Primer for a P2P Distributed Exchange

[notme]

How do you ensure that each bitbuck on the chain is actually backed by a dollar?

Yeah that's the problem. Colored coins might be the solution. I'm still reading the OT + BM thread (https://bitcointalk.org/index.php?topic=212490.120) with great interest.

Colored coins is simply marking a particular satoshi (or group of satoshis) as representing something else so that ownership of that asset can be transferred.  You still have to trust the issuer of the asset that they actually have what they claim they have.

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[nwbitcoin]

Wow, I really like this idea!

Having a cryptocurrency pegged to the USD or something will allow anyone to convert it to BTC easily.

The only problem is adoption. This new cryptocurrency (say, BitBucks) will actually solve the problem, but only if everyone accepts it. If everyone in the world accepted BitBucks, then it would be easy to convert between fiat and BTC! If no one accepts it, then no one will want to convert to BitBucks because its useless.

So you have the same problem as Bitcoin where the market is determining its value, yet we want to peg the value of BitBucks to the USD.

Just thinking out aloud here...

How do you ensure that each bitbuck on the chain is actually backed by a dollar?

Its backed by the fiat of the person who converts the voucher to fiat!

So, its just like the voucher system currently used by the exchanges, except its going to be your local joe banker who is converting your voucher to dollars, or euros or whatever. 

The other side of this is that it might be useful if these virtual bankers were to mine their own voucher coins, so there was no need to create a market for these pegged coins.  If the coins are extra low value, and can easily be mined on a CPU, The actual value per coin can be worked out as being 1% more than the electric needed to mine them.  So, we would say something like 10 digital fiat vouchers is worth 0.1c and will be for the next 12 months when the formula between coins produced, electricity used and the value of fiat can be reassessed by a mining committee of some kind!

These are all ideas that need your interaction to make them work - does this sounds doable in your part of the world?

[greBit]

Before someone says: "Hey, colored coins can move Fiat..." I assure you that so far everyone talking about them has only suggested holding an IOU in colored coins, which is simply not good enough for our needs. Any attempt to have some kind of bank fulfill an IOU is to make a CPOF again.

But we know that the actual value of Fiat can and already is held in software now! Most of the planet's Fiat DOES exist only as digital currency, and moves just fine through networks like Wire transfers, SWIFT, SEPA, and ACH. -So if those networks can get access to the value of nationalized currency, then we should be able to as well... As an example, think of doing an ACH transfer to a software client, and from there it exists only in your online wallet as fiat credit.

If you take out the decentralized fiat requirement then the system can be built fairly easily. It is just a technical problem. We could end up with a P2P version of localbitcoins with some 'real-time' trading functionality, where escrow is used to enforce trading rules.

But as you say, we must have this instant-trading facility for it to be a successful replacement for MtGox. To do this we must have some cryptographic representation of fiat, so it too can be kept in escrow and traded like Bitcoin, quickly.

Real-time trading does not work if I have to keep checking my bank account to see if Bob has sent me the $10000 or not. Which can take days. Even if it takes an hour, it is too slow.

So for instant trades we need to store a fiat balance somewhere.  How can that be done without requiring IOUs and trusting some third party to keep my money safe?

The only solution I see is in having a distributed set of IOU issuers who deal with fiat. Trust cannot be avoided, but at least with a federated system you can spread the risk, and probably chose to only hold onto IOUs for a small amount of time.

So if we have decided that we need to represent Fiat as some crypto IOU style token (a c****ed coin) then we can alter the original requirements so that it no longer mentions fiat.

I would argue that we need:

1) A P2P real-time trading platform for crypto currency. (no mention of fiat)

And completely separately,

2) A lively ecosystem of dealers of IOUs that allow you to get fiat in and out of the P2P platform.

I would also argue that a nice solution to 2) could end up looking like Ri**le, without XRP and where the project is entirely open source.

[nii236]

2) A lively ecosystem of dealers of IOUs that allow you to get fiat in and out of the P2P platform.

I would also argue that a nice solution to 2) could end up looking like Ri**le, without XRP and where the project is entirely open source.

This second part is what makes it all work. The issue is gaining enough ground to get local IOU sellers in every corner of the world. Then what happens if everyone wants to cash out in only one currency? There won't be enough of that type of fiat to redeem all of the IOUs!

Not to mention it will be difficult to control the issuing of IOUs. Mining them for cheap won't help if the value is pegged to the USD, it means the miners will be making value off nothing.

[greBit]

This second part is what makes it all work. The issue is gaining enough ground to get local IOU sellers in every corner of the world. Then what happens if everyone wants to cash out in only one currency? There won't be enough of that type of fiat to redeem all of the IOUs!

