could you prevent double spend attack with cross-chain trading?

In general, see Contracts: cross-chain trading

Double spending is always possible even on a single chain.  Adding multiple chains implies you would want to post to the weaker chain first.

The largest risk tends to be "holdup risk", where one sender simply refuses to proceed with the transaction.  In that case, Party A would be forced to double-spend, to secure the coins it wanted to trade with Party B.

[killerstorm]

Double spend can be prevented by waiting until 'the payment' gets enough confirmations.

When Party B refuses to proceed and 'the payment' already got some confirmations Party A has to wait until Tx2 ('the contract') is locked so Party A will get its coins back.

So this is inherently slower than 'atomic coin swap' because in the best case one needs to wait several confirmations, in the worse case one needs to wait for Tx2 lock.

[sron]

I too recently started a thread regarding this matter - How to clone Bitcoin to create your own crypto currency or crypto shares system: https://bitcointalk.org/index.php?topic=114336

I really believe that a decentralized crypto currency based stock exchange is very important and could have great benefits for humankind.

I support the idea of separate block chains. I would like to make it as easy as possible for anyone to create their own crypto currency clone and use it as an asset if they like. I think the open transactions system could work for the exchange part of it.

Now, this discussion quickly gets very technical but I'm glad to see that so many people are working on a solution to this problem.

I personally believe that the crypto stock exchange is as important as the crypto currency software itself and I can't wait too see more solutions go live. It could be a VHS vs betamax sort of thing. I support the idea of separate block chains, not the colored coins one at least for the time being.

[jl2012]

So this is inherently slower than 'atomic coin swap' because in the best case one needs to wait several confirmations, in the worse case one needs to wait for Tx2 lock.

That's why I think doing it on the same blockchain is more efficient

[jtimon]

If shares ownership relies on the issuer/share holder to transferring their shares to another shareholder,...

This is true for OT's "untraceable cash" and two-phase Ripple, but not for ripplecoin or colored coins.
The credit/smart property can be moved even when the issuer is not connected.

And I'm not sure your proposal will work or I've even understand it.
Why do you want to put the orders in the chain if the chain protocol is not going to enforce it?
Are you talking about a fork too?
In any case, putting the orders in the chain sounds already non-optimal to me.

If you make it in another chain, you can make atomic coin swapping with the new hostcoin, which you need anyway to incentive miners and pay them tx fees.

I definitely think that a "smart property chain" separate from the main bitcoin chain should be pursued.  It helps separate purposes (currency vs. property registry) and keep property registry data out of the mainnet chain.

The main practical obstacle is getting the smart property chain into the common merged-mining merkle root that pools obtain from the merged-mining daemon.

In the ripplecoin thread (not sure if here or in the ripple mailing list), we came to the conclusion that a hostcoin cash was probably the only way to incentive miners effectively. We considered paying fees with the credit/propery claims itself, but probably miners would not be interested in such an uncertain reward or a lot of transaction would be excluded for not offering "the right currency".

This other solution doesn't convince me:
https://en.bitcoin.it/wiki/Alternative_chain#Incentivising_non-resource_based_chains
and I don't think it's compatible with cross-chain trade.

But this may be feasible by paying the fees with an extern chain cash (bitcoin) as described here:

https://en.bitcoin.it/wiki/Alternative_chain#Paying_for_resources_on_alternative_chains_with_Bitcoins

A first problem is that you're making the altcoin protocol dependend on the bitcoin chain.
"Why is that a problem?" you would say. Well, not really a problem per se, but it would be "unfair" for freicoin.
Not only because you make bitcoin more valuable with this new fee use...
Once your protocol is dependend on another chain, you no longer need the cross-chain contract to atomically trade with it. You can make the part on the other chain the commit itself.
That's what I proposed for "trading across chains" before the contract solution existed. Sorry for introducing another made up term but once I called this middlecoin.

Middlecoins (in this case the issued assets) would be considered transferred conditionally, if a given quantity of bitcoins was sent to a given address (both explicitly espcified in the middlecoin tx). You also need the "bitcoin collateral" (or "public pre-pay") to prevent DoS attacks, so I'm not sure this have any real advantage over the cross-chain contract. An expiry block would also be needed or..."I have some bitcoins, let's pree-accept some orders and block some middlecoins until I get bored or I want to spend my btc elsewere".

Be it with contracts or making the new chain dependent, what scares me most are DoS attacks for cashless chains. If you're going to pay the fees later...why not broadcast 10 million tx with a generous 1 btc fee?

