*old* BitShare Economic Theory 10 BTC bounty to prove me wrong... paid.

[bytemaster]

I want to create a new alt-chain with a few modifications to the Bitcoin to enable a multi-currency, crypto-fiat, exchange.  I am a software engineer (C++ expert) and could potentially do it all myself, but this project is important enough that I would like to collaborate with someone who is very familiar with the existing Bitcoin code base and who can help me work through technical details specific to Bitcoin.

* I will be updating these specs based upon discussion in this thread, so check back from time to time*

Specific changes I want made to the bitcoin client are:

1)  Distribute half of all mining fees as dividends to outputs with a positive balance.
2)  Annotate all outputs with a currency UNIT.
3)  Create an output script that will only allow the output to be spent under 2 conditions:
          a) it is signed by a specified address's private key (cancel the bid)
          b) it is part of a transaction that has 2 characteristics: (accept part of the bid)
                  - 1 output to a specified address in a specified currency at a specified exchange rate
                  - 1 output that allows the change to be spent under the same terms as this output.
4)  When accepting a bid, the input may be coins in one UNIT used as collateral for coins in the EXCHANGE unit.
5)  When one UNIT is used as collateral for another THEN the dividends paid to that UNIT get paid to the other UNIT.
6) Update the hashing algorithm in a way to prevent centralized control or instant monopoly of all shares by asic mining companies.

I suspect that someone who is very familiar with the bitcoin code base would be able to help me get this implemented in very short order.  I have much of it figured out / designed.  Please contact me if you are interested.

I am also looking for feedback on how to improve this idea.  I have explained the reasoning / economic model behind these changes in other threads, but will answer questions here as well.  I suspect that once we get to talk on skype/phone you will forget about the money and be more interested in the result.  But even if you are skeptical I am willing to make it worth your while to spend some time helping me try it out.

Payments can be made in bitcoin or other negotiable methods.

Anyone who can convince me to abandon this idea before I invest more money into it will be given a 10BTC bounty.

Original Explanation of Economics behind this:
Background / Explanation of Economic Model behind these changes: https://bitcointalk.org/index.php?topic=215369.msg2259254#msg2259254

* EDIT *
Updated / clearer explanation:
https://bitcointalk.org/index.php?topic=215488.msg2273237#msg2273237

* EDIT *
I have created a github repository / branch from bitcoin for this project.
https://github.com/bytemaster/bitshare

If you are interested in investing in BitShares to help fund development and bounties (like the wonderful Icon that was just produced) then checkout INVESTING.md at github for the signed terms.  In summary 1000 BitShares will be pre-mined for every 1 BTC contributed to the investing BTC address and your Bitcoin wallet should be importable into BitShares and allow you to redeem your BitShares once it is released.
  
The number of shares pre-mined will be in addition to the 21,000,000 issued via mining.

* EDIT *
I will close out this bounty thread before spending any invested funds.  If the bounty is won, all invested funds will be returned.

If you would like someone other than me to be the decider of whether or not you 'win' the bounty, then I will agree to create a contract with objective criteria that will be arbitrated by Judge.Me.  

You can validate that I have the funds to pay the bounty by checking the balance of the investment address  (Over 50 BTC at that adress are my contribution to this).

Total outside investment thus far:  2 BTC  Thanks!
Total bounties paid:  0.75 BTC
Total tips paid: 2 * .05 BTC

* EDIT *
It is now clear that the only thing BitShares is good for is short-selling 'bitcoin' in a trustless manner.   This is very useful in its own right by allowing hedging, but it is not the system I hoped it would be.

All funds will be returned to investors.

[thezerg]

I do not think that you structured this very clearly.  And this is causing errors in your own beliefs.

First of all, the best way to characterize this is in fact a true open source distributed "ripple" based on the bitcoin codebase.  Another definition would be a "native" colored coin blockchain.  Since colored coins is frankly awkward, I have been considering a blockchain that accepts multiple currencies deeply.  What is blocking me is frankly that I'd want bitcoins to somehow be a "native" part of the solution, not an external currency that requires a backer.

Point 1: You somehow think collateral makes your USD not need a gateway.  Uh, No.  There's really no nice way to say it but your thinking here is flawed.  Essentially each individual is a mini-gateway, securing the genesis of your "crypto-USD".  And BTW, nobody who really needs a loan can put up that kind of collateral... people put up cars and houses because they can simultaneously USE them.  A loan is truly underwritten by FUTURE the earnings potential of the person who received the loan.  Irrespective of your blue-sky scenarios, when black monday comes around, the people who received the $1 USD and essentially "created" the 1 crypto-USD have to make good on that and convert the crypto-USD back to USD.  Or be sued to get it.

