Decentralized Exchange Technical Proposal - OrderBook blockchain

[airsheep]

There's been quite a few suggestions about decentralized exchanges
but they've generally petered out into either "Ripple will solve all
our problems (one day)" or "a decentralized exchange is impossible".

Here's what I believe is a fairly novel (but perhaps workable) idea
for how a decentralized exchange might work technically ...

Our decentralized exchange is a P2P system like bitcoin. There is
no central authority required.

It has a bitcoin-style block chain consisting of OrderBookBlocks.

Like bitcoin, proof-of-work is used to ensure everyone agrees on
the contents of the OrderBook block chain.

Each OrderBookBlock in the chain represents a snapshot of the "order book" -
that is, a list of the open Orders waiting to be matched on the exchange.

An Order in an OrderBookBlock would look something like this:

I want to BUY 5.0 BTC for USD at a price of 120.00 USD/BTC or better.

I enclose proof that I have 600 USD pledged for this order with
the "ClearingHouse" www.super-clearing.com - this in the form of
a "Pledge" signed with the ClearingHouse's private key.

I am willing to accept Pledges for bitcoins issued by the
ClearingHouse www.super-clearing.com (whose public key is ...),
and also by www.amazing-clearing.com (whose public key is ...).

Once an OrderBookBlock is complete, an agreed deterministic
algorithm can be used (by anyone) to determine which Orders
matched with which Orders. An Order can only match another
Order if its Pledge can be verified with one of the ClearingHouse
public keys listed in the other Order.

The traders can then collect their bitcoins or fiat from the
Clearing Houses, using the OrderBookBlock as proof that they
are entitled to the pledged funds.

Thoughts? Obviously there would be lots of details to be worked
out (fees for OrderBookBlock miners, protocols for orders and
pledges, a fair matching algorithm, ...).

[1715168837]

1715168837

[freequant]

Rename "Blockchain" by "Ledger", "Pledge" by "IOU", "ClearingHouse" by "Gateway", and "proof-of-work" by "consensus" and what you are discribing is ... Ripple. What you are proposing is an energetically wasteful version of Ripple.

[airsheep]

Ah, I hadn't noticed the "Project Development" board until my thread was moved here  

The proposal above has the following aspects of the ideas discussed on https://bitcointalk.org/index.php?topic=172705.0:

• one global order book (backed by consensus block chain)
• order matching occurs periodically (when order book block filled)
• multiple brokers (traders specify the broker(s) they trust)
• no coloured coins or new currency required

I didn't anticipate the need for trading between ClearingHouses / Brokers / Gateways - perhaps I missed somthing?

As freequant points out, yes, I broadly agree this proposal is a "subset" of Ripple.

But is that necessarily a bad thing - Ripple suffers from:

• being centralized (at present)
• being proprietary (at present)
• not being in widespread use (at present)
• solving a much bigger and more abstract problem
• introducing a new virtual currency with some dubious "pre-mining"

I just think it would be a shame to see all attempts to design a decentralized exchange abandoned in the hope that one day Ripple will take off ...

tumak - Yes, I should have said P2P rather than merely decentralized. I guess I will have to think about "conditional block withholding attacks"!

[Lemon]

I cannot be the only person who would prefer the stability and accountability of a fully accredited exchange...

[airsheep]

I cannot be the only person who would prefer the stability and accountability of a fully accredited exchange...

There's plenty of market manipulation possible even on a fully accredited exchange - e.g. "ramping", "painting the tape", "ghosting" (and all kind of other tricks that were routine in the early days of stock exchanges!). It's hard to know if it market manipulation is happening or not - we just have to trust the "fully accredited" exchange and the regulators to keep the market honest.

One advantage of a P2P exchange with a global order book block chain is that all orders ever placed can be seen by all - making detecting market manipulation much easier.

There may also be differences in incentives - a P2P exchange can be run for the benefit of all, whereas a central exchange is run for its own benefit (and may choose to ignore manipulation as long as it is not too blatant). For example, stock exchanges could use a "discrete double action" system to provide fairer order matching and limit high frequency trading. Why don't they? Perhaps because that would mean less volume and hence less fees ...

On the other hand, when it comes to the "looking after the fiat money" side of things, yes, I would prefer the fully accredited exchange!

[btcmind]

Several problems. Last price is enough to broadcast. In most cases you don't need the orderbook. You also need 100% of the orderbook, otherwise you can't trade. Something like P2P EXC could work when you abstract the trading needs appropriately. Trading itself on an exchange is fine. The question is really about the interaction with banks.

[Lemon]

I cannot be the only person who would prefer the stability and accountability of a fully accredited exchange...

There's plenty of market manipulation possible even on a fully accredited exchange - e.g. "ramping", "painting the tape", "ghosting" (and all kind of other tricks that were routine in the early days of stock exchanges!). It's hard to know if it market manipulation is happening or not - we just have to trust the "fully accredited" exchange and the regulators to keep the market honest.

One advantage of a P2P exchange with a global order book block chain is that all orders ever placed can be seen by all - making detecting market manipulation much easier.

There may also be differences in incentives - a P2P exchange can be run for the benefit of all, whereas a central exchange is run for its own benefit (and may choose to ignore manipulation as long as it is not too blatant). For example, stock exchanges could use a "discrete double action" system to provide fairer order matching and limit high frequency trading. Why don't they? Perhaps because that would mean less volume and hence less fees ...

On the other hand, when it comes to the "looking after the fiat money" side of things, yes, I would prefer the fully accredited exchange!

Fully public and transparent auditing and records can help to alleviate concerns of market manipulation. With our exchange, we've offered up 40% of the profits to people who want to invest BTC in the platform - and are using the remaining 60% to actually fund the platform (profits from flat rate fees of 0.18%). I expect at some point we will have to defend ourselves against accusations of manipulation however, though we're considering getting a respected legal/accountancy firm in to do regular audits on that basis.

[btcmind]

One advantage of a P2P exchange with a global order book block chain is that all orders ever placed can be seen by all - making detecting market manipulation much easier.

You can easily subscribe to orderbooks on MtGox and Bitstamp...

[airsheep]

What you are proposing is an energetically wasteful version of Ripple.

I agree that a proof-of-work based consensus algorithm (like in bitcoin, and in my P2P exchange proposal) is energetically much more expensive than the Ripple consensus algorithm (which is described at https://ripple.com/wiki/Consensus ).

And I agree that there's no reason why a P2P exchange has to use a proof-of-work based consensus algorithm - it just needs to use a well-proven P2P consensus algorithm.

But ... the bitcoin consensus algorithm has been demonstrated to work well over the last four years.

How confident are people in the Ripple consensus algorithm (which hasn't been tested yet)?

What other consensus algorithms can be considered well-proven in the face of huge botnets and hostile clients?