How to fix the exchanges - a professional view.

[Minor Miner]

Everyone keeps talking about decentralized exchanges.  Sorry if this is a dum dum head question...but where will the dollars be stored?

In your pocket or bank account.  Not in MtGox's account.

There would need to be a custodian to handle and arrange settlement.

Yes we need to have someone performing the role of custodian or clearing house, but if one broker is very trustworthy that broker can have the role of custodian.

We do not need to trade derivatives etc.   There needs to be places where you can change FIAT for BTC and vice versa.   Ever been to asia?  There are places on every corner that do this and in rome too.   That is all we need.   a trusted broker that has capital, you wire fiat, he sends your wallet btc and you never need to risk leaving your money with him,

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[Manticore]

Is naked short selling really good?
It will only worsen the volatility of bitcoin.
Assume i would short sell 100 000 bitcoins i dont have at mt gox, the price would crash down to 10$ in a second with an average price of maybe 30$.
Some people would panic and sell their coins and drive the price even more down, i would buy back all coins with profit with an average of maybe 10$ and could also go long at those levels.

No naked shorting......the BTC would be borrowed from a prime lender just as it would be during a normal short position in stock market.

Shorts & derivatives on any real scale are probably things that would require a mature market and only occur when/if there is more liquidity.....at this point we can barely handle long only positions.

Short selling reduces market volatility.

http://whitepapers.stern.nyu.edu/summaries/ch12.html

[Manticore]

And regarding the circuit breaker....

Yes, probably not the best way to handle it. But I do think it is doable for BTC. CME halts gold, oil, & gas, etc., occasionally due to volatility. Forex does not have circuit breakers for obvious reasons....although I believe any particular marketplace within forex could halt trading.

http://www.firstenercastfinancial.com/news/story/43046-cme-halt
http://www.euroinvestor.com/news/2013/04/12/cme-group-goldaposs-slide-triggered-trading-pause-friday-morning/12289041

IMO it doesn't necessarily matter that there are multiple exchanges. ADRs are traded on multiple exchanges and continue on one exchange or the other during trading halts or when one market is closed.

12 hour circuit breakers are ridiculous. Short circuit breakers are not entirely out of the question. This would be less of an issue if we had a legitimate exchange.

[Malawi]

Small transaction is not a problem by itself. The person with 0.0001 BTC should also be allowed to trade.
The problem is many transactions from the same origin in a short timespan.

If the small transaction from individual users were to be a problem due to amount of trades, they could just be collected into larger lots that are traded in one transaction. There could be one such transaction every x ticks(once a minute?), or whenever a whole slot of say 0.25 BTC is filled up .

[kazoo]

One big thing distorting the Mt Gox recent bubble was the ability to game the averages by making a bid you had know way of backing up. I think this is a big recent for the recent attack. Per MtGox, their statement about changing this, starting Wednesday:

Orders will only be accepted when there are enough funds available in your wallet!   Dear users, starting on April 17th we will be rolling out a minor change on how people place orders via the Mt.Gox interface.  Until recently, anyone could place a buy or sell order for Bitcoin, regardless of how much funds were actually available in their wallet, resulting in an order showing a "Not enough funds" error status in the Open Orders list.  Starting on April 17th, this counter productive scenario will no longer be possible and will be automatically rejected before validating your order; until you have enough funds in your wallet to match the order value.  While this change should only affect a minority of users, it will however have a major impact on our trading platform and improve our system overall performance.

It must have been easy for the bad actors to inflate the price, under these conditions. Of course, if I'm missing something, that wouldn't be the first time.

[CasinoBit]

If more than 5 transactions in a minute > display captcha = software DDOS solved
Physical ddos protecting router = hardware DDOS solved

How hard is it exactly?

[ChristianK]

If more than 5 transactions in a minute > display captcha = software DDOS solved
Physical ddos protecting router = hardware DDOS solved

There too much money to be made by manipulating the Bitcoin price with
DDoS that a single ddos protecting router is able to handle the issue completely.

Maybe the people that run the DDoS even want ransom to avoid DDoSing MtGox.

[Manticore]

If more than 5 transactions in a minute > display captcha = software DDOS solved
Physical ddos protecting router = hardware DDOS solved

There too much money to be made by manipulating the Bitcoin price with
DDoS that a single ddos protecting router is able to handle the issue completely.

Maybe the people that run the DDoS even want ransom to avoid DDoSing MtGox.

But there really isn't. How would a nefarious DDoS attack squad profit from completely destroying Bitcoin?

Everyone acts as if Bitcoin's success is a foregone conclusion, so a shadowy group would aim to DDoS attack (assuming that creates a panic....doubtful) so they could pick up cheap coins because they will definitely be worth much more in the future.

No, that is not a business model. There is no guarantee that they will ever be worth more in the future.

And at this point how would a DDoS even be successful in dropping the price now that everyone has been fooled into believing this DDoS nonsense? It's an excuse that, if believed, would boost the price because everyone would stop selling whenever we have a lag.

If anything, the lag prevents a sell-off. Is Bitcoin really so fragile that a temporary lag annihilates the currency? If so, that is even scarier than the supposed DDoS attacks.

The only entity that stands to benefit from lags are Mt Gox, IMO. The lag stems the sell-off, as I've posted ad nauseum. Having you believe this nonsense supports the price of bitcoins. The sell-off always starts prior to the lag. The system becomes unresponsive at key support levels and almost never breaks these levels (only during the crash). Tiny bot buys support the price fiercely and the price turns around.

