How to create decentralized exchanges today

[Anon136]

Being able to trade person to person with out an intermediary is a must and it is the first challenge. Fortunately it has already been solved for us by this website (http://nashx.com/About) From the about section:

What is NashX?
    Anonymous Online Person-to-Person Exchange that uses Mutually assured destruction to create Nash equilibrium for traders.
Why was it made?
    Because nobody wants to send first.
The basic concept
    Traders risk money for destruction in each other's hands whenever they get into a deal.
    So, when one sends first, it doesn't benefit the other to just take it and run.
How it works
    Make an account.
    Add funds to risk.
    Make a post, or take a deal.
    Chat to arrange the details.
    Make the trade.
    Release or destroy risked funds.
    If your fund is destroyed, you will immediately see a transaction id as a proof of destruction.

But we still have the problem of nashx being a centralized point of failure. So lets solve the problem of nash x being a centralized point for communication. This can be solved by modifying the bitcoin code. As everyone here already knows im sure we can store messages in the blockchain if we wish. So what we do is radically increase the max block size, store the blockchain for only a very limited amount of time and destroy all data from before that time, and set the rate that coins are released to never decrease (prob 1 per block for all time would be perfect). This could act as the underpinning for platforms that could be used to trade, since communication is all that is required for trade. There would be a market for purchasing space in this media which would mitigate spammers to tolerable levels. Since the worst they could do was spam transactions that they then failed to fund the corresponding risk fund too (since we know it would not be in a scamers interest to ever fund a risk fund)

(excuse me if i get some of this language wrong im not a computer science guy) The block size could be auto-adjusted by recording network propagation times. the minter of each block would record in the header data what time he received the previous block and max block size could be regularly adjusted similarly to how bitcoin adjusts hash rate difficulty. As a crude example and i dont know if this would be right numbers at all. If average propagation time is <10% of target block rate than adjust max size up. If average propagation time is >10% of target block rate than adjust max size down.

Early on the coins for this chain would require centralized exchangers but once it became a bit more established the exchange could be used to exchange its own native currency.

ok and so the last problem is the centralization of the destruction account service provided by nashx. This can be solved by using the previous block chain based communication mechanism to come to arrangements for how a multisigature transaction will be used on the bitcoin blockchain. Multisignature transactions on the bitcoin blockchain can be used to create a destruction fund.

Anyway thanks to everyone who entertained my incoherent babbling this far!


*Added after* you know what this is much bigger than i was realizing. this allows for decentralized publishing of anything by anyone anywhere. if you developed a web browser like application around it you could create a decentralized market for moving information. This would solve the public goods problem in distributed mesh networking and provide a strong market based incentive for the development of decentralized PHYSICAL communications networks (as opposed to the bitcoin network which rides ontop of the infrastructure provided by isps) as well as a market feedback mechanism for people who wanted to develop their own private nodes for carrying other peoples data across a mesh network.

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[conroe64]

I agree that nashx is a really interesting concept. But why do we need to change the mining reward, and why increase the blockchain size to add messages?

Why not simply add a transaction type that allows both the buyer and seller to fund to an "mutually assured destruction" account with a condition that within a stipulated time frame (for example two weeks), either party can issue a destroy command and have the funds become part of the mining reward of its containing block. Otherwise, if both parties issue a "I'm satisfied" transaction, the funds are released to both parties in the amounts they initially funded.

What's also interesting is that this feature can be used for trading anything. In other words, just because both buyer and seller fund the MAD fund, "C" in bitcoin, and the two parties are trading "A" for "B", doesn't necessarily mean that "A" nor "B" must be in bitcoin at all, but could be anything.

Edit: After re-reading your comment, I think I now understand why you want to store messages in the blockchain. I still don't see this as necessary, because as long as the buyer and seller can communicate, over any channel, they can reach an agreement. And since they are the only ones that can do anything in the event of a dispute, then why do we need to publish any communication between the two?

[sor.rge]

The idea is flawed, because it's possible to make the other party lose more.

When you make a post, the amount you risk should be equal in value to what you're trading. Whoever takes your deal will risk twice as much

At this point you destroy the money, and whoever took the deal loses twice as much. This way a wealthy scammer can suck the money from the poor, increasing the gap between them further. So it will not work, a rational agent should never accept the deal.

[Anon136]

The idea is flawed, because it's possible to make the other party lose more.

When you make a post, the amount you risk should be equal in value to what you're trading. Whoever takes your deal will risk twice as much

At this point you destroy the money, and whoever took the deal loses twice as much. This way a wealthy scammer can suck the money from the poor, increasing the gap between them further. So it will not work, a rational agent should never accept the deal.

no both parties lose the same amount because the one who gets the item risked double and the item that he receives mitigates the money lost in the risk fund.

this still doesnt stop the problem of money having different marginal utilities for different people, you just have to hope that generally speaking this problem is over ridden by peoples desire to get revenge for being defrauded. So for example even if i unwittingly initiated a trade with a millionaire fraudster who could more easily afford to lose money than me, this still wouldnt give him more leverage over me because i would be willing to take a greater loss in order to insure that he also took a loss. If you do not have this sort of conviction, and you can not afford to lose the money in the risk fund, it is recommended that you do not use this system.

