P2P Exchange for bitcoin

[gollum]

Got an idea after all problems that MtGox often have because of DDOS and huge amounts of order.
Why do we rely on a Server-Client Exchange (MtGox) when the strength of Bitcoin is in decentralization???
We should outsource the exchange to a P2P blockchain and let companies like MtGox only handle the fiat and the client-contact.
If we create an open source exchange platform that is decentralized and inspired by bitcoin it would benefit both brokers and clients.

Any ideas and suggestions?

----------------------------------------------------------
Discussions on this topic in other threads:
https://bitcointalk.org/index.php?topic=174039  A decentralized exchange!
https://bitcointalk.org/index.php?topic=174326    
How to Create A True Decentralized FAST Exchange...Easily With Existing Code...
https://bitcointalk.org/index.php?topic=174464 The Final Solution to the Mtgox Problem...
https://bitcointalk.org/index.php?topic=174302 Myths and mis-understandings about "decentralized exchanges"
https://bitcointalk.org/index.php?topic=174498 How to fix the exchanges - a professional view
https://bitcointalk.org/index.php?topic=173187 Yet another Decentralized Exchange Topic
https://bitcointalk.org/index.php?topic=62879 P2P Cryptocoin Exchange (P2PX)
https://bitcointalk.org/index.php?topic=27055 Dark Exchange: a 100% decentralized p2p exchange
----------------------------------------------------------
Latest copy from the git: https://github.com/p2p/bitcoin-exchange
bitcoin-exchange
================
The purpose of this project is to build a global exchange system backed by bitcoin and p2p technology. This exchange system will host many virtual exchanges created by broker alliances which enables both local and global trading of assets in form of OTC markets. The overall goal of this project is to contribute to a free market economy with the help of bitcoin and decentralization.

This exchange system could be used by this kind of markets:
* FX (Bitcoin & Fiat currencies)
* Precious metals
* Commodities
* Stocks and Funds
* Derivatives
* Auctions
* Bartering

The solution described in this file is derived from a collection of ideas proposed at bitcointalk.org and is still being discussed until we reach consensus of a final solution and a detailed architecture.

# Inspiration:
github.com/bitcoin, #Bitcoin-OTC, github.com/bitcoinx, github.com/macourtney/Dark-Exchange, github.com/FellowTraveler/Open-Transactions, github/?/p2pool,
retroshare.sourceforge.net, Ripple.com, CME Group, Forex markets, OTC-markets, Western Union, https://en.bitcoin.it/wiki/Contracts, https://en.bitcoin.it/wiki/Distributed_markets, http://en.wikipedia.org/wiki/Peer-to-peer_lending, http://en.wikipedia.org/wiki/Over-the-counter_(finance)


## Exchange system
* The exchange network is built with the bitcoin network as inspiration.
* The network has a blockchain of orders that gets processed by miners willing to participate and get rewarded
from the brokers with one bitcoin for each N orders that are forwarded in to the exchange.
* Each block takes around 1 second.
* Order matching is done once every block.
* Order cancelling is delayed for 10 blocks to discourage market manipulation.
* The order matching is deliberately slow to prevent High Frequency Trading algorithmis having advantage over the rest of the market. The orders are not executed as FIFO but in random order as a second protection against HFT.
* Once the orders are matched it is up to the brokers to settle the traded assets.
* Transaction history of executed orders will be saved in the blockchain as evidence if dispute would occur between brokers and clients
* Brokers need to create unique client ids for each of their clients, but the real identity of the clients will only be known by the broker and can only be revealed to authorities of the jurisdiction where the broker is based.
 

## P2P-model
We should decide on which P2P-model to use:
* One worldwide blockchain for all virtual exchanges and their orders.
* Isolated blockchains for each virtual exchange (similiar to bittorrent, peers can choose which torrents to seed). This model would probably result in faster order processing but less stable and secure - but still better than centralized exchanges. Another benefit is that miners can actively discriminate virtual exchanges with bad reputation and instead provide their computing power to trustable virtual exchanges.

