Primer for a P2P Distributed Exchange

[Zangelbert Bingledack]

Is my suggestion of sending paper fiat through the mail too absurd to deserve a response??

Then the bitcoin funds have to be held until the money arrives. Also the agent of escrow as to then resolve disputes in the event you claim the check was lost in the mail.

How about certified mail? If the post office website shows the package was delivered and signed for, the oracle releases the BTC from escrow to the buyer. If the package is recalled or something else goes wrong, the oracles returns the BTC to the seller.

This would also work with bank wires, assuming they give the right kind of records and post them online.

[charleshoskinson]

What if I send you an empty envelope?

[Zangelbert Bingledack]

What if I send you an empty envelope?

I thought that with certified mail you could certify the contents ("$500 cash," etc.). I'm not sure how certified mail actually works, though. [EDIT: Yahoo Answers disagrees: http://answers.yahoo.com/question/index?qid=20080901020635AADNJ4Q]

In any case, supposing some service of this nature exists anywhere (or is ever offered in the future), this would enable trustless P2P buying and selling, though not instantaneous. No need for reputation systems, since the banks or post office are the trusted parties, unwittingly.

[Rant2112]

Is my suggestion of sending paper fiat through the mail too absurd to deserve a response??

Then the bitcoin funds have to be held until the money arrives. Also the agent of escrow as to then resolve disputes in the event you claim the check was lost in the mail.

This is going to be true for any fiat exchange.

Transactions would be broken up into chunks to reduce risk and prevent the receiver from claiming the entire transaction didn't go through.

For any fiat transaction there has to be trust.  There is either a central point of failure that can accrue a lot of trust (bank, government) or a distributed system where a lot of people are each trusted a little bit.

[bytemaster]

Is my suggestion of sending paper fiat through the mail too absurd to deserve a response??

Then the bitcoin funds have to be held until the money arrives. Also the agent of escrow as to then resolve disputes in the event you claim the check was lost in the mail.

This is going to be true for any fiat exchange.

Transactions would be broken up into chunks to reduce risk and prevent the receiver from claiming the entire transaction didn't go through.

For any fiat transaction there has to be trust.  There is either a central point of failure that can accrue a lot of trust (bank, government) or a distributed system where a lot of people are each trusted a little bit.

This is not true.   It is possible to 'secure' a fiat balance with 'crypto' collateral and then exchange that fiat balance like a btc balance.  There may be some 'exchange fees' for depositing or withdrawing 'fiat' to a 'network', but once deposited into the network it can be exchanged and traded at face value. 

[Rant2112]

Is there an alt-coin that has a constant value instead of a fixed supply function (like bitcoin)?

For example, the supply of the coin adjusts such that N alt-coins always equals M US dollars?

No, nor could there ever be.

Basic economics, something I understand is not taught in schools anywhere on this planet anymore, shows you why it takes evil men with guns pointed at you to fix a price.

An IOU, however, can be cryptographically signed. I'd still rather not deal in IOUs but crypto-IOUs could serve the purpose you are looking for here.

Maybe I can explain in more detail and you can tell me what I'm missing?

A P2P exchange determines the alt-coin's value in US dollars.

Alt-coin balances are adjusted so a wallet's value stays constant in US dollars.  In other words the P2P exchange price history would be part of the blockchain and would be used to adjust the number of alt-coins represented by each transaction.

Alt-coins are created by miners who receive fiat in exchange.  Someone that wants to buy alt-coins with fiat posts to the P2P exchange.  The order can be filled by someone that currently has alt-coins or could be filled by a miner who mines new coins.  If the fiat price is higher than the mining cost then miners would compete to solve a block and accept the transaction.

If the fiat price is lower than the mining cost then no new alt-coins would be created and transaction fees would be needed to incentivize the miners to validate/verify/include the transaction.

You could also bid to exchange alt-coins for fiat.  Your wallet would be credited with the appropriate number of alt-coins and you would send fiat to the withdrawer.  The withdrawer's coins would be destroyed.  Everyone else's balance would be proportionally reduced to 'pay' for the credit given to the fiat-sender.