Fundamentally, there IS no crypto-USD unless its the US government issuing it.  There is only someone's individual promise to pay.  And as we learned in the 2008 mortgage crisis it can be REALLY BAD to "bundle" these promises together under the assumption that they are equivalent!

Ok, now that we've got that out of the way, lets structure the system.

Base: 
  cleaned up bitcoin codebase with a single "native" currency, let's call it "thecoin" (THC)

  new transactions:
  1. Coin-type genesis.  A coin type is represented by a public key.  URL and hash of a coin contract are included.  The private key controls that coin type.  Could require a nontrivial txn fee of THC to miners, not to just one miner but distributed across the next 1000 mined blocks or something to reduce coin type spam.  However, just like there can be essentially an infinite # of bitcoin accounts, so with coin types.  This is good because as I was saying above, you can't combine fiat promises together.
  2. Coin genesis.  Signed by the private key, this allows new currency to be minted.  (THC txn fee)
  3. Coin destruction.  A transfer to the coin type's public key is essentially coin destruction because it gives control of the coin back to the issuer.

  Transaction changes:
  4.  Of course, all txns can have multiple inputs and outputs that take different coin types (coin type public key is of course included in the TXO).  This allows atomic exchange. 
  5.  A new transaction type called "market-based exchange" that is essentially the exact same as a normal txn but just marked as an exchange between anonymous parties (see below).

Exchange:

  For some reason you feel that bids/asks should be encoded in the blockchain.  There are huge issues with that, including blockchain bloat and matching speed.  But there is no need.  Bids and asks (actually they are ALL bids, just offering different currencies if you see what I mean) do not need to be remembered forever. 

These could be a special half-signed txn specifying what is offered and what is asked in return.  These are propagated throughout the network.  Someone trades by supplying and what is requested and signing, making a full txn.  The issue here is the half-signed txn cannot easily be withdrawn.  The only sure way to withdraw is to "double-spend" the underlying TXO so the $ the half-signed txn represent does not exist.  So perhaps bids have an "expiration block number".

Another choice is an unsigned half-txn.  The only issue here is your client needs to remain on-line to sign the txn if someone matches it.

Matched txns are committed to the blockchain, with a fee in THC paid by either/both parties.  Multiple matches against the same half-txn are resolved when the next block is found -- whichever full txn makes it in that block wins.  Note a higher THC fee would encourage more miners to use your trade (txn) as opposed to someone else's, which might make things very interesting...

Another issue would be bid flooding to attempt a DOS.  This could be handled to some degree by miner's fees -- essentially clients would refuse to forward the bid if the TXin does not offer enough THC as a miner's fee.  Clients can't tell the size of the bid because they don't know the value in USD of the coin-types being traded.  So we don't know if a txn is "dust".  So the miner's fee essentially needs be used to eliminate dust txns.  Clients could also refuse to forward half-txns that are far outside the trading range of currency-types as known by looking at txns committed to the blockchain and marked as being an "market-based exchange".

Another possibility is proof-of-stake.  You sign the bid half-txn with an account holding at least M THC, clients only hold N bids from a particular signature at one time.


Done!  Easy!  :-)

[bytemaster]

I do not think that you structured this very clearly.  And this is causing errors in your own beliefs.

I certainly want to structure things clearer, and the goal of this bounty was to bring out errors in my beliefs so I appreciate your response.

First of all, the best way to characterize this is in fact a true open source distributed "ripple" based on the bitcoin codebase.  Another definition would be a "native" colored coin blockchain.  Since colored coins is frankly awkward, I have been considering a blockchain that accepts multiple currencies deeply.  What is blocking me is frankly that I'd want bitcoins to somehow be a "native" part of the solution, not an external currency that requires a backer.

This is not a trust-based issuer situation.  Crypto-USD has a fluctuating market price relative to paper USD that trades in a range similar to the transaction fees paid to move money into or out of Mt. Gox, your ATM, Dwolla, etc.   Because the price fluctuates it is backed by supply and demand and nothing less.  The supply is provided by individuals who see a price difference where crypto-USD is worth MORE THAN paper-USD.  This price difference must be sufficient to motivate them to give up the DIVIDENDS they are receiving on their BitShares (thecoin).  BitShares + their dividends have value for the same reasons bitcoins have value.  Thus new crypto-USD is created increasing the supply and driving the price back toward parity.

Crypto-USD is redeemed when the price of crypto-USD is LESS THAN paper-USD.  In this case anyone who issued Crypto-USD can buy crypto-USD with paper-USD at a price below face value and then use crypto-USD to redeem their BitShares held as collateral and start receiving BitShare DIVIDENDS again.  Thus there is profit to be made by redeeming shares and no need to 'trust' anything but the markets profit seeking initiative.    