And if we accept that a hostcoin is needed for the mining incentive and fees, won't that new cash become more valuable than bitcoin even if its chain gets "dirty with non cash transactions"?

If people are interested in working on a smart property chain The Right Way, let me know and we can coordinate.

I'm definitely interested in participate in such a project. And I'm sure I can learn much working with experienced bitcoin developers like you.
Since I will be done with the univeristy this friday (yeah!), I will have time to write other free software different from my lonely (and worse than pybrain) preann.
But I need to train some basic skills first, like making my first git commit and pull request.
I will do it with freicoin: I feel really bad about not having coded a single line even when there's people working on it. Maybe freicoin can be the ideal incentive hostcoin with its constant supply but everlasting miners reward I would also like to learn python and help with villages.cc and two-phase Ripple (better privacy and/or latency). Maybe too many things...

We first need to discuss if the hostcoin is necessary. Maybe there's another solution I haven't thought about.

My smartcoin (formerly pybond) project will include some cross-chain trading support for precisely this purpose.  In fact, I am seriously thinking that cross-chain trading should be prioritized over making a solution that works in the main bitcoin chain.

Cross-chain trading is cool and will be good to have at some point anyway, but the current bitcoin protocol needs to be modified too, doesn't it?

[ShireSilver]

So this is inherently slower than 'atomic coin swap' because in the best case one needs to wait several confirmations, in the worse case one needs to wait for Tx2 lock.

That's why I think doing it on the same blockchain is more efficient

That's a good reason to use a separate blockchain. It slows down the trades, which prevents two potentially harmful things from happening: high-frequency trades and using shares themselves as currency. (At least for the latter it might not prevent it outright but would make the shares less useful as a currency.)

[jtimon]

That's a good reason to use a separate blockchain. It slows down the trades, which prevents two potentially harmful things from happening: high-frequency trades and using shares themselves as currency. (At least for the latter it might not prevent it outright but would make the shares less useful as a currency.)

Why the use as currency should be prevented?
What's wrong with voluntary credit currencies?
What's wrong with high frequency trading when there's no insider information (today the privileged class knows prices in advance and abuses this through high frequency trading)?

[killerstorm]

Why do you want to put the orders in the chain if the chain protocol is not going to enforce it?
Are you talking about a fork too?

As far as I understand, he wants to use Bitcoin blockchain as a medium of transmission for signed, timestamped messages. On Bitcoin protocol level only signatures are checked, but not message contents.

These messages are interpreted with a special client software which will then maintain current state: i.e. who owns what.

I see a number of problems with this approach:

• To compute current state you need full Bitcoin blockchain. It isn't compatible with pruning. Thin clients are not possible.
• It makes rather inefficient of Bitcoin blockchain. It is, of course, possible to do implement signed, timestamped messaging with much lower overhead.
• Since protocol has to deal with concurrency, it will likely end up being rather complex, but still prone to all kinds of race conditions and stuff.

So, frankly, I don't see it as anything more than a curious mis-use of blockchain.

It is interesting to compare it with colored coins, though. Colored coin protocol is more integrated with Bitcoin protocol: colored coin transactions are Bitcoin transaction, and they have to follow Bitcoin conservation rules, but they impose additional rules (conservation of colors).

Thin colored coin client requires more information than thin Bitcoin client: besides basic information about transaction it also needs information to check correctness of coloring. But still, it doesn't need to download full blockchain: only path which goes from genesis to current transaction is required.

[jtimon]

...
It is interesting to compare it with colored coins, though. Colored coin protocol is more integrated with Bitcoin protocol: colored coin transactions are Bitcoin transaction, and they have to follow Bitcoin conservation rules, but they impose additional rules (conservation of colors).

Thin colored coin client requires more information than thin Bitcoin client: besides basic information about transaction it also needs information to check correctness of coloring. But still, it doesn't need to download full blockchain: only path which goes from genesis to current transaction is required.

Now that you mention it, pruning may be another argument for ripplecoin (do this on an altchain) if all inputs are "tagged" with the issuing address. Tagging the inputs would be more efficient than tagging the outputs, right?

As said somewhere before, the "color conservation rules" would also be enforced by the chain protocol.

[EskimoBob]

[markm]

It looks like one can centralise stock markets pretty easily starting by eliminating the central market and having the brokerages talk to each other directly.

The back end of Marketcetera is an order router to which all your clients (your night traders, your day traders, your evening traders, your financial offer, your compliance officer, basically all your staff that need access to trading) connect and to which you also connect strategy engines and, - here comes decentralisation - the order routers of other brokerages.