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Decency and respect are evidently not taught enough either.

[Rant2112]

...
It is possible to 'secure' a fiat balance with 'crypto' collateral and then exchange that fiat balance like a btc balance.  There may be some 'exchange fees' for depositing or withdrawing 'fiat' to a 'network', but once deposited into the network it can be exchanged and traded at face value. 

For the intermediate exchanges I agree completely.  A fiat-fixed currency or IOU is useful and could be traded quickly.

In the end people are going to want 'normal' fiat currency.  THAT is the part I'm talking about using the mail for.

I need something that I can spend at my local grocery store that doesn't accept crypto currency.

This exchange is going to have to involve trust - either a bank or an individual.

Localbitcoins is good for anonymity but is costly to split into multiple transactions and isn't available easily everywhere.

Sending paper currency through the mail is easier and allows transactions to be split into multiple parts to reduce risk.

[eMansipater]

CV tokens claims to have a solution to the fiat problem by making issuers of coloured coins hold sufficient bitcoins as "reserve currency".  Sort of makes them less of an IOU and more of a digitally enforceable contract for their face value in BTC.  And no need for a trusted party.

Also, with two fully digital currencies, there is no need for an escrow role in p2p trade.  Trades can simply be done as atomic transactions with no need for a third party (or use timelocking for trades between different blockchains).

[bytemaster]

Ok, first of all it wouldn't be a fiat-fixed currency IOU in the typical sense of an IOU backed by nothing.    It would be a fiat-fixed currency backed by VALUE stored in a real crypto currency like bitcoin.  

Imagine you had 100 bitcoins, you could mortgage those bitcoins (which have value) and receive half the value in REAL USD from someone who wants crypto-USD.   The 'network' being all of society just lent you $100 real USD in exchange for $200 worth of bitcoins posted as collateral.   If you disappeared and all exchange rates remained fixed, the individual who gave you $100 would end up with $200 worth of BTC (via interest payments).   If BTC went up in value he would have more than $200 worth of BTC.     However, because you have $200 worth of BTC tied up that are now worth $400, you really want to repurchase some crypto-USD so you find someone else who wants to withdraw crypto-USD and you give them real $USD.   End result is that all parties who held USD were able to move it into or out of the system at near face value.  Those who 'held' USD in the system earned interest for lending to the network.

Clearly you still have to exchange $USD for crypto-USD but this is a FAR MORE STABLE exchange rate and can easily be solved with escrow and done via the internet.  This is effectively like moving money into or out of Mt. Gox but instead of a single 'entity' holding the dollars they value is actually held by the network and can be withdrawn by anyone who can find someone who wants to make a deposit.  

The fact that it allows people to transact in crypto-$USD and price things in crypto-USD instead of BTC also simplifies adoption and eliminates exchange rate risks for merchants.    

[bytemaster]

CV tokens claims to have a solution to the fiat problem by making issuers of coloured coins hold sufficient bitcoins as "reserve currency".  Sort of makes them less of an IOU and more of a digitally enforceable contract for their face value in BTC.  And no need for a trusted party.

Also, with two fully digital currencies, there is no need for an escrow role in p2p trade.  Trades can simply be done as atomic transactions with no need for a third party (or use timelocking for trades between different blockchains).

CV tokens idea is VERY similar to what I am proposing with one slight variation.   I automatically pay the issuers collateral to the users of the 'colored coins' over time.  If the issuer disappears then the users of the colored coins still received more 'value' than they put in (assuming stable exchange rates).     Because exchange rates change daily and new issues are made daily this results in an average interest rate over all crypto-USD AND automatically adjusts the GLOBAL collateral for all colored coins to be sufficient to back all crypto-USD.

My system has a unique twist though:  crypto-USD deposits pay an interest rate that GOES UP when the value of the collateral goes up.  Thus you could maintain a USD balance and STILL benefit from the growth of the backing crypto-currency while also being protected to the downside of the Crypto Currency.  Little but a total and rapid failure of the crypto-currency would affect the USD value of crypto-USD. 