As a result there is never any IOU in this system.  As all 'crypto-USD to BitShare' exchanges occur on the block chain and all issuance of crypto-USD occurs via a Bid transaction there will be a definite and changing ratio between crypto-USD and BitShares but a relative stable ratio between crypto-USD and paper-USD.

Point 1: You somehow think collateral makes your USD not need a gateway.  Uh, No.  There's really no nice way to say it but your thinking here is flawed.  Essentially each individual is a mini-gateway, securing the genesis of your "crypto-USD".  And BTW, nobody who really needs a loan can put up that kind of collateral... people put up cars and houses because they can simultaneously USE them.  A loan is truly underwritten by FUTURE the earnings potential of the person who received the loan.  Irrespective of your blue-sky scenarios, when black monday comes around, the people who received the $1 USD and essentially "created" the 1 crypto-USD have to make good on that and convert the crypto-USD back to USD.  Or be sued to get it.

First of all, all crypto-USD is backed by dividend payments paid in BitShares.   The source of the dividend payments on USDs comes from the BitShares used by the system to issue the crypto-USD in the first place.  The source of BitShare dividends comes from half of the mining fees + rewards.  Thus if BitShares have value like Bitcoin then what is backing the crypto-USD is the future DIVIDEND earnings on the Bitshares held as collateral.   The ratio of dividends between crypto-USD and BitShare balances is proportional to the exchange rate.

Fundamentally, there IS no crypto-USD unless its the US government issuing it.  There is only someone's individual promise to pay.  And as we learned in the 2008 mortgage crisis it can be REALLY BAD to "bundle" these promises together under the assumption that they are equivalent!

I think that with the explanations above this statement is clearly 'wrong' as crypto-USD is not an IOU *issued* by anyone.   It is not a promise any more than a bitcoin is a promise.  

Ok, now that we've got that out of the way, lets structure the system.

Base:  
  cleaned up bitcoin codebase with a single "native" currency, let's call it "thecoin" (THC)

  new transactions:
  1. Coin-type genesis.  A coin type is represented by a public key.  URL and hash of a coin contract are included.  The private key controls that coin type.  Could require a nontrivial txn fee of THC to miners, not to just one miner but distributed across the next 1000 mined blocks or something to reduce coin type spam.  However, just like there can be essentially an infinite # of bitcoin accounts, so with coin types.  This is good because as I was saying above, you can't combine fiat promises together.

Yes I was thinking of something similar for defining a new coin-type.  The problem is the network requires an exchange rate to be established before THC can be used to back the coin-type.   So I figured that a new coin-type would be allowed once a certain THC value in open bids for that coin were published on the network.  These bids would be backed by THC (until they were canceled).  With a high enough value threshold there should be enough 'volume' to get a market started and thus the network would allow the creation of the new coin-type in response to the highest available bid and work its way down.  Publishing all of these 'bids' and keeping them open would require transaction fees, time, and locking up of real value and therefore could not be spammed.

As a result there is no need for a new coin-type to be associated with any particular private key.  To accumulate sufficient bids those placing the bids would have to know what it was they were bidding on and what it represented.   For version 1.0 I would probably pre-define the set of national currencies + popular crypto-currencies + gold and silver.   Only after the concept was well understood would I enable the feature to create arbitrary coin types (such as company stocks, oil, etc).

 2. Coin genesis.  Signed by the private key, this allows new currency to be minted.  (THC txn fee)
  3. Coin destruction.  A transfer to the coin type's public key is essentially coin destruction because it gives control of the coin back to the issuer.

Coins are not issued nor are they IOUs.  They are their own free-floating currencies which are issued in response to a bid on the market and thus are issued in proportion to the value relative to THC.  Of couse this relative value is constantly changing.  The block chain knows the sum total of all THC to OtherCoin issuance and thus knows how much of the THC dividends should be paid to OtherCoin balances and in what proportion.   Thus the DIVIDEND rate as a PERCENT OF VALUE is the same across all currencies.

Therefore if THC were BTC and there was a bid to buy 125 Crypto-USD for 1 BTC then that bid could be satisfied by issuing 125 Crypto-USD backed by the DIVIDENDS paid on 1 BTC.    Later BTC goes up in value and
there is another bid to buy 150 Crypto-USD for 1 BTC.  In this case 150 Crypto-USD would be issued backed by just 1 BTC.  Over time the all Crypto-USD currently issued will yield DIVIDENDS of value at about the average recent exchange rate.  Any differences in the value of the DIVIDENDS in various crypto-currencies would be taken out via arbitrage as people trade between Crypto-USD and THC.