Not to mention it will be difficult to control the issuing of IOUs. Mining them for cheap won't help if the value is pegged to the USD, it means the miners will be making value off nothing.

An issuer should only issue an IOU when it is capable of redeeming it. I would prefer my issuer to hold 100% of my deposits and not do fractional reserve, to insure against a bank run.

Not to mention it will be difficult to control the issuing of IOUs. Mining them for cheap won't help if the value is pegged to the USD, it means the miners will be making value off nothing.

I think you are a bit mixed up here.

Only Bob can create Bob-IOU, only Alice can create Alice-IOU. Miners have nothing to do with it.  The market will decide how to value Bob-IOU against BTC or other IOUs, depending on the levels of trust people have in Alice and Bob.

[nii236]

An issuer should only issue an IOU when it is capable of redeeming it. I would prefer my issuer to hold 100% of my deposits and not do fractional reserve, to insure against a bank run.

How would this be controlled?

[greBit]

An issuer should only issue an IOU when it is capable of redeeming it. I would prefer my issuer to hold 100% of my deposits and not do fractional reserve, to insure against a bank run.

How would this be controlled?

Well yeah thats the issue. Nothing would prevent Issuers doing the same as my bank and only holding 2% of customer deposits, and gambling the rest.

There are possible ways in which an issuer could prove his trustworthyness, he could get independent audits, get digitally signed bank statements perhaps

[nwbitcoin]

This second part is what makes it all work. The issue is gaining enough ground to get local IOU sellers in every corner of the world. Then what happens if everyone wants to cash out in only one currency? There won't be enough of that type of fiat to redeem all of the IOUs!

Not to mention it will be difficult to control the issuing of IOUs. Mining them for cheap won't help if the value is pegged to the USD, it means the miners will be making value off nothing.

The key word here is local fiat - it doesn't have to be USD or anything, it just needs to be fixed to the value of a single currency, so you know that 150 fiat vouchers is worth .01 US Cent - for at least 12 months. What its worth in exchange for a Euro is dependant on what the dollar is worth compared to Euros and is a world standard rate.  The local Joe Bankers just need to know their local exchange rate to be able to be a money changer.

[waxwing]

Right.  Fiat is out if we want true decentralization without physical meetups.

Not necessarily. https://bitcointalk.org/index.php?topic=210903.0

Unless you can solve the issue of reversibility that exists with all digital fiat transfer mechanisms, as well as a solution to the escrow issue addressed above for cryptocurrencies, I remain unconvinced.

That's why the architecture I describe is completely focused on wire transfer. Wire transfer is the closest thing to a 100% irreversible fiat transfer outside of cash.
This is built in to banking architecture; current accounts (or checking accounts in the US vernacular) are intended to be good-as-cash accounts; what is recorded in your account can be withdrawn at any time, meaning it has to be a cash-like electronic account, meaning transfers into it have to be irreversible.

Escrow: I described the use of 2 of 2 or 2 of 3 escrow mechanisms in the use cases and the high level description.

[luv2drnkbr]

Wow, I really like this idea!

Having a cryptocurrency pegged to the USD or something will allow anyone to convert it to BTC easily.

The only problem is adoption. This new cryptocurrency (say, BitBucks) will actually solve the problem, but only if everyone accepts it. If everyone in the world accepted BitBucks, then it would be easy to convert between fiat and BTC! If no one accepts it, then no one will want to convert to BitBucks because its useless.

So you have the same problem as Bitcoin where the market is determining its value, yet we want to peg the value of BitBucks to the USD.

Just thinking out aloud here...

How do you ensure that each bitbuck on the chain is actually backed by a dollar?

You would need a large centralized source, like a big bank, that simply buys and sells them for $1 no matter what other markets are doing.  Then nobody has any incentive to change the price.

[nii236]

Yeah but then you have the "Big Bank Centralisation Bad" thing going on all over again!

[nwbitcoin]

How do you ensure that each bitbuck on the chain is actually backed by a dollar?

You would need a large centralized source, like a big bank, that simply buys and sells them for $1 no matter what other markets are doing.  Then nobody has any incentive to change the price.

NO you wouldn't - you would just need an understanding that these vouchers are worth a fixed amount and there is no point trying to sell them for any more because nobody is going to pay you any more - the value in holding them is the fee for transferring them to and from fiat.

Its just like the fact that bitcoin has a market driven price based on its perceived value - if there were 200 Bn bitcoins, the price would be easy to keep to a fraction of a penny without any kind of centralisation - same deal here.

