Can someone better explain: BTC<->exchanger<???>Dwolla<->USD

[dontListen2me]

What kind of mechanism is it that gives the exchanges the ability to exchange?

I am not understanding this supply chain very well. It feels sketchy.

Basically, I am confused as to how BTC are converted to liberty reserves, dwolla bucks, etc.

Does Mt.Gox for example have a large sum of dwolla bucks that they manage around?

[you2]

The easiest way is to exchange into LR($) (Liberty Reserve) and then try to sell LR($) into Cash (like US-$ or EUR)

[dontListen2me]

Just trying to understand the process.

I'm not educated in stocks and economies.

I am however confused as to how the exchanges function. Are there wikipedia links or something similar someone can recommend?

[grod]

They function very simply.  When you deposit funds (whether dollars or bit coins) into your account they are held by the exchange.  Then when you match a buyer and a seller of one currency into another, the funds are moved between the two accounts and a commision is deducted.

The exhanges are simply a trusted third party holding funds and performing the actual trade.

Dwolla and others are simply a way to send money between established real world banking entities.  When you deposit or withdraw funds from mtgox they move them between real world bank account #1 (yours or mtgox) and real world bank account #2 (theirs).

[breminp]

Simple diagram to explain hash to cash

http://www.bitcoinpincher.com/hash-to-cash

Mt. Gox is simply marrying buyers to sellers... and Buyers already have $$ in their accts and sellers already have bitcoins in their accts, so they don't need a stockpile of coinage.