Now the purpose of issuing a Crypto-USD is because the buyer who is paying with paper-USD wants to avoid exchange rate risk.  So he is issued a currency that pays DIVIDENDS of value proportional to the exchange rate.  Market forces will work to keep this as close as possible.   He knows he can then redeem the crypto-USD from the 'THC believers' at the same value regardless of exchange rate fluctuations because what he is really redeeming is a THC dividend bearing bond.

 For some reason you feel that bids/asks should be encoded in the blockchain.  There are huge issues with that, including blockchain bloat and matching speed.  But there is no need.  Bids and asks (actually they are ALL bids, just offering different currencies if you see what I mean) do not need to be remembered forever.  

First of all a bid can be broadcast and matched before even getting into the blockchain.  The only bids that would be in the block chain are 'outstanding bids'.   Second, transactions can be pruned.  Third, eventually they do get in the block chain as part of a transaction.  Fourth, a bid with no transaction fee (or low fee) will be broadcast but not included in the chain until a matching transaction was made.    Fifth, the block chain needs to know about bids / asks to establish the exchange rate for issuing currencies.   That said, nothing stops out-of-chain exchanges from being setup like Mt. Gox for those who want to do HFT.  Mt. Gox would be able to operate using this system without having to take deposits and therefore could even operate behind a TOR hidden service.   Thus, let 3rd party dedicated services handle the high-frequency stuff and let the block-chain handle 'trustless' exchanges that might be slightly slower but still not that bad for most peoples purposes.  

All of that said, another way to create a bid is as an INPUT to any standard output that allows it to be spent as part of a valid exchange provided the bid is signed by someone allowed to spend the output.  Therefore the bid could be broadcast without actually creating a new output type.  Spam on the bids could be controlled by proof-of-work applied to the bid.   Bids can now be broadcast/cached and only people accepting the bids would include them as part of a transaction.



Once again, thank you for your response, you clearly took time to think about things and respond thoughtfully.  

[bytemaster]

I want to concentrate all efforts into this thread, so am quoting explanations from other related threads... more info here.

@btcluke

I want to start by saying I appreciate everyone who takes time to post thoughtful responses.  So I will respond to your post stating I fully believe I can satisfy all of your requirements.  So much so that I have posted another thread where I am looking to hire someone to help me and invest $20,000 or more in creating a working system based on my ideas.   But, as a sanity check I am also offering a 10 BTC bounty to anyone who can convince me that the idea will not work and save me time and money.    That said, let me attempt to explain my idea in greater detail.   I am also willing to discuss my ideas on skype with anyone interested in helping or attempting to claim the 1 BTC bounty.   (my handle isn't exactly anonymous because I have tied it to my website the-iland.net and my github account (also bytemaster)), send me a private message for skype (or ichat).

Now that I have your attention let me attempt to address your requirements by first stating that I am a very well read student of mises and austrian economics and thus am basing EVERYTHING on an austrian understanding of economics and will clarify anything I that you think I might misunderstand.  I am actively want to be proven wrong if I am wrong.

First of all we must understand that all forms of USD have different value despite being denominated in USD.  USD on Mt.Gox is less valuable than a paper note in my hand because it costs time and money to move a deposit from Mt. Gox and convert it into a bill in my hand.  It is also less valuable because there is counter-party-risk where the counter-parties are Mt.Gox and various governments and banks that could all prevent me from redeeming my Mt.Gox USD.    Even money in my bank account is of lower value than USD in my hand (provided I need it now) because of ATM fees, daily withdraw limits, and of couse counter-party-risk.

We must also recognize that at other times paper-USD is of less value than Mt. Gox USD such as times when you want to buy BTC NOW to take advantage of the price movement.   Therefore the price of Mt. Gox USD is above or below parity depending upon the relative demand for deposits vs withdraws from Mt. Gox as well as the ease of trading balances within Mt. Gox.

With that understanding we can clearly see that it is only an illusion to claim redeem-ability at 'face value' with any issuer.  Every issuer has a different trust level with every individual and therefore USD notes issued by different issuers are not perfectly fungible nor free of counter-party-risk.  The issuer is always subject to seizure from the government and could default regardless of how honest he intended to be.   The conclusion we can draw from this is that there might as well be a market for crypto-USD that fluctuates AROUND actual USD prices give-or-take a couple of percent similar to the price variance between Mt. Gox USD and paper USD which is what Bitinstant's entire business model is designed to capitalize on.  Thus if we can create a crypto-USD currency that has VALUE recognized by the market yet without any redeemable IOU like contract (like Bitcoin) yet trades at or near parity of paper USD base solely on market forces (not price fixing) then we will have a workable system.