The client GUI looks quite nice, take a look at http://www.marketcetera.org/confluence/display/PN/Photon

It talks FIX protocol, which is pretty much standard trading protocol. FIX is also what the brokerages use to talk to each other.

Explore Marketcetera's site, fire up the router and client yourself and try it out, and you'll see that the default setup has you talking to their "stock market simulator". Dig down into the nitty gritty of your strategy engine capabilities (the Photon client includes strategy tools) and it should become clear to you that about the only service a centralised "stock market" would add would be co-ordinating everyone's views of how much of what is for sale at what price and who wants it.

Most of the that the brokerages can get directly from each other, and they can also co-ordinate their views too if they want by using tools such as http://zookeeper.apache.org/doc/trunk/zookeeperStarted.html

To scale up - that is, to become even more distributed, handling more than just the hundreds of brokerages that zookeeper might reasonably suffice to provide synchronised views to, message buses can be set up on which many many such clusters of brokerages can communicate, using things like http://incubator.apache.org/kafka/design.html and http://www.mulesoft.org/what-esb

It is important to notice that Marketcetera does not assume that brokerages just talk to stock exchanges and to end-users but to each other. That is key, as it is clear when you look closer that ultimately the stock is exchange is basically just the biggest broker on the block. If a few hundred brokers synchronised a view well that is what the stock exchange once was, wasn't it? Just hundreds of brokers all communicating with each other at once.

We can go farther with this though, because modern personal computers can run this stuff. So even small brokerages can run it, heck even a power user individual broker could run the whole system in his back room office at home.

-MarkM-

[EskimoBob]

It looks like one can centralise stock markets pretty easily starting by eliminating the central market and having the brokerages talk to each other directly.

The back end of Marketcetera is an order router to which all your clients (your night traders, your day traders, your evening traders, your financial offer, your compliance officer, basically all your staff that need access to trading) connect and to which you also connect strategy engines and, - here comes decentralisation - the order routers of other brokerages.

The client GUI looks quite nice, take a look at http://www.marketcetera.org/confluence/display/PN/Photon

It talks FIX protocol, which is pretty much standard trading protocol. FIX is also what the brokerages use to talk to each other.

Explore Marketcetera's site, fire up the router and client yourself and try it out, and you'll see that the default setup has you talking to their "stock market simulator". Dig down into the nitty gritty of your strategy engine capabilities (the Photon client includes strategy tools) and it should become clear to you that about the only service a centralised "stock market" would add would be co-ordinating everyone's views of how much of what is for sale at what price and who wants it.

Most of the that the brokerages can get directly from each other, and they can also co-ordinate their views too if they want by using tools such as http://zookeeper.apache.org/doc/trunk/zookeeperStarted.html

To scale up - that is, to become even more distributed, handling more than just the hundreds of brokerages that zookeeper might reasonably suffice to provide synchronised views to, message buses can be set up on which many many such clusters of brokerages can communicate, using things like http://incubator.apache.org/kafka/design.html and http://www.mulesoft.org/what-esb

It is important to notice that Marketcetera does not assume that brokerages just talk to stock exchanges and to end-users but to each other. That is key, as it is clear when you look closer that ultimately the stock is exchange is basically just the biggest broker on the block. If a few hundred brokers synchronised a view well that is what the stock exchange once was, wasn't it? Just hundreds of brokers all communicating with each other at once.

We can go farther with this though, because modern personal computers can run this stuff. So even small brokerages can run it, heck even a power user individual broker could run the whole system in his back room office at home.

-MarkM-

Nice, that you found those links useful I sent you but this is not really a decentralized market you are taking about. 
Yes, it looks like the old days of Wall Street, when every broker was hanging around at his favourite lamp post and buyer can walk around the street and shop for trades - sorry, but this is NOT a decentralised market. This is a typical bazaar, where everyone has his own fruit stand and when they go bust, the fruits they sold are gone too.

I am not a technical person so my vocabulary is probably off but this is how I see it:
What we need is a peer-to-peer technology to operate the "exchange" with no central bazaar with multiple GBSE like fruit stand, no assholes like brokers, bankers and other wankers, who are fucking up the world for the rest of us, have no place in this "exchange" - it can operate without those scumbags.
 