This is why I would have thought using Devcoins might be a nice twist.  There is an incentive in using them for a related purpose, and they already have a plan to mine millions of them, so its a kind of short cut! In fact, the use of a parity with a fiat would be of benefit to Devcoin too!

[franky1]

the OP seems to want a decentralised exchange, yet wants it to be a decentralised platform like mtgox....

seriously. if there is 1 single website used as the order book.. its then centralised.

how about set up regular meetups and have people do local face to face cash in hand exchanging. that way its not centralised for the masses, not reliant on bank transfers (causing banking regulation issues) the prices can vary dependant on local value as oppose to mass agreement on a single website (again centralised pricing).

i just think the OP is missing the point of what he/she really wants. the closest thing to a decentralised place where there is no central pot(account) of FIAT and there is still a order list of buys and sells. would be localbitcoins.com.

anything else would be cash in hand meet ups as a full decentralised peer-to-peer exchange or mtgox as a fully centralised exchange.

so where abouts in the spectrum between face-to face 1-on-1 exchange or mtgox fully centralised exchange does the OP envision his ideal plan bet put.

[CypressXM]

I've seen no less than ten different threads pop up here from people wanting to start a P2P decentralized/distributed exchange, but each and every single time, without fail, the definition of what a P2P distributed exchange actually is gets totally forgotten and the thread dies... Sometimes without a single mention of the word Ripple, too! 

The sad thing is, Bitcoin desperately NEEDS a P2P Exchange... It's not like we don't know already that MtGox is a single point of failure that could severely set us back any day now... We all instinctively know this, and most of us know that if uncle sam made bitcoins "illegal," they'd come after ALL of the exchanges at the same time, yes, even in England, Germany, Canada and Oz too. Obomba's done worse already.

So we all agree that we need to replace these central-points-of-failure (CPOF) allowing access into the bitcoinoshpere, but we simply have not yet been able to agree on what the replacement should look like.

...Which is silly actually, because a P2P distributed exchange is a VERY specific thing!

It must have all the functionality of a full, real-time trading platform (MtGox or better) yet be completely distributed software with no CPOF. This marriage of unique properties would require a very specific feature set and design, yet every time a thread pops up on here calling for one, half of the forum chimes in with comments like "Open Transaction can do that," "Buttercoin was made to do that," "LocalBitcoins can do everything you need," and of course: "Ripple already does it!"

I got news for you weekend bitcoin warriors: Those services ARE NOT distributed replacements for MtGox... They just aren't, by design.

So in order to combat this huge problem that we all desperately need solved, I'm making this thread to DEFINE what criteria exactly a P2P Distributed Exchange needs to meet. These are my ideas, but please feel free to throw in your own.

A P2P Distributed Exchange MUST:

• 1. Be without any central points of failure, since a government or two WILL be coming after it one day. I suggest a Bitorrent-like software schematic.
• 2. Show everyone a very large number of possible trades to choose from, (thousands?) so assets can form a stable price. (e.g. a Bitcoin is going for $120)
• 3. Transact trades pretty much INSTANTANEOUSLY, so when you're watching a graph and want to trade at a very specific time you can do so. (This is extremely important for arbitragers and other traders who help keep the price fluctuation down.)
• 4. Offer Graphs and APIs for for graphing like MtGox does.
• 5. Have three-user (trustless) trading, so a non-interested 3rd party always hosts the trade between the buyer and seller. (And should provide Escrow too!)
• 6. Hold and transfer VALUE, not just IOUs. (With Cryptocurrency this is easy... With fiat? Not so much.)

Those are my must-haves. I will never spend a second helping out any software that doesn't meet all 6 of those criteria. You shouldn't either. Again, if you know something I've overlooked, feel free to add it below.

Having thought really hard about this nonstop since the April bubble pop, I've devised most of the system and exactly how it would work, with the exception of exactly one thing... Holding the value of the Fiat (nationalized currencies) within the software.

If we can solve this one issue, I'm convinced we'll change the entire investing world with this software and make bitcoin safe from all attacks that don't involve nuclear weapons... However even if we don't fix this, the system can be programmed up right now to trade between cryptocurrencies just fine.

Before someone says: "Hey, colored coins can move Fiat..." I assure you that so far everyone talking about them has only suggested holding an IOU in colored coins, which is simply not good enough for our needs. Any attempt to have some kind of bank fulfill an IOU is to make a CPOF again.

But we know that the actual value of Fiat can and already is held in software now! Most of the planet's Fiat DOES exist only as digital currency, and moves just fine through networks like Wire transfers, SWIFT, SEPA, and ACH. -So if those networks can get access to the value of nationalized currency, then we should be able to as well... As an example, think of doing an ACH transfer to a software client, and from there it exists only in your online wallet as fiat credit.