Another aspect of depositing (trusting) money with a 3rd party is the expectation of interest payments in return for the risk associated with lending your money to the bank.  Any bearer-bond contract that does not pay interest will always be subject to immediate demands for redemption and thus put heavy stress on the most expensive / difficult part of converting fiat to crypto-fiat (redemption).

1. Be without any central points of failure
  - a crypto-USD that can be traded via systems like localbitcoins at prices near parity with the dollar would lack any central points of failure.  Assuming you could provide a way to imbue value into the crypto-USD independent of any backer or price-fixing.  (It can be done, more on this later)

2. Show everyone a very large number of possible trades to choose from
  - by separating the process of converting paper-USD to crypto-USD and trading crypto-USD for BTC or crypto-USD you enable all trades to occur through broadcasts on the network or offers in the blockchain.

3. Transact trades pretty much INSTANTANEOUSLY
  - assuming there exists crypto-USD and BTC then an exchange could be run entirely from behind a TOR node.  However, there is still value in trades that can occur at the same speed as bitcoin transactions for most people who are not attempting arbitrage.  On the other hand if the exchange were a natively transparent part of a single blockchain then there probably would NOT be much need for arbitrage.  

4. Offer Graphs and APIs
  - considering the entire market would be part of the same blockchain this could easily be added into any desktop client.

5. Have three-user (trustless) trading
  - how about 2-user trust-less trading between crypto-Fiat and 'BTC' and using escrow for remote exchanges of crypto-Fiat for bank-Fiat?

6. Hold and transfer a cryptosecurity that perfectly represents fiat
  - crypto-USD is more divisible, fungible, malleable, and scarce than paper-USD.


I think the #1 criteria is to eliminate counter-party-risk from holding of crypto-FIAT.  

I believe I have done this with my system which I will attempt to describe with more clarity and to PROVE that crypto-USD is not an IOU, has value of its own (like BTC) and that the value is automatically moved toward paper-USD parity by market forces, and that the value of crypto-USD is not at risk regardless of 99% changes in the value of 'BTC'.

More in a follow on post...

[bytemaster]

So the challenge we have before us is to create a crypto-USD that has market value of its own at or near parity with real USD with no issuer 'backing' the crypto-USD.  I will now explain how this can be done.

First we must establish that bitcoins already establish market-value without an issuer.   So we must now find a way of using 'bitcoins' to back crypto-USD in such a way that crypto-USD maintains a value near parity with paper-USD. 

To do this there must be some way to make holding crypto-USD pay interest in BTC and have the amount of interest paid automatically adjust with the exchange rate.  So lets try to set up such a system.

1) Assume for a moment that holding bitcoins paid a dividend in bitcoin proportional half of the mining fees (miners get the other half).   This would turn bitcoins into BitShares where a BitShare can be thought of as a share in the exchange.   Suppose Mt. Gox issued shares in the exchange that paid dividends based upon profits from the exchange.  In this case the 'exchange' is the BitShare network and the Shares are 'bitcoins' and the 'fees' are the transaction fees + mining reword.

2) With the above scenario owners of BitShares own them for 2 reasons, appreciation and dividends.  The dividends encourage saving.

3) If someone wanted to issue crypto-USD they could divert their dividend payments from their BitShare to crypto-USD issued at the current exchange rate.  The result would be that crypto-USD pays dividends proportional to the exchange rate and therefore has value derived from BitShares that is close to parity.

4) Why would someone convert BitShares to crypto-USD?   Because there is a buyer with paper-USD that is willing to pay a premium to above parity to covert paper-USD into crypto-USD.  This premium would have to be high enough to justify giving up BitShare dividends and cash out into paper-USD.   This will increase the supply of crypto-USD with each conversion and each conversion will be done at the current market price of crypto-USD vs BitShares and thus the ratio of BitShare dividends paid to crypto-USD holders would follow the exchange rate.   

5) Why would someone redeem crypto-USD for with paper-USD on this market?  They would do this because they own some BitShares that are not paying dividends because they are used as collateral for $100 crypto-USD.  If they can buy crypto-USD for $95 worth of paper USD then they can profit by redeeming $100-crypto-US for a mere $95.  This profit comes because $95 paper USD allows them to free BitShares that pay dividends equal to $100 crypto-USD.  They also know that eventually the crypto-USD market will swing back the other direction.

6) The reason the price of crypto-USD vs paper-USD fluctuates between $95 and $105 is based upon the relative demand for deposits and withdraws.  When demand is 'equal' the price is approximately at parity.   This market behavior is no different than the actual price fluctuations you would see with people willing want to buy or sell Mt.Gox USD.