Decentralized exchange has to operate similarly to BTC (hopefully with out the absurd and ever growing 4.5+ GB dat files and without wasting absurd amounts of electricity to keep going)
I guess the "exchange" or the "central bazaar" lives in the p2p network and can not be taken down or traced to any single participants because nobody holds the complete data of available stuff. This data can not be used/abused/changed by one "server"  or a node - the "file" is undecipherable alone. No one node ever has a complete picture of the market (in it's data file), but P2P network has it in multiple copies. 
If one node drops dead, the "market" can keep operating. Not a single node can pull a "GLBSE" on us
Yes, investors are screwed if issuer runs but this is the risk you have to accept.
I guess this system requires 3+n nodes to be operational and there has to be at least one more good guys than there are bad guys.
OT, Marketcetera, Monechanger etc can be the clients for the network, there can be websites that show you the complete picture of the market but the single owner/exchange risk is eliminated.

Questions:
1) Why do I want to run a node and carry the cost of power and hardware? How am I rewarded? Maybe I have to run the node if I am a issuer?
2) How are the contracts actually issued and managed (dividends, buy back, I(P)O)?
3) Are prices tied/quoted in BTC/LTC/etc and trade will activate a transfer in one of those blockchains?
4) How is this networks protected from scumbags and lunatics like we have seen trolling the altcoin section of this forum?
5) ...

[markm]

You can decentralise the order-book simply by spamming offers anywhere you can spam anything.

Throw enough offers on the wall and some will stick kind of idea.

You can look as long as you like at as many spam-piles as you like looking for what you thing is a good enough price for you.

So "matching offers" is not important.

Thus it seems like all you absolutely need is atomic exchange, which can already be done on a single block chain and when currently-disabled feature(s) of bitcoin are re-enabled will be possible between chains too.

Another idea is maybe crptography can do some sort of blind XOR type of operation. You can exchange the contents of two variables without needing a third variable by means of XOR operations. A crypto version of XOR if such a thing could exist would similarly switch the bits of two contracts, your contract becoming the other guy's while his becomes yours. Similarly private keys, maybe the contents of two private key storage areas can be swapped one bit at a time or something.

Maybe you could even indicate what price you want for the contents of an address by generating the next address in a predictable/deterministic series of addresses, like the extended ideas beyond deterministic wallets speak of. Anyone can compute what the next address would be, even though they don't know your private key, supposedly. So for any given address anyone could compute its "price address" and look there to see what the contents of the coloured coin address are being offered for sale for, in bitcoins or satishis or heck, maybe even in some other colour of coins.

For markets, your requirement that no one know all the machines involved in their currently selected market seems to maybe rule out using Zookeeper unless we use Zookeeper over i2p and/or Tor so that althrough they all know all of them that form one cluster, they really do not "know" them in a send police to smash in their doors sense, they merely know the current Tor or i2p address of each participant.

But the thing about Tor and i2p comes back somewhat to your question of why would anyone bother.

None of the people going on about how much they need a distributed anonymous market seem to actually have Tor and i2p up and running, I often feel like well gee guys, you are shooting your own idea down by not even being on any of the networks on which such things could be deployed. Maybe the standard response should be "cool idea, bu why are you even talking about it out on the non p2p, non anonymous net" and "great idea, I always like to discover new nodes of the anonymous networks, give me your Freenet email address so we can discuss it" and "great, lets chat about it, what is your Torchat ID" and suchlike.

Basically if these people are incapable of even joining the networks on which the things they want would reasonably be expected to run, what makes them even think the thing they want doesn't already exist? Thousands of people could be anonymously trading right now and these here folk cannot even get off their asses to join the network let alone run an app on it.

We could deliver a servlet and/or applet for Jetty to run in your eepsite, or even a plugin for i2p to run such a thing alongside Jetty as a separate service from their eepsite, but these people don't even have eepsites yet!

So hey maybe lets start from the basics: get your eepsites running, publish your Torchat IDs on them, maybe even run a forum on your eepsite where we can discuss this stuff. The distributed forum system for i2p could be useful too, though that could do with some work. Maybe if people actually used p2p anonymous networks all this stuff people keep complaining about needing would already exist. But instead they seem to keep on pretty much implying that even if what they keep complaining about not having did exist they would not actually use it.

Back again to the cost. If you offer people money to do some sneaking clever stuff to avoid big brother, you will attract sneaky clever people who want to steal your money or defraud you out of your money. People who actually want a thing don't need to paid to have the thing they want, they in fact are the demand side of a market, they are willing to pay to get what they want. For example, programmers who are willing to pay hours and hours of work to get what they want programmed, or anonymous net traders who are willing to pay bandwidth for an anonymous net so they can trade, and so on.