So that's the final problem to solve, and once we fix that, the rest of this program will fall into place:

That's a diagram of the parts of a fully P2P Distributed software client that is self-promoting. All you have to do is download this thing, keep it running, and it will make you money as fees for other people's trades. Like bitcoin miners, first adopters will get paid the most often, so it's sure to take off and spread worldwide easily like bitcoin did.

How would a transaction work? I've charted some of that process too:

After the trade is matched on Mary's machine, both Tim and Bob send their currencies to Mary's escrow wallet, and as the 2nd of those is received, she sends out the traded currencies MINUS HER FEE from both. (This amount could either be hard-coded in, or a user setting like the BTC transaction fee.)

All of that will be done hands free, and Mary's client will send out a "stop" signal to all clients for those traded amounts. An API feed can also be generated for anyone to graph all of these trades from the viewpoint of any particular client.

Anyway, long post I know, but I hope we are starting to get on the same page here. THIS is a P2P exchange, and of course it's not the only way to do one but no one else here has mentioned anything else at all that meets all of the criteria for a truly distributed P2P exchange before.

Again, if you can think of more necessary criteria for my list above, please add it here.

Now let's get this thing made!

The mechanics of moving the currencies? How will dollars move from my wallet to theirs? I'm starting to think this is a pointless masturbatory retardo idea unless someone can explain how the currency exchange will work.

[nwbitcoin]

The mechanics of moving the currencies? How will dollars move from my wallet to theirs? I'm starting to think this is a pointless masturbatory retardo idea unless someone can explain how the currency exchange will work.

You decide to get some bitcoins.

You visit a website where you can register or top up your local currency vouchers.  You can do this online as a wire transfer or by visiting some guy in your local town.  He will change your $100 for 100 fiat vouchers and put them in your exchange account for a fixed price.

On the exchange website - which is more like a torrent search engine page in that there are lots of different exchange websites, but the data is all the same - you can find bitcoins to buy for your fiat vouchers.

You place an order for some bitcoins and the proces as set up by the OP takes place.

When you want to sell your bitcoins for fiat, you do it all in reverse

You take your fiat vouchers to a local dealer who will change your vouchers for fiat for a fixed price.

Does that make sense?

[charleshoskinson]

Why not use bittorrent sync for the database? http://labs.bittorrent.com/experiments/sync.html

[CypressXM]

The mechanics of moving the currencies? How will dollars move from my wallet to theirs? I'm starting to think this is a pointless masturbatory retardo idea unless someone can explain how the currency exchange will work.

You decide to get some bitcoins.

You visit a website where you can register or top up your local currency vouchers.  You can do this online as a wire transfer or by visiting some guy in your local town.  He will change your $100 for 100 fiat vouchers and put them in your exchange account for a fixed price.

On the exchange website - which is more like a torrent search engine page in that there are lots of different exchange websites, but the data is all the same - you can find bitcoins to buy for your fiat vouchers.

You place an order for some bitcoins and the proces as set up by the OP takes place.

When you want to sell your bitcoins for fiat, you do it all in reverse

You take your fiat vouchers to a local dealer who will change your vouchers for fiat for a fixed price.

Does that make sense?

So why not just exchange my local currency directly for BTC, instead of vouchers. Why would I trade fiat for 'vouchers' (I.E. another form of electronic currency) and then trade those for BTC when I could just trade fiat directly for BTC?

[usscfounder]

I have created a system for a P2P orderbook here:

https://bitcointalk.org/index.php?topic=209269.0

I figured out how to make a P2P Orderbook for a decentralized exchange:

I am updating the post daily but will add more in a few minutes:

https://bitcointalk.org/index.php?topic=209269.0

Decentralized Orderbook - BTA System (Bus - Train - Plane)

BTA - Bus. Train. Plane. BTA is a concept I came up with the solve the problem of a decentralized orderbook for P2P systems.

BTA is a system to move orders from Tier I exchange nodes to Tier II exchange nodes to Tier III exchange nodes according to a predetermined cycle.

BTA is a system akin to a mass-transit public transportation system.

example:
In a mass transit system you could have a bus that would route and cycle through a city with 25 bus stops, stopping at every stop to pick up people. The bus would then drop all of the people off at the last stop which for the purposes of this demonstration is the city's train station. The bus would then repeat the cycle continuously bringing more and more people to the train station.