7) Because crypto-USD pays dividends in BitShares (proportional to their issuance), it creates an incentive / demand for people seeking a return to deposit paper-USD.  This demand for deposits of paper-USD is a source of supply for those wishing to withdraw.  Thus most of the time 'redemption' is not doen by issuing or paying off of BitShare bonds, but via the direct exchange of crypto-USD for paper-USD at near parity prices between depositors and withdrawers.

In conclusion, I believe I have identified all of the market forces required to create a bitcoin like crypto-USD that derives its value from the same source that Bitcoin does yet does not suffer exchange rate fluctuations beyond those already found in the traditional banking system.  I would even submit that due to open market competition that market forces would drive the exchange rate fluctuation to be much close to 0 than is currently provided by the closed, regulated, slow banking systems.

[mmeijeri]

Hmm, you are starting to make me change my mind. Right now I'm at the point I was at two months ago with Bitcoin. I was intrigued, and thought they might be on to something, and it took me a couple of hours of reading up on the algorithms to convince myself the concept was sound. I'm going to put in those hours again, though I can't promise you I'll reach the same conclusion. And even if I should remain unconvinced, you have certainly opened my eyes to new possibilities. If it works, it's a clever innovation based not so much on new technology, but on a good understanding of (Austrian!) economics. Sent you a small tip for the entertainment value of this alone.

BTW, this reminds me of the unfinished Market.h and Market.cpp that Satoshi accidentally committed and subsequently removed. You are not secretly Satoshi, are you? If so, your cover is blown.

[bytemaster]

Hmm, you are starting to make me change my mind. Right now I'm at the point I was at two months ago with Bitcoin. I was intrigued, and thought they might be on to something, and it took me a couple of hours of reading up on the algorithms to convince me the concept was sound. I'm going to put in those hours again, though I can't promise you I'll reach the same conclusion. And even if I should remain unconvinced, you have certainly opened my eyes to new possibilities. If it works, it's a clever innovation based not so much on new technology, but on a good understanding of (Austrian!) economics. Sent you a small tip for the entertainment value of this alone.

BTW, this reminds me of the unfinished Market.h and Market.cpp that Satoshi accidentally committed and subsequently removed. You are not secretly Satoshi, are you? If so, your cover is blown.

Thanks for the Tip... all tips will be funneled into this project (or the bounty).  I look forward to answering any questions you may have resulting from your research!

[Micromancer]

to critique your idea

What if the alternate block chain verified the transactions of a peer 2 peer decentralized crypto-currency exchange

each transaction would cost the regular fee of 0.2% of whatever currency is being exchanged and those holding said currencies would recieve interest from that

but what if each transaction also cost x of the new coins created by the new block chain

the new block chain i bleieve would act as a fail safe against alot of problems crypto-currencies currently have

also you could integrate some kind of decentralized peer to peer social network with a rating sytem, like a bitcointalk.onion... kinda

it would make lending and borrowing decentralized and earning more coins for everyone holding

[Micromancer]

I believe the amount of coins you are holding should give you more coins from the new block chain (example: 50,000 dev coin gives you more coins from the new block chain than 1 btc)

[Micromancer]

this encourages hoarding all coins

[Micromancer]

I just now got it... you are trying to achieve parity between usd/btc with the new blockchain, correct?

[btcmind]

Ver interesting. There are some important elements, especially the dividends idea.

But there is also a lot of confusion here. Honestly, I would recommend to studying how a paper fiat money system and an exchange works first. Its not at all trivial. Did you know that every bank transaction gets wired over the central bank? Every bank holds an account at the central bank. The way banks exchange money is that they use the central banks system. And the central bank is backed by the government.

In any case: think about it - how can you convert 1$ into 0.01 BTC? You have to transfer the 1$ to a place or a person who has BTC and wants $. The only way to transfer $ is through an entity that has an account at the Federal reserve, aka a bank. Or the entity has USD cash, and you can accept cash. Those are the only ways to transfer fiat money without an IOU scheme. Every holder of USD has a counter-party risk against his bank and against the central bank. Which is why Bitcoin is so brilliant in the first place. But the legal frames make a total bootstrap very unlikely IMO. In some ways it implies that nation-states can't tax people. And they don't like that. Compare the AAPL discussion recently and the broken international tax regime.

Compare that with Ripple where you have all kinds of layered couterparty risks. In your personal IOU network and against the network overall. Which it makes it worse than fiat in a way.