One nice thing about i2p is that unlike Tor is is not designed for random non-contributors to pop in grab what they want and leave. Rather, you tend to get crappy speed until your node has been online long enough, passing along other people's traffic enough, to have established itself as a good reliable node that contributes good bandwidth and does not shut down and so on...

-MarkM-

[EskimoBob]

I agree with above 100%, when it comes to anonymity. Tech is here, use it.
P2P exchange is actually something else and not that "anonymous" - like BTC.
Or we can just say "fuck this RL nonsense" and call it WOB - "World Of Bitcoin" - and play what ever we like to play. We can have many play exchanges, play that we are big-time investors, imagine we are CEO's of play companies (like there was any real Co'in GLBSE... lol) and so on.   
Just like you do it in any other game.

Let the games begin. ( I am not kidding).

... Problem solved!

BTW, I have this really cool game called The ART Project - The game can return some nice play income in toy coins, called dBTC, per Earth month. Are you paying? I am! Sign up now and get yourself a cool hand made Bitcoin Mug (see my signature) 

[markm]

I guess I do not understand what you mean by a decentralised market.

Decentralised exchange, atomic secure exchange, fine.

But is there even any actual need for all the participants in a bazaar or market to all reach unanimous agreement about exactly which is the best price and exactly which is the top of the queue offer against which it should be executed?

Before everyone can agree as to the exact total orderbook, they each need to have an exact total orderbook of their own.

Even if no new orders are published, it will take time for everyone (possibly thousands of people) to all compare their order-books to check that they all have the exact same order-book.

Even if they do all agree on one global orderbook across one entire "market" or "bazaar", it will very likely be out of date by the time they all agree that it is correct and that they all have the exact same contents and sequence in it. Because meanwhile anyone who sees they are not at the top of the queue can go behind the order book's back to contact someone else who might also not be at the top of the queue, and exacute an order directly between themselves, accomplish an exchange directly between themselves, and even choose not to waste time telling the distributed order book that they changed their minds, instead that could simply not bother to answer if or when the distributed order book finally gets around to matching their order (which is now obsolete as they found a partner to exchange with faster by simply doing a p2p exchange with someone else who didn't mind not waiting around for some global distributed order book to match them up with someone.

It seems like what you mean by a market is an order book with associated matching of orders, and it also seems like such a thing is ultimately just one view of what the current offers are that are out there in the bazaar. Thus you basically first have a bazzer, then you have one or more agents trying to put together possibly different order books that try to provide some sense of what the best offers are that are available in the bazaar at a given moment.

Is do not really see what you gain even if you do manage to all agree on one order-book's contents. I do think that forcing any offers shown in such an order book to still be available by the time an attempt is made at matching them probably goes beyond what many people think decentralising is all about. Because it basically centralises matching, even if it is centralising it into an insanely  possible complex form of distributed consensus like the way bitcoin decentralises one one global centralised consensus across many distributed machines.

Isn't being forced to have my funds locked up by some global central consensus system until such a system finally (if ever) gests around to matching them up with a counteroffer going to be seen as being against the whole point of decentralisation from many/most people's view? Why create a massive decentralised Big Brother if the point is to avoid having a Big Brother at all?

-MarkM-

[markm]

Lets get specific.

Look at Zookeeper: http://zookeeper.apache.org/doc/trunk/zookeeperAdmin.html#sc_zkMulitServerSetup

Up to 255 machines can be on one "quorum" of servers/nodes.

We could use Zookeeper itself to ensure all 255 nodes in the quorum all have the exact same information as to who exactly are the current 255 nodes currently (at a given moment) forming that quorum.

Based on their node number within the quorum, each can publish offers.

Each can see the same overall state of all offers all nodes currently have open.

We would need to set watches that will change the list of nodes when a node leaves, and provide some kind of enrollment system whereby machines can apply for a spot as a node in a quorum.

Initially we can start with 255 permanent nodes, 255 people who are committed to engaging in this 24/7. Once all works smoothly with that fixed set of nodes, and of demand is sufficient, we can proceed onward to enrollment interfaces.

It actually does not matter if machines of a quorum are offline, as long as at least three machines of that quorum are still online. So we can assign new people to a not yet full quorum and just leave them there, no need to keep enrolling and un-enrolling.

Once there is more than one quorum up and running, we can start adding gateway nodes that pass on the data in one quorum to another quorum.