Statements from Mt Gox would lead you to believe that the only time the price ever goes down is during is DDoS because Bitcoin simply doesn't go down.

[Manticore]

If more than 5 transactions in a minute > display captcha = software DDOS solved
Physical ddos protecting router = hardware DDOS solved

There too much money to be made by manipulating the Bitcoin price with
DDoS that a single ddos protecting router is able to handle the issue completely.

Maybe the people that run the DDoS even want ransom to avoid DDoSing MtGox.

I do like that you've at least come up with something creative.....ransom. Doubtful, but at least this makes more sense than the DDoS/panic nonsense that everyone seems to believe.

[TimJBenham]

3. Create a minimum trading size, the tiny bot trades of $1 are swamping the system and add nothing.

This would definitely be a good start...

Good points, but the ultimate solution is a decentralized exchange period. 

Trying to build on the wrong foundation is simply building a robust house on sand.  It's only a matter of time before its central point of attack is overwhelemend.

...decentralization is the only solution.

+1

I don't understand the obsession with decentralization. It might be useful but there are many successful financial exchanges that are centralized.

[matthewh3]

3. Create a minimum trading size, the tiny bot trades of $1 are swamping the system and add nothing.

This would definitely be a good start...

Good points, but the ultimate solution is a decentralized exchange period. 

Trying to build on the wrong foundation is simply building a robust house on sand.  It's only a matter of time before its central point of attack is overwhelemend.

...decentralization is the only solution.

+1

I don't understand the obsession with decentralization. It might be useful but there are many successful financial exchanges that are centralized.

Well they're none in the UK any more when we used to have access to both Intersango and MtGox Barclay's.  Both were forced to shut for banking reasons.  Buying bitcoins in the UK is both expensive and difficult for smaller transactions or new buyers.

[buryfarmer]

My solution for a decentralised exchange would be this: www.poundcoin.org

[TimJBenham]

I don't understand the obsession with decentralization. It might be useful but there are many successful financial exchanges that are centralized.

Well they're none in the UK any more when we used to have access to both Intersango and MtGox Barclay's.  Both were forced to shut for banking reasons.  Buying bitcoins in the UK is both expensive and difficult for smaller transactions or new buyers.

No  successful financial exchanges in the UK? What about the LSE?

[spndr7]

I don't understand the obsession with decentralization. It might be useful but there are many successful financial exchanges that are centralized.

Risk of failure of central node and need to eliminate escrow(trusted third party).

Decentralized trading is not possible with fiat currencies as they themselves are fully centralised.


Have a look at my proposal of decentralized trading between alternate crypto-coins.

https://bitcointalk.org/index.php?topic=112222

[TimJBenham]

I don't understand the obsession with decentralization. It might be useful but there are many successful financial exchanges that are centralized.

Risk of failure of central node and need to eliminate escrow(trusted third party).

Decentralized trading is not possible with fiat currencies as they themselves are fully centralised.

That's nonsense. In fact the forex market is one of the few professional financial markets that is distributed.
http://en.wikipedia.org/wiki/Forex

[fivemileshigh]

Every time I've had a problem with an exchange it was caused by the fiat side. Have a look at the bitcoin.de model: centralised BTC (basically an automated escrow service), fiat changes hands via free p2p SEPA transfers. We need more of these kinds of exchanges.

[spndr7]

That's nonsense. In fact the forex market is one of the few professional financial markets that is distributed.
http://en.wikipedia.org/wiki/Forex

But govt. control monetary policies by sometimes manipulating forex price of their currencies as they have full control of minting money and its initial distribution.

[TimJBenham]

The reason traditional financial exchanges don't have the problems that MtGox is having largely comes down to something everyone here hates, brokers. In the traditional model Joe Public does not talk directly to the exchange. He talks to a broker who talks to the exchange, or as it happens now, his computer talks to the broker's computer that talks to the exchange's computer through secure channels. There is no public exchange IP address to DDOS. (They would have a corporate site, but that just has corporate info and maybe some delayed quotes).

If MtGox followed this model the advantages would be several. They would be free to concentrate on their core business (matching orders). Their AML/KYC burden would be restricted to (say) ~1000 broker accounts total, not hundreds of thousands of new client accounts per year. They wouldn't have to pay for DDOS protection or deal with client scams and complaints. That's the brokers' job. Of course they would have to slash their fees to let the brokers eat, but their costs would also be much lower. Selling access rights to the brokers would be an new source of income.

The objection that everyone will have is "what do we need brokers for, they are just useless parasites". Well they are not useless: they are paid for being the exchange's meat shield.

[zebedee]

4. Forget about circuit breakers or 'cooling off', this only works when assets are only traded on only one exchange (ie NYSE/Nasdaq) which is why you do not see gold or Forex stop trading. The market continues and your customers are left helpless.

Great insight, thanks for that.  How true, and what a load of cobblers the whole trading halt lark is.

[ex-trader]

There is no public exchange IP address to DDOS. (They would have a corporate site, but that just has corporate info and maybe some delayed quotes).

Nice theory, but the brokers still need a public facing site with an IP address, which can then be DDOS'd.

The problem here is the exchanges have not spent the money they're making in developing adequately secure and resilient sites, it's that simple. The same would apply to a broker-led community. The difference is that a fragmented set of brokers would have less money to spend on security and resilience each than a good large single exchange like MTGOX.

MTGox can resolve this, they just need to throw some money at it.