## Market type
Each virtual exchange will be able to chose from this order processing models:
* Dealers market: clients trade with market makers and not directly with each other
* Double auction: clients trade directly with each other, the price is calculated based on supply and demand. http://en.wikipedia.org/wiki/Double_auction
* English auction with reservation price and time limit: Suitable for sales of huge quantities of an asset, or sales of non standardized assets, such as paintings, cars and real estate.

## Assets
* Assets can be both digital or physical, example: cryptocurrencies such as BitCoin and LiteCoin, digital fiat currencies, physical fiat currencies, gold coins, silver coins, barrel of gasoline.
* Any asset pair can be traded in the exchange just as in a futures exchange since no real asset is handled through the exchange itself, only orders of assets.
* An asset pair can be: Bitcoin traded in US Dollar, BitCoin in Euro, 1 Oz Gold in BitCoin, 1 Oz Silver in BitCoin, LiteCoin in BitCoin, Euro in Dollar, 1 Barrel of Gasoline in Gold, 100 chicken eggs in Oz Silver, or whatever asset pair the brokers wishes to enable trading in.


## Clearinghouse:
"A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions.
http://en.wikipedia.org/wiki/Clearing_house_(finance)
* Trust is used instead of a clearing house - the brokers are responsible for the actual transfer of assets between the traders.
* Voluntary rating of the brokers from the clients could be used to indicate the trustworthiness of each broker.

## Brokers and virtual exchanges
"A broker is an individual or party (brokerage firm) that arranges transactions between a buyer and a seller, and gets a commission when the deal is  executed." (http://en.wikipedia.org/wiki/Broker)
* Anyone can become a broker in this exchange.
* A broker must either join an existing virtual exchange or create a new virtual exchange where orders will be executed.
* Each broker wishing to join a virtual exchange must be approved by the founder of the virtual exchange which is done by mutual exchange of certificates.
* When several brokers exist in a virtual exchange their order books will merge for each asset pair they have in common and all of their clients orders will get matched together.
* Creation of a virtual exhange by virtual exchanges is not allowed, therefore trading between virtual exchanges is not possible.
* All brokers should use .bit domains (NameCoin) as a backup domain.
* Two classes of brokers: Class A Broker can settle assets with brokers in other jurisdictions, Class B Broker can only settle assets with a Class A Broker in the same jurisdiction.
* Each broker has its own order book, and its own asset pairs.
* The brokers using this exchange can have clients globally or locally.
* Client orders are always forwarded to the exchange by the brokers. Clients dont need internet access
from the exchanges perspective since the clients will never use the exchange directly.
* Settlement of assets should be made on a regular basis (daily or weekly) between brokers in a broker-pool in order to minimize the possible loss off assets in
the event of fraud or default.

## Legal issues
* Each virtual exchange must comply with local laws in the jurisdictions where the brokers are located.
* Any legal issue is a matter between brokers in a virtual exchange or between a broker and its clients.
* The exchange system itself cannot be held responsible for any legal issues. The exchange system will be distributed among thousands of computers around the world and its role is to host the virtual exchanges.

## Fees
* Fees are taken from the brokers and virtual exchanges to encourage miners to provide computing power to the exchange and to discourage creation of fake virtual exchanges, brokers and orders.
* Brokers and Virtual Exchanges will have bitcoin wallets created in the bitcoin blockchain where they send bitcoins in advance to pay for the exchange fees. If the broker-wallet or virtual exchange-wallet is empty no orders are processed for that broker or virtual exchange.
* The actual fees must be discussed in the community.

We could apply one of this fee models:
* Predefined fee: Static fee during all circumstances until the community changes the fees manually.
* Parameter based fee: Fee based on the number of one or several of this parameters: number of orders in last N blocks, the VWAP price of BtcUSD the last N Blocks, difficulty of the bitcoin blockchain, difficulty of the exchange blockchain
* Free market model: Fees are decided by each virtual exchange, virtual exchanges paying more fee per order will attract more miners.