-MarkM-

[EskimoBob]

markm, for start, it's important to get the semantics straight.
Lets keep it really simple for now and not start nitpicking.
Les say we have a Market (bazaar) Market place on it's own is just a empty "floor" or a lot of empty land - place to get together and trade something.
First, it starts out where every guy has it's own stand and most of them are selling actually the same stuff.
Lets evolve and make it better (and move away from typical farmers market setup). 
In our new and improved market, all items named "A" are listed in one order book - "A". Users person is irrelevant for the user at the opposite side of the trade. Buyer do not give a flying f* who actually holds the "A"'s and who even sells those. Same applies to seller. It has no importance who is the actual buyer. (In real world, we moved to clearing house/trade matching/broker territory but lets not go there for now)
Now, forget the farmers market analogy for good and lets move on.

Described market is centralized because the "floor" (virtual or real) is "located in one place". You close that place down and... puff, all participants got probably glbse'd. Not only because the "place" was closed down, but because this "market" was acting also like a clearinghouse - the only place for the 'who owns what' data. 
Moving this type of "market" (exchange) to anonymous net will not make it decentralized. It make it anonymous.

I guess I do not understand what you mean by a decentralised market.

Now you know what I mean by "market" and "order book" and what is the role of "clearing house". Let me try to explain.
Decentralized market for me is a market,  where no data is held by single entity so It can be tweaked, deleted etc.
From customers point of view, it actually look like any other market (exchange) -  place where buyer and sellers can meet and trade.
To make it effective -  item "A" is always available in order book "A", "B" in orderbook "B" and so on. I do not have to run around and look for B in multiple "markets" nor multiple order-books.
There is no brokers, no clearing house - only buyers/sellers and orderbooks for the listed items. All the "who owns what" data is in distributed form and can not be fucked up by a single entity.

There is no need to keep the entire trading history around forever. At some regular checkpoint, only balances move forward.
I think the trades have tiny fees and those fees get distributed among the nodes/servers that make this distributed market operate.
Types of securities can be pooled together to a "sub market" that helps you to find "bonds" or "stocks" etc. Those can be tied to any existing coins blockchain so coin can move instantly and is never actually held in/by this "market".

[markm]

Now it sounds like you just need a bunch of newsgroups for people to spam their offers in.

If you're selling bitcoins for devcoins, you spam the alt.forsale.bitcoins.for.devcoins newsgroup, if you are selling litecoins for bitcoins you spam the alt.forsale.litecoins.for.bitcoins newsgroup and so on.

People can independently subscribe to groups of interest and independently decide what offers are the best they have seen and which offers to try to contact the author of to arrange a trade.

-MarkM-

[phelix]

This thread is an attempt to answer the following questions, and to mind storm about the possibility of having an open source decentralized BTC stock market protocol/features/design.

• GLBSE is closed, so what is next?
• Is it possible to have a decentralized BTC stock market in the same manner BTC/namecoin operates?
• Is it possible to have a new protocol/block chain where assets "instead of coins" can be created by the asset issuer instead of mining?
• Is it possible that such block chain handles multiple different kinds of assets instead of one kind of coins?

It seems that the most challenging problem is in the exchange mechanism between assets and e-currencies such as BTC. For that such decentralized stock market has to operate on top of other block chain "if not on top of multiple block chains", where BTC or LTC message signing can confirm assets movement "buy/sell orders" between different accounts.

Namecoin Stock Control: https://bitcointalk.org/index.php?topic=123271

add swap transactions to namecoin and you should be done

[Bitcoin Oz]

Now it sounds like you just need a bunch of newsgroups for people to spam their offers in.

If you're selling bitcoins for devcoins, you spam the alt.forsale.bitcoins.for.devcoins newsgroup, if you are selling litecoins for bitcoins you spam the alt.forsale.litecoins.for.bitcoins newsgroup and so on.

People can independently subscribe to groups of interest and independently decide what offers are the best they have seen and which offers to try to contact the author of to arrange a trade.

-MarkM-

Or different irc channels...

[Ichthyo]

Hi all,

after having read the Killerstorm vs Casascius controversy in this thread, it seems that just a tiny outright obvious detail is missing for a complete solution of the "trust" problem. Casascius is right, there needs to be an enforcable "secundary link" to prevent the issuer from running with the money. Just this link doesn't need to be "old-style real-world".

Instead, there should be a secondary market for default insurance. And this market is cast in terms of colored coins, of course.
Thus, an issuer sells a bundle of a stock-colored coin plus an insurance-colored coin. He buys the latter (the insurance coins) from the insurance market, by providing some limited collateral, possibly even poviding this collateral in regular payments. He doesn't even need to know the actual issuer of the insurance coin.