First of you need to be much clear of how such an exchange would allow throughput of 100'000 of orders per day. Then you will see the problem. Take the MtGox volume and calculuate the necessary throughput time. Take into account the speed of light (no kidding). The maximum time for execution would be rather in the 50 ms range or lower (in fact the speed of light makes auto-trading across the globe impossible, but auto trading is the base requirement to process most than 10M$/day). Certainly a blockchain makes such an exchange simply impossible. Just do the calculations of execution time that are needed, say based on 100x current volume at MtGox. Imagine BTC would rule the world, then you need up to 10^12 more volume, which is roughly what the current markets handle. (Global money in circulation is very roughy <10 Trillion$ per day, compared to ca. 10 million $ per day at MtGox). Of course nobody would trade significant volume at 1% fee. Bitcoin exchange fees should in theory approach 0.01%.

An exchange works like this. You have a central datastructure, which is the limit order book. Because it is central, by definition, a distrubted block choin simply does not make any sense. An exchange has to be fast, and so a good exchange has to have a synchronous architecture. In fact that is its primary feature, namely liquidity attracts liquidity. If one single trade takes 10 minutes, you simply can't operate.

If you study this you see where Bitcoin differs and how it improves it. But there is a significant problem (not vulnerability) in Bitcoin in terms of potential adaption. And the problem is that Bitcoins has to interface with fiat banks. Which makes the BTC exchanges act as banks. So if I want to use BTC I have to receive money in BTC, be it a wage, or capital income, etc. Otherwise I have to go through the exchange, and the governments of the world have the ability to shutdown the exchanges, as they already have.

However, what you could do is to have gateways which are liquidity providers. These could meet at an efficient exchange. The gateways would handle fiat money and the exchange handles orders.

Say you are in a country, where you don't run the risk of getting jailed for ML, like you would establishing such a system in most developed countries (have you thought about that?). Then you would do this in a TOR like fashion. Doing this I would consider very, very risky though. Even it would work the first customers are going to be people who want to ML. I would suggest you look at B24 and how this has been going. SH now faces serious charges and in part rightly so, because his exchange clearly enabled ML. Which shows some of the big problems with Bitcoin, and why my enthusiasm is now greatly reduced after seeing this. Essentially BTC in part leads in part to what is considered criminal in most jurisdictions. Which at some point there will be massive backlash. B24 and Bitfloor are closed now. MtGox potentially could be closed at any time.

[bytemaster]

I get that what you're trying to do here is much bigger than facilitate USD to crypto-USD but I think you bring up a good point about the relative value of a dollar based on our desired ends.

The simplest way to think of this is the Mt Gox example you gave where USD ready to be exchanged for BTC (or other cryptocurrency) immediately is worth more than USD in my hand. This means there is a market for crypto-USD sitting in an exchange ready to be utilized. If there is a market why isn't it happening?

I think the reason it's not already happening is the trust issue. The fact that regardless of how much I offer you to let me use your crypto-USD in exchange for the USD in my hand, you have to believe you'll actually get my USD before you'll even set a price for your crypto-USD.

To me the central issue is trust. If you solve that problem the market will adjust to the relative value of USD in different forms and to changes in demand.

Such a thing already exists today, it is called Bitinstant.  They charge a fee for 'instant funds' in Mt. Gox and the reason they can charge that fee is price difference.

Actually, you can set a BitShare price for crypto-USD without having to trade with anyone but yourself.  It would lock in the 'exchange rate' and if you were the ONE AND ONLY issuer and held all crypto-USD then your dividend payment would be EQUAL to holding just BitShares and thus there is NO RISK in placing bids without having $USD in hand because the value you receive is proportional to the DIVIDENDS received which is the same both immediately before and immediately after your bid is accepted.   Now if the price changes while you hold-crypto-UDS then you could lose money due to exchange rate changes between crypto-usd and bitshares, but that is what markets do.

[bytemaster]

First of you need to be much clear of how such an exchange would allow throughput of 100'000 of orders per day. Then you will see the problem. Take the MtGox volume and calculuate the necessary throughput time. Take into account the speed of light (no kidding). The maximum time for execution would be rather in the 50 ms range or lower (in fact the speed of light makes auto-trading across the globe impossible, but auto trading is the base requirement to process most than 10M$/day). Certainly a blockchain makes such an exchange simply impossible. Just do the calculations of execution time that are needed, say based on 100x current volume at MtGox. Imagine BTC would rule the world, then you need up to 10^12 more volume, which is roughly what the current markets handle. (Global money in circulation is very roughy <10 Trillion$ per day, compared to ca. 10 million $ per day at MtGox). Of course nobody would trade significant volume at 1% fee. Bitcoin exchange fees should in theory approach 0.01%.

An exchange works like this. You have a central datastructure, which is the limit order book. Because it is central, by definition, a distrubted block choin simply does not make any sense. An exchange has to be fast, and so a good exchange has to have a synchronous architecture. In fact that is its primary feature, namely liquidity attracts liquidity. If one single trade takes 10 minutes, you simply can't operate.