Example of fees with the predefined model:
* Broker fee: 1 BTC per 30 days (18 144 000 blocks)
* Virtual exchange fee: 10 BTC per 30 days (18 144 000 blocks)
* 1 BTC per 10 000 Orders forwarded to the Exchange
* 1 BTC per 100 000 Orders cancelled from the Exchange  

## Questions
* If the exchange should work as a stock exchange instead of a futures exchange: How to prevent short selling assets that the client dont own and the broker cannot lend on the market?
* Minimum trading size in each asset to prevent order spamming? (0.1 BTC)
* Even trading sizes? (0.1, 0.2, 0.3 ...BTC)
* Clearing houses or two classes of brokers?
* Market makers?
* Darknet?
* Digital tokens to represent the traded assets and wallets to handle the tokens?
* Allowing creation of alliances between virtual exchanges?
* Which P2P model should we apply? Possible to combine a unified worldwide blockchain for some parts of the system and isolated blockchains for parts that are unique for each virtual exchange?
* What kind of fee model should we use?

Discussion on: https://bitcointalk.org/index.php?topic=172705.0

[1713576776]

1713576776

[1713576776]

1713576776

[1713576776]

1713576776

[tycho]

Got an idea after all problems that MtGox often have because of DDOS and huge amounts of order.
Why do we rely on a Server-Client Exchange (MtGox) when the strength of Bitcoin is in decentralization???
We should outsource the exchange to a P2P blockchain and let MtGox only handle the fiat and the client-contact.
If we create an open source exchange platform that is decentralized and inspired by bitcoin it would benefit both brokers and clients.

Benefits of a P2P-exchange
-One orderbook: regardless of what broker you use you orders would end up in the same order book. That creates higher liquidity and better execution of orders when all orders in the markets re in the same exchange.

-Harder to attack: If the orderbook is decentralized like the bitcoin blockchain it is almost impossible to attack it with DDOS or manipulate the orderbook. The attackers might shut down the brokers' sites but they cant shut down the exchange itself, all orders in the order book will be processed even if no broker site is working.

-More stable. Decentralized exchange means huge computer power combined and fast execution and it can handle huge quantities of clients without problem.

Instead of rewarding the miners with new coins, the rewards can be based on a percent fee (0,001%) of the bitcoin value handled for each transaction.
It might be possible to build the exchange functionality side-by-side with the existing bitcoin software so all miners automatically also can handle the exchange.
But the blockchain should be separated.

Any ideas and suggestions?

I N C E P T I O N

EDIT: Also, yo dawg i heard you like bitcoins so i put some bitcoins in your bitcoins so you could trade bitcoins while you trade bitcoins.

[HostFat]

There is already a project that is moving in this direction:
https://ripple.com

[gollum]

There is already a project that is moving in this direction:
https://ripple.com

Ripple is owned by a company. Im talking about a free model of ripple where everyone can "mine".

[TierNolan]

How do you ensure settling up?  If an offer is accepted, both parties are told to settle up offline?

[nwbitcoin]

How do you ensure settling up?  If an offer is accepted, both parties are told to settle up offline?

Would settling up be considered a broker feature and not a part of the main exchange?

[gollum]

The settlement should be handled by the brokers. The exchange block chain is only for handling this parts:

-brokerid
-clientid
-orderid
-ordertype
-amount
-price


The miners job is to match orders

so when this 2 orders get matched it is up to the brokers to handle the real transaction of the bitcoins and the money.
The biggest issue here is of course the exchange of USD between the brokers (MtGox, BTCE, Icbit...) but if they trust eachother they can settle with bitcoins or dollars once every night, or once every week.

brokerid = MTGOX
clientid = noob1
orderid = 1000
ordertype = BUY
amount = 1 (BTC)
price = 150 (USD)

brokerid = BTCE
clientid = noob2
orderid = 1001
ordertype = SELL
amount = 1 (BTC)
price = 150 (USD)

[gollum]

How do you ensure settling up?  If an offer is accepted, both parties are told to settle up offline?