In case of a default, the current holder of the stock+insurance passes the insurance coin back to its issuer, receiving the default compensation in turn.

The issuer of an insurance coin initially places his own money into multisig escrow to cover the possible default compensation. Over time, he receives the insurance policy payments from the stock issuer, summing up to his own contribution plus a premium. Getting some additional, real-world legally binding dept title from the stock issuer would of course significantly reduce the required insurance premium.

[killerstorm]

Ichthyo: IIRC I mentioned something like this, without any details, though.

In general I think "If you build it, they will come" might work here: it's important to create an open ownership tracking/trading platform.

And then market will find a way how to use it. Insurance ("credit default swaps") seems to be a viable option.

Also we'll likely see other creative ways to deal with it.

BTW (I don't remember whether I mentioned it) it is possible to make secure multi-issuer Ripple-style currencies with help of collateral: large issuers will hold each others' balls via "legally enforceable" collateral agreements, then smaller fish can connect to it and transfer money via that currency.

This scheme can also allow a registered, legal company to support the currency while minimizing money laundering accusations: it won't issue this currency, but it will insure it in case of default. So normally this company never touches the currency and doesn't facilitate the trade, so it's kinda hard to accuse it. But it kinda helps when users know that currency is backed by hard $$$ and a legal company.

[EskimoBob]

Now it sounds like you just need a bunch of newsgroups for people to spam their offers in.

If you're selling bitcoins for devcoins, you spam the alt.forsale.bitcoins.for.devcoins newsgroup, if you are selling litecoins for bitcoins you spam the alt.forsale.litecoins.for.bitcoins newsgroup and so on.

People can independently subscribe to groups of interest and independently decide what offers are the best they have seen and which offers to try to contact the author of to arrange a trade.

-MarkM-

Or different irc channels...

You two...

lol

[jtimon]

Casascius is right, there needs to be an enforcable "secundary link" to prevent the issuer from running with the money.

This is not necessary for all use cases. For example, I can sell you the digital key of my bike without a legal contract demonstrating the ownership of the bike. Or I can just Ripple with my friends.

For cases when legal liability is needed (or desirable) like stocks, keypairs can be linked to legal contracts outside of the protocol.

Instead, there should be a secondary market for default insurance.

That would be a third intermediate case I guess. Well, it's really complementary with both cases.

[killerstorm]

lol

I'm not sure what you guys are talking about, but colored coins + some simple communication medium + some trading software sounds like a viable approach to me.

By simple communication medium I mean anything like IRC/newsgroups/web chat/mailing list/p2p network... I'm going to start with a specialized web chat, though.

If I finish stuff I'm working on this week, next week I'm going to start with p2p exchange for colored coins, and I hope I'll get it working in a week or so.

Problems you talk about seem to be largely theoretic. If authorities shut down IRC server people can go to trade on newsgroup. There might be some disruption, but it can be repaired  in matter of minutes through software reconfiguration, so I doubt it's same thing as getting "GLBSE'd".

If trade happens both on IRC and on newsgroup, then, liek, post your orders onto both, and read both. Problem solved?

It might be a problem only for high-frequency trading, but since any p2p solution is inherently slow and unreliable, they'd have to live with it. Maybe it is not a problem at all because high-frequency traders compete with other such traders, and if it's slow for everybody, that's fine.

If we are talking about capital markets, it's unlikely that fundamentals change more often than once per day or so. So there is NO NEED in high-speed trading. If you trade faster than your peers you can make money on it, like trading right after news were heard. But it just a race, and if trading system is fast, people will compete for milliseconds or even microseconds. Obviously there is no fundamental difference.

Likewise, there is no real problem with multiple separate markets: you can poll many of them to find the best deal. Even if you don't poll some, we can hope that arbitragers will make sure that there is no large discrepancy isn't large. Again since fundamentals change infrequently whatever "commission" arbitragers get is largely unimportant.

[EskimoBob]

The problem in not so much as where the trades happen (the exchange - the market) and how orders are matched/cleared, but where is the asset holders information stored, after the trades is cleared (transfer/payment). Is it the issuer, who only knows that information? Definitely not. Sure, they need to know where to transfer the dividends, invite to voting or similar stuff, but this is it. Exchange? No! Broker? Hell no! We do not need those scumbags.  
As you see, all this information has to float around in the P2P networks in a "distributed" form. It has to be tamper proof and be available, even if a large part of the network keels over and kicks the bucket for good.
Market, call it trading environment, is another layer on top of that network. It's sole purpose is to handle the price quoting and trades - this is where prices are quoted and deal are made.