Thanks for your summary of the field, but from what I can tell these paragraphs are your most direct challenge to the viability of a block-chain based exchange.   So lets see if I can address this very valid and insightful comment.

Not all trades must occur on the blockchain provided the blockchain facilitates the level of trading required to handle currency issuance and redemption.  Currency only has to be issued or redeemed at the edge cases because anyone willing to hold a balance in crypto-USD because it pays dividends would be a cheaper source of liquidity than issuing.  Crypto-USD can be traded on a centralized exchange but is ultimately backed by trades / arbitrage on the block chain.  So you can think of trading crypto-USD on the block chain like having a direct connection to the stock exchange.  It can be expensive... most people just use a broker which can be faster, cheaper, and lump large trades together.   All that really matters for this system to work is that crypto-USD can be created,  spent like BTC, and exchanged between currencies easily enough to maintain near parity.   HFT can AND SHOULD occur off chain.

After all blockchain real-estate is a finite resource and HFT would bid up the transaction fees forcing only bulk trades to occur on-chain and everything else could be resolved off-chain.

[bytemaster]

I just now got it... you are trying to achieve parity between usd/btc with the new blockchain, correct?

No I am trying to achieve parity between crypto-USD and paper-USD by allowing BTC  to float against crypto-USD.

I am trying to allow one block chain to handle crypto-USD, crypto-GOLD, crypto-EUR, and to allow parity to be maintained without counter-party-risk or IOUs.

[bytemaster]

I believe the amount of coins you are holding should give you more coins from the new block chain (example: 50,000 dev coin gives you more coins from the new block chain than 1 btc)

Could you elaborate? 

[bytemaster]

this encourages hoarding all coins

The economics section already addresses the hoarding myth promoted by mainstream economics and throughly debunked by austrian economics.  I will not debate this particular issue on this thread.

[bytemaster]

to critique your idea

What if the alternate block chain verified the transactions of a peer 2 peer decentralized crypto-currency exchange

each transaction would cost the regular fee of 0.2% of whatever currency is being exchanged and those holding said currencies would recieve interest from that

but what if each transaction also cost x of the new coins created by the new block chain

the new block chain i bleieve would act as a fail safe against alot of problems crypto-currencies currently have

also you could integrate some kind of decentralized peer to peer social network with a rating sytem, like a bitcointalk.onion... kinda

it would make lending and borrowing decentralized and earning more coins for everyone holding

I am trying to follow what you are saying, but think what I have proposed effectively accomplishes the same thing.  Could you explain what problem your solution attempts to address?

[thezerg]

bytemaster, I have read you reply but do not have time right now for a point by point reply.  But let me ask a few questions and offer one piece of writing advice that I hope will clarify things.

Advice:  you tend to write anecdotal examples and stories and "prime" your and other people's mind to a sub-conscious assumption by using terms like crypto-USD.  In other words, you assume crypto-USD and try to argue backwards why it works.

Instead what you want to do is something like a true white paper:

Proposal:  A crypto currency X with these properties:
1
2
3

Effects:  Combining these properties creates the following interesting effects:
1
2
3:  [Ultimately I think you want to say] Payment of dividends creates a negative feedback loop that drives the price of X in THC (the "native" currency) towards parity with the price of the USD in THC.
This is clear because [now prove it].

Extreme situations:  [Prove the effects work during major market upset]

Result:  crypto currency X will track the value of USD


Questions:

1. How does information about the price of USD in THC enter the system?

2. When I was talking about anyone creating their own currency... you said at one point that "we" will start with just the major currencies.  Who is "we" here?

3. How does crypto-USD enter the system?  I get that someone buys it for USD, but I mean technically how is it actually created?

4. How does your dividend system cause crypto-USD to approach USD value?


And then an observation:

By not letting other people "mint" their own instruments, you tremendously limit the crypto-infrastructure.  Doing so would let:
A company issue its stock or bonds
An individual finance his own mortgage
(and a million variations)

Today, all current crypto-currencies (bitcoin, litecoin, etc) are really the same; they may have minor variations but hold the same fundamental role.  The above allows crypto-currencies to hold roles that interact directly with real life entities, rather then through the indirection of a floating exchange.

Whether an individual instrument is legally issued and enforced is not a problem to be solved by the crypto-infrastructure, just like the same is not solved by the paper these instruments are written on today.  In fact, a crypto-infrastructure really is like digital legal paper, allowing verifiable signatures and near-instant transfer.  But ultimately courts will decide about the legality of issuance and enforcement of a particular instrument.

 

[bytemaster]

I am working on just such a paper and explanation.  All of your questions are exactly what I need to do.  Thanks.