Eventually the train would arrive to that city and pick up the people who got off the bus and are waiting at the train station. The train would then continue on and cycle through all of the cities of that particular province/state picking up people (who were dropped off by the bus) at every city train station. At the end of the train route would be an airport with a planes ready to pick people up and take them to a specific destination. The train would cycle continuously through all of the cities picking up people and dropping them off at the airport.

The people who were first on the bus and then on the train and now at the airport would then board the plane (jumbo jet if you will) and travel on the plane from the province/state they were in to a final location all the while making stops in every major province/state of that country to pick up additional people. After the plane arrived at the final location it would take off again and cycle through all the provinces/states of the country continuously picking up and dropping off people.

Now, imagine if you will a dating and match making service on one of the sides of that county that has a big convention to help people find a spouse. That service decides to utilizes the same aforementioned mass transportation system to bring people together from all over the country.

People would leave their homes and go to the bus stop. Some people would find compatible matches for themselves at the bus stop or while riding on the bus. Those people would get off the bus pay the fee and then go home with no need to go to to the convention. Those people have what they want; a spouse.

The rest of the people would continue on to the train station and get on the train. But again some people would find matches on the train and at the station; so, they too would pay the fee and go home. They have what they want; a spouse.

What remains of the people would continue on to the airport then get on the plane to go to the convention hoping to find a good match for a spouse.

A P2P BTA (Bus-Train-Airplane) exchange would operate the same way only picking up orders instead of people.

(More in a few minutes)

 

More here in a few minutes:

https://bitcointalk.org/index.php?topic=209269.0

Here is how it works:

P2P BTA Application

How does it work?

In a P2P BTA system a "Bus" exchange node would cycle through and collect orders from P2P "home-server" nodes mentioned in the above posts.  "Home-server" nodes house user accounts and wallets in a P2P network.

1. The Bus exchange server node would collect orders from home-server nodes 1 through 25 (for example).

2. Matching orders (if any) are fulfilled in a mini exchange. Receipts are generated. All unfulfilled orders and receipts are then stored for pickup by an "Train" exchange node.

3. On a predetermined cycle the higher Train exchange node would pick up all of the unfulfilled orders and receipts from all four (for example) of the Bus exchange nodes in the P2P network. All matching orders are fulfilled in a medium sized exchange and more receipts are generated.  Again, All unfulfilled orders and collected receipts are then stored for pickup by an "Airplane" exchange node.

4. Finally, on a predetermined cycle the higher Airplane exchange node would pick up all of the unfulfilled orders and receipts from all four (for example) of the Train exchange nodes in the P2P network. The Airplane exchange is the highest exchange on our example P2P network. All orders would attempt to be fulfilled here. Collected receipts are used to generate reports and to display fulfilled orders.

In our example P2P network, if no orders were fulfilled by the Bus or Train exchange nodes then the Airplane exchange node would have picked up 400 orders.

(MORE TO COME LATER TODAY)

https://bitcointalk.org/index.php?topic=209269.0

[nwbitcoin]

So why not just exchange my local currency directly for BTC, instead of vouchers. Why would I trade fiat for 'vouchers' (I.E. another form of electronic currency) and then trade those for BTC when I could just trade fiat directly for BTC?

Because this way, the p2p exchange is not dealing in fiat, and that keeps the regulator away.

It also keep the fiat away from any central location which keeps the crooks away.

It also means that you get a wider choice of BTC to buy, rather than just your local market, which may be far more expensive without competition

[charleshoskinson]

Luke I read your post and I have a few comments.

First, Mary is the agent of escrow between Bob and Tim. How would one prevent Mary from simply stealing both of their funds? Second, should distance be the only factor in determining who gets to be the agent of escrow? All networks require some form of maintenance, perhaps you could adopt a more robust metric combining network distance with contribution to the network's health? Third, how do we verify Tim's holdings in fiat? Even if we could do so, then how does one avoid double spending without a global fiat ledger? Finally, wire transfers are not instantaneous for example and thus the party who acquires Bitcoins would have access to the money far faster than the fiat party.

One could resolve the fiat/Bitcoin access lag by implementing a system that sends coins to a new address with the private key encrypted by some method (say AES). Split the key in two parts with one going to both Tim and Bob and keep the other part in the global transaction ledger until the fiat transfer has cleared. Once it clears the other half of the key gets sent to Tim. Thus Tim cannot access his funds until Bob can. Should Tim's wire transfer fail, Bob gets the other half of the key to access his original Bitcoin.    

I agree that IOUs are no sufficient because they have to be exchanged at some point and such points violate criterion number 1. Overall, this post is significant and exactly what I wanted to generate in my original thread.