So you get layers like:

Code:

  |--- trading and quoting ------------|
  |--- clearing trades and payments ---|
> |--- tracking ownership -------------| <
  |--- issuer / holder communication --|

Where everything revolves around "tracking ownership" 

[killerstorm]

but where is the asset holders information stored, after the trades is cleared (transfer/payment).

The right answer is "in blockchain", obviously. That's the only way to make it secure and decentralized.

Think about it: if there was a way to store ownership information without blockchain, we would have cryptocurrencies other than Bitcoin.

There might be a way to secure transactions without proof-of-work, e.g. Ben Laurie's "mintettes": http://www.links.org/files/distributed-currency.pdf

But since we already have PoW-secured Bitcoin, it just makes sense to use same PoW to secure asset transactions. Either via merged mining, or via embedding information right into Bitcoin blockchain.

[yoniassia]

http://cdn.memegenerator.net/instances/400x/29521947.jpg

Awesome picture, fits colorded bitcoins very well

[EskimoBob]

but where is the asset holders information stored, after the trades is cleared (transfer/payment).

The right answer is "in blockchain", obviously. That's the only way to make it secure and decentralized.

Think about it: if there was a way to store ownership information without blockchain, we would have cryptocurrencies other than Bitcoin.

There might be a way to secure transactions without proof-of-work, e.g. Ben Laurie's "mintettes": http://www.links.org/files/distributed-currency.pdf

But since we already have PoW-secured Bitcoin, it just makes sense to use same PoW to secure asset transactions. Either via merged mining, or via embedding information right into Bitcoin blockchain.

I think that inventing and building a decentralized exchange with all the required parts is one of the coolest projects in the *coin world at the moment.
OT (OpenTransactions) guys have also done a massive amount of work and if those 2 projects/ideas can somehow be integrated... wow. Honestly, this stuff is exiting.

One thing that bothers me about the BTC type of blockchains is the ever growing size and it's vulnerability to 51% attacks. Also, lets not forget the huge cost (power) to keep it healthy and protected from all sorts of scumbags and losers with serious mental issues. BTC difficulty has soared to the level where small scale mining has become a pointless waste of time and looks like ASIC's will not help in this department. BTC mining will (has) become highly specialized business and this is probably not good at all. Concentration of power in to the hands of few greedy megalomaniacs and we go back to the "world" that BTC was built to avoid - money printing "fed" and it's greedy sock puppet "banks", who can remove you from the picture by a flip of a switch.

Sorry, I did not read the whole thread so it's a bit unclear how do the securities get issued. Second issue is "why keep mining". How is "mining" this stuff made financially attractive?

[killerstorm]

Well, colored coins kinda solve mining issue: we just use existing blockchain, assuming that it's already secure.

People need to purchase coins to turn them into asset-representing tokens, and also they need to pay txn fees. That's how miners are compensated.

If we'll have a blockchain specifically for asset ownership tracking (e.g. ripplecoin), we'll have "host coins" which are awarded to miners, while asset issuers have their own tokens which are created as needed. You need to pay hostcoins as a transaction fees, so that's how miners get compensated.

Sorry, I did not read the whole thread so it's a bit unclear how do the securities get issued.

You send coins to yourself, then create a "color definitions" which says what they mean, i.e. it can point to a contract.

[jtimon]

@EskimoBob
Just to clarify, in case you're asking what the holder needs demonstrates that he owns the asset.

1) You need the issuance transaction that killerstorm explained. The issuer can also provide it outside the chain protocol to the potential buyers (through an advertisement service or another p2p protocol based on IRC, Tor or whatever), probably signed with additional information (like what the token means, maybe a legal contract also signed with a legally binding digital signature).

2) You need the chain from the moment of issuance. If blocks were Merkle trees where leafs are transactions (the chain is a Merkle tree where leafs are blocks), you could prone much and keep only the transactions that trace your purchase back to the issuance transaction.
I have no idea if this is the "ultra-prune" that I've read of on the mailing list, which will get into the bitcoin reference implementation 0.8 or 0.9.

About combining OT and bitcoin... maaku (our great freicoin developer) is drafting some designs on an OTcoin. Basically all miners act as one and the same OT server that processes and validates transactions. It's feasible and it could easily implement ripple (it's only one server, the problem was ripple across OT servers). I still think the "untraceable" "cash" instrument is useless though.