[sor.rge]

no both parties lose the same amount because the one who gets the item risked double and the item that he receives mitigates the money lost in the risk fund.

He gets nothing. The first user will not send anything, of course. If you propose a different scheme than what is described at that website, please explain it more.

The utility issue that you pointed out is another valid point, albeit weaker.

[conroe64]

At this point you destroy the money, and whoever took the deal loses twice as much. This way a wealthy scammer can suck the money from the poor, increasing the gap between them further. So it will not work, a rational agent should never accept the deal.

A wealthy scammer would make both himself and the other person both more poorer is not rational behavior on the part of the wealthy scammer. Since the money held by both is so small compared to the combined wealth of everyone else, they both become poorer relative to the rest of the world.

Besides which, the money isn't actually destroyed, but instead transferred to whoever mines the block. So in essence, from the wealthy scammers point of view, they are receiving "x" BTC from party A (the scammee), then giving "2*x" BTC to party B (the miner). This kind of arraignment may work for the government, but as anyone in private industry would know, this is not a very good business model.

[sor.rge]

Since the money held by both is so small compared to the combined wealth of everyone else

That's an assumption. When you're the second party, you don't want to bet your money on propositions like that (I wouldn't), and actually on the rational behavior of the other party as well (but that's a pitfall of the whole approach even if it was perfect othewise).

Besides which, the money isn't actually destroyed, but instead transferred to whoever mines the block. So in essence, from the wealthy scammers point of view, they are receiving "x" BTC from party A (the scammee), then giving "2*x" BTC to party B (the miner).

Now consider B = scammer.

[Anon136]

At this point you destroy the money, and whoever took the deal loses twice as much. This way a wealthy scammer can suck the money from the poor, increasing the gap between them further. So it will not work, a rational agent should never accept the deal.

A wealthy scammer would make both himself and the other person both more poorer is not rational behavior on the part of the wealthy scammer. Since the money held by both is so small compared to the combined wealth of everyone else, they both become poorer relative to the rest of the world.

Besides which, the money isn't actually destroyed, but instead transferred to whoever mines the block. So in essence, from the wealthy scammers point of view, they are receiving "x" BTC from party A (the scammee), then giving "2*x" BTC to party B (the miner). This kind of arraignment may work for the government, but as anyone in private industry would know, this is not a very good business model.

his criticism is legitimate under a very specific set of circumstances. basically if the poorer person can not afford to lose the money and the wealthy person knows this. its unfortunate but it isnt enough to discredit the idea in general.

[sor.rge]

The problem could be mitigated in the same way the untrusted exchange is made safer now: by splitting the transfer into chunks of size which is negligible to both parties. This would create a heavy load on the system and very high transaction fees though.

[Anon136]

The problem could be mitigated in the same way the untrusted exchange is made safer now: by splitting the transfer into chunks of size which is negligible to both parties. This would create a heavy load on the system and very high transaction fees though.

well the whole point of trust free systems is to be able to trade with people you dont know and if neither party knows the other they have no way of knowing whether or not they have the leverage to extort the other party.

[sor.rge]

well the whole point of trust free systems is to be able to trade with people you dont know and if neither party knows the other they have no way of knowing whether or not they have the leverage to extort the other party.

Each could declare the maximum single transfer amount that they wish to risk. A millionaire says he would risk 100$, while I'd say no more than 1c. Then we start transferring the money 1c at a time
And yeah, this works only with the arbitrarily divisible things, like money. No way you could buy an item with that approach.
What this system could give is some more insurance so that the people will feel somewhat safer and willing to risk more money than with the completely untrusted "you send first" exchange. Still the safety and efficiency is nowhere close to a centralized exchange.

[Anon136]

well the whole point of trust free systems is to be able to trade with people you dont know and if neither party knows the other they have no way of knowing whether or not they have the leverage to extort the other party.

Each could declare the maximum single transfer amount that they wish to risk. A millionaire says he would risk 100$, while I'd say no more than 1c. Then we start transferring the money 1c at a time
And yeah, this works only with the arbitrarily divisible things, like money. No way you could buy an item with that approach.
What this system could give is some more insurance so that the people will feel somewhat safer and willing to risk more money than with the completely untrusted "you send first" exchange. Still the safety and efficiency is nowhere close to a centralized exchange.

the big advantage is it doesn't have the web of trust scalability problems.

[sor.rge]

the big advantage is it doesn't have the web of trust scalability problems.

Could you elaborate a bit more? A bitcoin-like setup is not scalable, because it forces each node to have a complete view of the entire system. If the transaction rate will increase above certain level, the bitcoin network will begin to drop transactions massively. See https://en.bitcoin.it/wiki/Scalability . For example, the network at the moment could not possible handle every transaction on mtgox, since the maximum rate is 7 transaction per second, while mtgox does about 30.