Decentralized BTC Stock Market [Goodbye GLBSE]

[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.

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[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.