Decentralized BTC Stock Market [Goodbye GLBSE]

[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?

[1714661186]

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[1714661186]

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[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.