Would settling up be considered a broker feature and not a part of the main exchange?

Yes the settling must be the reponsibility of the brokers. Thats why we need the brokers in the first place - I trust MtGox more than I can trust a random guy at ebay or IRC.
But I trust a P2P open order book more than I can trust the orderbook of a server that easily can be hacked or ddosed.

[TierNolan]

But I trust a P2P open order book more than I can trust the orderbook of a server that easily can be hacked or ddosed.

So, effectively, the brokers publish promises as their order book? 

Does this get linked to a particular customer?  If you place a sell order, you then see it on the public list?  How are cancels handled?

In theory, you could have the exchanges actually act as banks.  For example, they could issue chaum digital cash.  Mt. Gox could give you 10 Mt. Gox dollar for $10 and buy 10 of them back for $9.90 (or whatever spread made them profitable).

These "dollars" could then be traded using a alt-chain. 

In fact, you could exploit the main chain if you wanted to.  You could use the coloured coin idea with 1 satoshi coins = $1.  Basically, coins generated from a particular source would be alt-coins.  For example, if the coin came from a particular address.  However, an alt chain might be better.

However, it is done, mints convert fiat to/from digital tokens and then they can be handled digitally.

[gollum]

Addition to the functionality:

-Anybody who desires can become a broker, you, me, Mr Scam, Mr Spam, Mr Fraud, MtGox, BTCE, ICBIT, SaxoBank, IGMarkets, Interactive Brokers, Scot Trade..
But to prevent market manipulation or fraud against honest brokers, each broker can list other brokers they trust in their "wallet". And if both parties got eachother in their wallets, the miners will match their orders.
If MtGox dont trust other brokers the result will be that only MtGox client orders will be matched against each other.
If ICIBit and BTCE trust each other, all their orders will be matched against each other.
If I have 2...N friends trusting me, I can act as a broker, putting their orders and they can trade against eachother through me.
If mr Scam have 2...N friends trusting him, he will act as a broker, but the only ones losing money because of him not paying out peoples coins or dollars will be his clients, not MtGox clients or my friends.

-Transaction fees are paid to miners on a percentage basis (0.001%) regardless of actual execution or not in order to prevent market manipulation orders and order spamming. Withdrawn orders will not pay back fee.

-Orders are matched in one-minute auctions in the block chain and randomnes is used if several orders are at the same level and size. High Frequency Trading are thereby eliminated since there is no possibility to cheat in the order book, or to do nanosecond trading since there is one minute between every execution of orders.

[gollum]

But I trust a P2P open order book more than I can trust the orderbook of a server that easily can be hacked or ddosed.

So, effectively, the brokers publish promises as their order book?  

Does this get linked to a particular customer?  If you place a sell order, you then see it on the public list?  How are cancels handled?

In theory, you could have the exchanges actually act as banks.  For example, they could issue chaum digital cash.  Mt. Gox could give you 10 Mt. Gox dollar for $10 and buy 10 of them back for $9.90 (or whatever spread made them profitable).

These "dollars" could then be traded using a alt-chain.  

In fact, you could exploit the main chain if you wanted to.  You could use the coloured coin idea with 1 satoshi coins = $1.  Basically, coins generated from a particular source would be alt-coins.  For example, if the coin came from a particular address.  However, an alt chain might be better.

However, it is done, mints convert fiat to/from digital tokens and then they can be handled digitally.

Yes the order book will match promises of a deal containing the exchange of bitcoin against fiat. Or bitcoin against potatoes. Or cows against pigs. Or 1 oz gold against BTC... but the preferred exchange would of course be BTC/USD.

The exchange part itself relies on trust since the P2P network cannot handle fiat, potatoes, cows, pigs or gold without the involvement of some kind of broker or bank.