[bytemaster]

CV tokens claims to have a solution to the fiat problem by making issuers of coloured coins hold sufficient bitcoins as "reserve currency".  Sort of makes them less of an IOU and more of a digitally enforceable contract for their face value in BTC.  And no need for a trusted party.

Also, with two fully digital currencies, there is no need for an escrow role in p2p trade.  Trades can simply be done as atomic transactions with no need for a third party (or use timelocking for trades between different blockchains).

One downside to CV tokens is that while the issuer is 'backed' they are still a single issuer.  You would have to redeem from that one issuer specifically and the issuer would face huge LEGAL liabilities as issuing FIAT bearer instruments (colored coins) would be 'illegal'.    Under my system there is no one 'issuer', the 'issuer' is the network and anyone can redeem them.

The problem with multiple issuers is that each issuer's IOU (even if backed by collateral) has a different value based upon faith in the issuer and the current value of the collateral.  Thus not all $USD issuers are considered equal.   Lastly, there would have to be some 3rd party to decide when the collateral may be claimed.   I eliminate all of these issues.

[eMansipater]

CV tokens idea is VERY similar to what I am proposing with one slight variation.   I automatically pay the issuers collateral to the users of the 'colored coins' over time.

Why would anyone become an issuer then?

One downside to CV tokens is that while the issuer is 'backed' they are still a single issuer.
...
The problem with multiple issuers is that each issuer's IOU (even if backed by collateral) has a different value based upon faith in the issuer and the current value of the collateral.  Thus not all $USD issuers are considered equal.   Lastly, there would have to be some 3rd party to decide when the collateral may be claimed.   I eliminate all of these issues.

This isn't my understanding of CV tokens.  I'm pretty sure that each token has multiple issuers, and that the tokens are fungible between all issuers since cashouts are rolled over to other backers if they fail.

Also, croesus specifically said that there is no entity deciding when collateral gets claimed--it's algorithmic based on a running auction.

[bytemaster]

CV tokens idea is VERY similar to what I am proposing with one slight variation.   I automatically pay the issuers collateral to the users of the 'colored coins' over time.

Why would anyone become an issuer then?

I throughly explained that in my thread but I can give 2 examples:

1) you are heavily invested in bitcoin but need some leverage / liquidity to pay bills.  You get $USD today and BTC goes up in value and then you repurchase $USD tomorrow... you just leveraged up your BTC investment.   If BTC falls you just cut your losses at 50%.

2) If there is more demand for deposits of crypto-USD because people want interest payments than there are people who have 'crytpo-USD' they want to withdraw, the only source for new crypto-USD is people borrowing.  This will cause the price of crypto-USD to be more than paper USD.  So someone with BTC will take out a mortgage on 2x the USD value in BTC and then trade $100 crypto-USD for $110 paper USD.    This dynamic will increase the supply of crypto-USD until it is once again at or near parity.

[bytemaster]

This isn't my understanding of CV tokens.  I'm pretty sure that each token has multiple issuers, and that the tokens are fungible between all issuers since cashouts are rolled over to other backers if they fail.

Also, croesus specifically said that there is no entity deciding when collateral gets claimed--it's algorithmic based on a running auction.

If there is a group of 'issuers' it is slightly better, but how does one join that group and how does the available collateral increase when the crypto-currency price falls?   How does one find an issuer to actually get FIAT paper?  I will go read up on it some more.

[greBit]

I would also recommend reading the cvToken thread https://bitcointalk.org/index.php?topic=197799.0

The idea is that users of the currency should not be forced to take on the market risk as they are not speculators.

The real speculators are motivated to take on the risk in the hope of making money, with the effect being that their actions keep the value of cvTokens fairly fixed.

Having a stable value token, without needing to trust IOU issuers, would be awesome.

[eMansipater]

If there is a group of 'issuers' it is slightly better, but how does one join that group and how does the available collateral increase when the crypto-currency price falls?   How does one find an issuer to actually get FIAT paper?  I will go read up on it some more.

