So let's say we solved the magical problem of centralized exchanges...

[coastermonger]

Central exchanges like MtGox, BTC-e, and others have their pros and cons.  The bad news (as we have seen in the past few weeks) is that they are vulnerable to DDos, government shutdown, and regulation.  Additionally you are limited to exchanging only the types of currencies that the exchange chooses to operate in.  And then there's liquidity.  Sometimes a central exchange can be awesome, but has too few users to be cost effective. 

A decentralized exchange is supposed to solve some of these problems.  They're much harder to directly attack or shutdown.  A few concepts like ripple and buttercoin have been proposed too (ripple currently being the most viable)  Yet one of the problems that even a decentralized exchange still must negotiate is that it has to use payment gateways of sorts.

Let's say I'm a new user and I want to use a decentralized exchange to buy bitcoin.  I gather my fiat, I see an offer and...wait crap, who do I send my fiat to?  For ripple, this is one example of a gateway https://dividendrippler.com/.  I can't send USD there.  A more viable payment gateway is bitstamp.com, where I can actually wire a cash deposit from my bank, then wait for it to show up, then buy bitcoins, then send the bitcoins or ripples to my ripple wallet.  Whew.  It's not simple enough yet.  Once in the ripple network I can supposedly trade.  And we're also right back to trusting exchanges again, or in the case of buttercoin, credit unions. 

I don't know, maybe I can't see it.  Can someone explain how an ideal decentralized exchange is supposed to operate without trusting some central authority to handle the fiat?

[franky1]

localbitcoins.com

[coastermonger]

localbitcoins.com

Sure I know about localbitcoins, but could you clarify how that could work with a decentralized exchange? One of the biggest problems with LB is that someone has to be in your area, prices can vary wildly, there might not be enough supply to meet what you want to buy, and you have to specifically trust a person who you may or may not know.  The whole idea of an exchange is that I can get on there and make a purchase without regard to my location, without regard to size, and without having to deal with the people selling it.

[CIYAM]

If you believe in the future of digital currencies then the only *exchanging* you will need to be doing is that of your efforts (to *earn* coins) or that for service/product providers (to *spend* coins).

The speculation part is really not that important (although a good way to try and get coins without much effort if you are prepared to take the risks that go along with combining non-reversible digital currencies with reversible fiat ones).

If you can earn coins and spend them for everything you need then why do you still need to be converting coins to fiat on an exchange?

[cbeast]

There's really no way to get around regulation here unless you have cash delivered by mail or courier. Having said that, maybe what we need instead is a Bitcoin based courier system. In the US, they are shutting down the Postal Service in many areas and there will be a need for a new private delivery system anyway. There have been discussions about this. There are ways to mitigate trust in courier systems using escrow. Bitcoin has a unique advantage there.

[ZephramC]

localbitcoins.com

I will play devil's advocate and ask: How do you do high frequency trading and minute-to-minute speculation with localbitcoins.com?

(I know the obvious answer: "Don't (do HFT and speculation). Bitcoin is not a get-rich-quick-in-fiat scheme." But there are many people who do and will want just that.)

[franky1]

localbitcoins.com

I will play devil's advocate and ask: How do you do high frequency trading and minute-to-minute speculation with localbitcoins.com?

(I know the obvious answer: "Don't (do HFT and speculation). Bitcoin is not a get-rich-quick-in-fiat scheme." But there are many people who do and will want just that.)

the OP asked how to get away from centralised exchanges. well if you imagine an exchange for every town then each town would base prices on that towns exchange. making that towns exchange locally centralised.

a non centralised exchange is where everyone has a different idea of value and that you are not paying into one bank account to deal with multiple people. but dealing individually.

so local bitcoins is the only true method to non-centrally exchange your currencies.

if the OP asked for a a method to have more then a dozen exchanges for HFT where everyone did not base the price purely on MTGOX then my answer would have been different.

[btcmind]

You could theoretically have a network which operates within the traditional banking system. Instead of exchange BTC to fiat, you would a P2P network in fiat which mirrors BTC to fiat transactions. That would be a counter measure if BTC would be shutdown completely.

But if you would receive your money in BTC, there is no need to transfer it into fiat. Banks will certainly take counter-measures and they have already. So this means there will be many games played around this, i.e. transfers from jurisdictions where BTC is blocked to BTC where it is not blocked. There will always will be gateways unless you have a "darknet", which is what localbtc is. But imagine transfering more than 1000$ via localbtc. Pretty scary and dubious. I think the next wave of BTC will be in certain countries, which are not so heavily regulated. The price will be very volatile anyway, so few people will consider a safe store of value, and insurance will be too expensive. The potential benefit to countries with unstable money and unstable infrastructure are much greater at first than to US and Europe.

[WilderedB]

Localbitcoin is a great idea but I have a total of one person in my area - and it's me.

Next nearest is a 1 hour flight away.

I like the idea but it's nothing like a replacement for exchanges.

[coastermonger]

If you can earn coins and spend them for everything you need then why do you still need to be converting coins to fiat on an exchange?

I see this as a common mentality cropping up, if we can just receive coins as payment for services, then why would we need a fiat exchange at all?  Because sadly I can't always receive btc as payment for services.  My employer in my home country will probably want to just pay me in fiat.  Assuming my employer even decided to start paying me in bitcoin, where would they get it? They have to go through a btc issuer first.  Issuers set their own prices, they're all over the place, it's nice to have some central consensus of what the exchange price should be.