[justusranvier]

But I trust a P2P open order book more than I can trust the orderbook of a server that easily can be hacked or ddosed.

So, effectively, the brokers publish promises as their order book? 

Does this get linked to a particular customer?  If you place a sell order, you then see it on the public list?  How are cancels handled?

In theory, you could have the exchanges actually act as banks.  For example, they could issue chaum digital cash.  Mt. Gox could give you 10 Mt. Gox dollar for $10 and buy 10 of them back for $9.90 (or whatever spread made them profitable).

These "dollars" could then be traded using a alt-chain. 

In fact, you could exploit the main chain if you wanted to.  You could use the coloured coin idea with 1 satoshi coins = $1.  Basically, coins generated from a particular source would be alt-coins.  For example, if the coin came from a particular address.  However, an alt chain might be better.

However, it is done, mints convert fiat to/from digital tokens and then they can be handled digitally.

I think you just described Ripple.

[gollum]

But I trust a P2P open order book more than I can trust the orderbook of a server that easily can be hacked or ddosed.

So, effectively, the brokers publish promises as their order book? 

Does this get linked to a particular customer?  If you place a sell order, you then see it on the public list?  How are cancels handled?

In theory, you could have the exchanges actually act as banks.  For example, they could issue chaum digital cash.  Mt. Gox could give you 10 Mt. Gox dollar for $10 and buy 10 of them back for $9.90 (or whatever spread made them profitable).

These "dollars" could then be traded using a alt-chain. 

In fact, you could exploit the main chain if you wanted to.  You could use the coloured coin idea with 1 satoshi coins = $1.  Basically, coins generated from a particular source would be alt-coins.  For example, if the coin came from a particular address.  However, an alt chain might be better.

However, it is done, mints convert fiat to/from digital tokens and then they can be handled digitally.

I think you just described Ripple.

Ripple is a wallet, not an exchange matching orders.

[juice]

would be also nice to have p2pool for standard and blockchain price on the client.
also hidden service integration and .bit dns on tor ,openvpn to connect the p2p net
and namecoin to hold the ca for it

[gollum]

I found this projects that are aiming for the same goal: a p2p exchange for different assets. But none of them handles the issue of settlement in a realistic way.
I believe that we need brokers in a p2p exchange to ensure trust in a massive scale.

P2PX https://bitcointalk.org/index.php?topic=62879.0
Dark Exchange https://bitcointalk.org/index.php?topic=26063.0
BitcoinX http://www.bitcoinx.org/

[Nemesis]

I must say, great mind think a like.

I started this a week ago, all by myself. I do have my day job that feed the family tho so i'm working on this part time:

We've been trying to figure out how to do a decentralized exchange for about two years now. The problem is figuring out how to store fiat (USD/EUR) in a decentralized way. No one has figured that one out yet. If you figure it out, let us know.

But then, if we could figure out how to store and transfer fiat in a decentralized way, we really wouldn't need Bitcoin, either (except for the inflation thing)

Rassah,

First of all English isnt my mother tongue. Having said that, here is my proposal (i actually started this already on my own)

The problem with exchanges we have right now isnt about whos holding fund, its about orderbook is centralized (controlled by one entity). When MtGox is attacked and caused panic, 80% of btc trading is at mercy of this attack.

What we need is to decentralize the orderbook. A distributed orderbook system if you will. All the exchanges will just be front end and handle funds holding ...etc ( so they only compete thro customer service, fees and local banking connection)

To do this we need a new matching engine. One that can deal inserts and match operation per price level concurrently.

Thats roughly the idea. I know its hard to see the concept, but i will do a better presentation when the time comes.


Any questions or feedbacks please let me know.

[gollum]

Yes, I hope many of us can agree on a template for a decentralized exchange-broker system so we can make the BitCoin trading (or any other asset trading) more stable and secure!

I must say, great mind think a like.