Okay, so after re-reading the thread, here is my understanding.  You join by adding your own BTC via the protocol and becoming a backer (which also issues more tokens).  From this post:

Anyone may become a backer of an existing cvToken by adding BTC at the same proportion or better as the existing collateralisation

The available collateral is meant to generally be higher than you need.  From here:

This "excess" of collateral would be perfectly normal

But when it isn't, backers have to make up the difference themselves.  From further down in the same post:

the backer has been forced to make up .06 BTC of the cashout from their own pocket

If no backer is willing to do this, the token "goes bankrupt" and the collateral is given out to the people who held the token.  Still in the same post:

When the last backer fails, the entire cvToken collapses into bitcoins.  The escrow was left holding 20 BTC, and with 200 cvTokens still outstanding, it could not have met all its obligations.  Therefore it minimises the risk of further loss by dissolving the cvToken colour and giving each cvToken holder .1 BTC per cvToken.  At $7.50, this means they have lost only 6.2% during a market that fell by 25%.  It's not ideal, but it was strictly better than holding bitcoins would have been.

It seems like a pretty stable approach.  Similar to how you described your method, I'm thinking of cvTokens like a house mortgage, where the collateral is generally worth more than the debt, and is typically expected to rise in value over time rather than fall.  Most people will keep paying an interest-free mortgage during a temporary dip in property values, but a total collapse in property values will see many people walking away from their homes as no longer worth it.  The difference with cvTokens is that it detects that collapse quickly and seizes all the affected homes before the crisis gets too bad.  In the end, there probably is no ultimate protection against total collapse of an underlying asset, but cvTokens' approach of swallowing the foul medicine as soon as you realise you're sick is probably as good as you can get when it comes to mitigation strategies.

I also don't think you would need to find an issuer for fiat-cvToken exchanges.  Lots of people would be willing to meet up and do it since it doesn't even involve trading and cvTokens hold closely to the fiat value.  They would collect a small fee (much smaller than bank transfer fees) to make it worth their while.  There would still have be a fiat-BTC market of course, but it would be mostly dominated by deep-pocketed businesses and speculators who can virtually ignore the percentage cost of bank transfer fees and already comply with AML provisions.  I don't see p2p trading as taking over from all the existing exchanges--it just needs to exist so that the option is there whenever centralised exchanges aren't meeting people's needs, and to make BTC-fiat exchange as universally accessible and fault tolerant as Bitcoin itself (i.e. this would allow U.S. exchange liquidity to support a thriving BTC-cvTokenUSD exchange in Iran or Zimbabwe).

[bytemaster]

....

Thank you for your through explanation of the cvToken concept.  It does indeed try a similar approach to mine (issuing a fiat-crypto token backed by crypto-currency).   Not to be biased toward my own idea, but here is where I think my approach has advantages:

1) There are no special rolls that people must take.
2) Paying people interest for depositing paper-$USD into crypto-USD really drives adoption and something people expect to receive while letting someone else use their money.
3) crypto-USD is as divisible as BTC, I am not sure how divisible cvTokens are.
4) My more recent posts demonstrate how market forces will automatically drive crypto-USD to USD exchange rate toward parity and ensure that 'globally' there is always enough backing.

So the question becomes what are the 'cons' of my approach and how can we effectively compare the two approaches?

[Chaoskampf]

As the OP has pointed out, there's one MAJOR link in the chain missing. You can't send a physical good like paper Fiat over the internet.

This might be one of the p2p threads he's talking about that's been popping up recently.

https://bitcointalk.org/index.php?topic=207764.0;all

It may be extreme, but it could provide ideas for better plans. I'm looking forward to seeing p2p bitcoin exchanging come to fruition. Not only can it happen...It must happen.

[nii236]

If there is a group of 'issuers' it is slightly better, but how does one join that group and how does the available collateral increase when the crypto-currency price falls?   How does one find an issuer to actually get FIAT paper?  I will go read up on it some more.