Going the other direction is equally as important.  If there was no easy way to get BTC into fiat you'd see a flood of people completely unwilling to trust it, afraid of being "locked in" to a specific currency.

[mobile4ever]

  Can someone explain how an ideal decentralized exchange is supposed to operate without trusting some central authority to handle the fiat?

A true P2P decentralized exchange should be modeled on free open source software. It will be able to put a buyer and seller together, face to face or email to email, however:



https://bitcoinstarter.com/projects/54

[qxzn]

I agree with OP, "decentralized exchange" is a vaporware concept.

From what I can tell about buttercoin, it's not a decentralized exchange, but rather a scalable and fast order book. I do expect the mtgoxes of the world will soon upgrade to scalable and fast solutions.

Even with ripple, you end up with centralized USD gateways, whose IOUs are not all the same value. In other words, if the community trusts a certain kind of USD IOU a lot, say mtgox, then it's worth about 1 USD (or possibly even more, I suppose, when there is high demand for it, like now). On the other hand, bitfloor USD IOUs would probably be trading at a deep discount right now.

The point is, this idea that "a dollar is a dollar" regardless of where it is, who is holding it, how accessible it is, etc., is just false. This "decentralized exchange" idea seems to rely on this false premise.

If somebody wants a fast and reliable exchange, I propose another solution: build a conventional exchange (1) in a friendly jurisdiction (2) with solid banking contacts, (3) hire some HFTs (like myself) to make your technology good, and (4) restrict access to a smaller, more managable number of market participants (read: brokers).

[btcmind]

and last not least (5) hire an army of lawyers.

From what I can tell about buttercoin, it's not a decentralized exchange, but rather a scalable and fast order book. I do expect the mtgoxes of the world will soon upgrade to scalable and fast solutions.

I guess they figured, if they have a chance to make maybe 10-20m/year why opensource? In terms of architecture it is best to do the exact opposite of what these guys are doing.

[herzmeister]

I had an idea lately. It could work something like this:

1. There is a fiat ledger database. It can be a distributed. It only contains internal bookkeeping information. Much like Ripple.
2. Any exchange website can use this database. Such a website can also run in Tor.
3. I'm new, I want to buy bitcoins, I register and log on to one of those exchange websites.
4. It looks and works like any other exchange. First, I have to deposit some fiat.
5. This website does not manage its own bank account however.
6. Instead, it tells me to wire-transfer the money to some random guy's bank account.
7. After a while, the random guy has confirmed he received fiat funds, and sends an appropriate confirmation to the network.
8. I now have my fiat displayed in my exchange account.
9. Everything looks and feels just like MtGox and other exchanges. No OTC crap. I can instantly buy and sell BTC for fiat. It's just local bookkeeping for the website after all at this point.
10. I've made some gains (or not) and want to cash out some or all of my fiat.
11. The network picks one or more appropriate candidates who want to deposit fiat to buy bitcoins.
12. From their point of view, the random guy of point 6 is now me.
13. I have to send a confirmation to the network, probably manually, that I've received my funds.
14. Mission accomplished.

Remarks:
A) The fiat ledger database contains all the necessary bookkeeping, but should keep private information like bank accounts secret.
B) However, cheaters could be blacklisted and their bank account details could be published.
C) Deposits and withdrawals may take quite a long while depending on current market parameters as there'd essentially be internal waiting lists that would have to be matched. Spectacular price crashes and bubble bursts can have dramatic effects in this regard.
D) There probably are still some unresolved issues with this whole idea.

[btcmind]

Yes, I thought of roughly the same. Problem is that a) identities are stored in one location (or worse at many openly) b) you still need a trusted network. There is no where around the fact that you have interfaces with banks or cash (and therefore regulation) every time you enter or exit the BTC system. The way I see it at some point AML kicks in. The people in this suggested network are really ML mules depending on the jurisdiction.

The most interesting aspect for me is that BTC is an alternative in case of a complete financial crash. And for this reason alone, even if adoption would stay extremely low, the value of the network is gigantic. My prediction is that BTC will emerge in countries where it has immediate value, and only much later in the richest nations. This will be truly fascinating to watch as it plays out.

[Elwar]

Ideally...a decentralized exchange would work like this:


You open the application. You have a list of bid/ask prices. Each bid/ask also has a means of payment and a user rating.

You have money in ING so you narrow the bid/asks down to using ING p2p payment. You see several options then you narrow it down again by rating (you only want 100% trusted with more than 100 trades). You see the best price for those criteria and you execute your buy. You send the money and get the bitcoin and rate the transaction.


Also, ideally, the software will include an easy API for every type of payment method for sellers. So you can hook your bank account up to the software and have it automatically send bitcoin once the correct amount has been transferred to your bank account. Even an API (all open source of course) to allow you to send money from your account in exchange for bitcoins.

If people want more access, they will set up more means of funding accounts which will give them better prices.

That is ideal. But the government destroys ideal.

[btcmind]

Then crosses don't work. A limit order book means that you can cross the orders in the book. The point of a market for a completely fungible good is that all orders can be crossed. Actually this is in a way what money is. Instead of transacting in pigs or horses you transact in a medium which abstracts from that. An order to buy 5.0 @ 120 BTCUSD is completely sufficient. So all you have in the system is a long list of buy and sell limit orders. And they meet at one central point. There is no way around that. But you have traders, brokers and exchanges who specialize in putting an orderflow optimally through the system. The question is how the fees are distributed. Perhaps one could somehow link the fees to the BTC network.