I started this a week ago, all by myself. I do have my day job that feed the family tho so i'm working on this part time:

We've been trying to figure out how to do a decentralized exchange for about two years now. The problem is figuring out how to store fiat (USD/EUR) in a decentralized way. No one has figured that one out yet. If you figure it out, let us know.

But then, if we could figure out how to store and transfer fiat in a decentralized way, we really wouldn't need Bitcoin, either (except for the inflation thing)

Rassah,

First of all English isnt my mother tongue. Having said that, here is my proposal (i actually started this already on my own)

The problem with exchanges we have right now isnt about whos holding fund, its about orderbook is centralized (controlled by one entity). When MtGox is attacked and caused panic, 80% of btc trading is at mercy of this attack.

What we need is to decentralize the orderbook. A distributed orderbook system if you will. All the exchanges will just be front end and handle funds holding ...etc ( so they only compete thro customer service, fees and local banking connection)

To do this we need a new matching engine. One that can deal inserts and match operation per price level concurrently.

Thats roughly the idea. I know its hard to see the concept, but i will do a better presentation when the time comes.


Any questions or feedbacks please let me know.

[Nemesis]

I just read over your post and understood fully your proposal as i did think the same as well. What i'm afraid is you will run into concurrency issue with the matching algorithm. We need the orderbook to be as realtime as possible. The price/time priority is not easy to handle.

Yes, I hope many of us can agree on a template for a decentralized exchange-broker system so we can make the BitCoin trading (or any other asset trading) more stable and secure!

I must say, great mind think a like.

I started this a week ago, all by myself. I do have my day job that feed the family tho so i'm working on this part time:

We've been trying to figure out how to do a decentralized exchange for about two years now. The problem is figuring out how to store fiat (USD/EUR) in a decentralized way. No one has figured that one out yet. If you figure it out, let us know.

But then, if we could figure out how to store and transfer fiat in a decentralized way, we really wouldn't need Bitcoin, either (except for the inflation thing)

Rassah,

First of all English isnt my mother tongue. Having said that, here is my proposal (i actually started this already on my own)

The problem with exchanges we have right now isnt about whos holding fund, its about orderbook is centralized (controlled by one entity). When MtGox is attacked and caused panic, 80% of btc trading is at mercy of this attack.

What we need is to decentralize the orderbook. A distributed orderbook system if you will. All the exchanges will just be front end and handle funds holding ...etc ( so they only compete thro customer service, fees and local banking connection)

To do this we need a new matching engine. One that can deal inserts and match operation per price level concurrently.

Thats roughly the idea. I know its hard to see the concept, but i will do a better presentation when the time comes.


Any questions or feedbacks please let me know.

[Rassah]

First, yeah, look into P2Pool code. 10 second blocks, pruned blockchain, very nicely distributed. Might even be better if instead if a 0.001% fee, placing an order was free, and all orders that did not complete that are older than a day or two simply feel off the tail end of the block chain. Only charge a fee for completed orders. That way people can still put up and move walls, and if need be, resubmit their order every few days, without making the blockchain too bloated.

That said, there's still the problem of fiat money:

* How will it be stored? Will people wishing to act as brokers have to accept cash into their banks and store all the money in their checking accounts? If then don't get a business account, there's a risk of their account being flagged for suspicious activity and frozen, making other people's money go poof.

* Thanks to FinCEN, anyone wishing to be a broker will likely need a license. I'm guessing not cheap.

* Still huge issue with fraud and chargebacks. Brokers will be required to take on the risk of having scammers reverse deposits.

* How would bitcoins be transferred? Also through the broker? I'm concerned that if it's automatic, as a requirement to complete and close the order, the buyer of BTC might get his coins, while the seller might discover that there isn't any cash waiting for him at the brokerage (I guess trust issues)

* Last, depending on how the process will work, I'm not entirely sure this idea is possible from a technological point of view.


Other than that, I can't really think of any other issues.

[mobile4ever]

There is already a project that is moving in this direction:
https://ripple.com

But is that not in the hands of a few people? ( Not decentralized.)