Okay, so after re-reading the thread, here is my understanding.  You join by adding your own BTC via the protocol and becoming a backer (which also issues more tokens).  From this post:

Anyone may become a backer of an existing cvToken by adding BTC at the same proportion or better as the existing collateralisation

The available collateral is meant to generally be higher than you need.  From here:

This "excess" of collateral would be perfectly normal

But when it isn't, backers have to make up the difference themselves.  From further down in the same post:

the backer has been forced to make up .06 BTC of the cashout from their own pocket

If no backer is willing to do this, the token "goes bankrupt" and the collateral is given out to the people who held the token.  Still in the same post:

When the last backer fails, the entire cvToken collapses into bitcoins.  The escrow was left holding 20 BTC, and with 200 cvTokens still outstanding, it could not have met all its obligations.  Therefore it minimises the risk of further loss by dissolving the cvToken colour and giving each cvToken holder .1 BTC per cvToken.  At $7.50, this means they have lost only 6.2% during a market that fell by 25%.  It's not ideal, but it was strictly better than holding bitcoins would have been.

It seems like a pretty stable approach.  Similar to how you described your method, I'm thinking of cvTokens like a house mortgage, where the collateral is generally worth more than the debt, and is typically expected to rise in value over time rather than fall.  Most people will keep paying an interest-free mortgage during a temporary dip in property values, but a total collapse in property values will see many people walking away from their homes as no longer worth it.  The difference with cvTokens is that it detects that collapse quickly and seizes all the affected homes before the crisis gets too bad.  In the end, there probably is no ultimate protection against total collapse of an underlying asset, but cvTokens' approach of swallowing the foul medicine as soon as you realise you're sick is probably as good as you can get when it comes to mitigation strategies.

I also don't think you would need to find an issuer for fiat-cvToken exchanges.  Lots of people would be willing to meet up and do it since it doesn't even involve trading and cvTokens hold closely to the fiat value.  They would collect a small fee (much smaller than bank transfer fees) to make it worth their while.  There would still have be a fiat-BTC market of course, but it would be mostly dominated by deep-pocketed businesses and speculators who can virtually ignore the percentage cost of bank transfer fees and already comply with AML provisions.  I don't see p2p trading as taking over from all the existing exchanges--it just needs to exist so that the option is there whenever centralised exchanges aren't meeting people's needs, and to make BTC-fiat exchange as universally accessible and fault tolerant as Bitcoin itself (i.e. this would allow U.S. exchange liquidity to support a thriving BTC-cvTokenUSD exchange in Iran or Zimbabwe).

I proposed something that was basically the same thing, but instead of cvTokens I proposed digital fiat which is issued when BTC is deposited into a pool.

https://bitcointalk.org/index.php?topic=214431.0

[bytemaster]

I proposed something that was basically the same thing, but instead of cvTokens I proposed digital fiat which is issued when BTC is deposited into a pool.

https://bitcointalk.org/index.php?topic=214431.0

Very cool, this is basically what I was proposing.  You 'deposit' BTC into a pool by 'mortgaging' it and it issues crypto-fiat.    Your idea used Open Trx and didn't allow for posting of additional collateral and thus downward deviations in the BTC price were directly reflected in the redeamability of the dUSD.   It also required people to use 2 systems: Open Trx + Bitcoin and Open Trx requires federated servers which don't require "trust-per-se" but they are still 'centralized' and potentially a legal liability.   I suppose an Open Trx server running behind BitMessage  would be a start.

So to implement my idea in your terms you would deposit your BTC in an OT server.  Then you would ask the OT server to mortgage your BTC for dUSD at 50% face value and you would end up paying interest for this privilege.  You must pay interest because you are effectively 'borrowing' USD from the network (society) AND there is risk of default and potential for your collateral to drop by 50%.   

Other people are willing to hold dUSD because it is paying them interest which makes up for the fact that there is still transaction friction between getting into and out of dUSD and the fact that they are exposed to some BTC risk.

Later when you want to pay off your mortgage you only get the collateral back that wasn't used to pay interest.  You would pay off your mortgage because the collateral is worth more than the dUSD and thus you are motivated to accept deposits from people.

I just implemented all of this directly into the blockchain.