Bitcoin Dealer Network Association (BDNA)

[rpietila]

BITCOIN DEALER NETWORK ASSOCIATION (BDNA) WORKING PAPER under construction

Moved from "rpietila public diary", please move your comments also here. I cannot easily move comments. Note that the paper is not even fully written due to my condition (I need rest, and even if I didn't, there is only 24/7):

How will the world be different? When someone wants to buy bitcoins, currently he uses Localbitcoins.com for trade. That has limits to trade size, few offer more than $ 3,000 deals. Also not all may be trustable. 99.9% sounds good unless you happen to be the 0.1%. The other option is to try to buy in exchanges, where volume is there, but trustability as a whole is not.

From BDNA on, the dealers will be empowered to be able to offer "unlimited" (10-100 times higher than before) size of deals, and have no more risk of anyone being defaulted upon. Read the spesifics how.


TL; DR

In every city there is now a local dealer to whom you can go to buy and sell bitcoins. Better than localbitcoins because margin is less (2-3% compared to their 5-10%), bigger deals possible (a million dollars OK in every city), also trustable guy who has been doing business for years. This can take care of all bitcoin trade in the world 100% escrowed because the escrow amount is currently tied up in one deal only, and there is no more than 100,000,000mBTC deals outstanding in any given moment anyway. This forms a backbone of the system to serve all of the Bitcoin community.


PURPOSE
The BDNA has a three-fold purpose:

A. for its members it provides a thrice-a-day (8-hourly) opportunity to trade in bitcoin in the most liquid way, possible on their own account, but mainly on the account of their clients. The system empowers the even dealers with rather small capital (<1,000,000mBTC) to safely and securely conduct large business (sell bitcoins to their new clients) without the liquidity risk / slippage risk that is so provident in all current ways of easily obtaining bitcoins (exchanges, current OTC networks).
  
B. Its members can safely trade with each other, because there is an automatic escrow/bail system in place to prevent problems. This half-automized system allows for all trades to be registered upon lock-in, and will then follow their completion and dispute management if necessary. This includes all currencies and altcoins.

C. The world (people outside the BDNA) will see the USD/BTC fixing price immediately after the fixing at 00:00, 08:00 and 16:00 UTC, and this will be act as a reliable gauge for bitcoin price worldwide. The system is build in a way that the current methods of price manipulation (that I all too well know, and have used to my advantage) are rendered unprofitable. Walls, flashcrashes and tapepainting in other venues become unprofitable after the legit hoarding and dishoarding of bitcoins. Price will fluctuate rapidly, but not more rapidly that that of silver or some stock. For p2p OTC trades, this solves the price-setting part, as price can be quoted at fixing+/-margin, where only fixing (usually the following fixing from the lock-in) and margin need to be agreed upon.

MEMBERSHIP

To become a member, you will need to buy stock in BDNA. The price of a stock initially will be 10,000mBTC. The price will be kept at the minimum level of the book value of the BDNA. No more than 500 stock will ever be issued. There will be standard KYC (ID + proof of address) for all members. The BDNA itself will be probably incorporated in Estonia.

1 stock = Member, you are liable to pay fees on the trades.
10 stock = Partner. Partners are void of most of the fees.
30 stocks = Senior Partner. They have more power and honor in BDNA

For every stock, the purchaser must post a bail of 100,000mBTC to BDNA

BOARD AND OFFICIALS

AGM selects the President and 4 other Board Members. One of them has to be Treasurer. One has to be marketing contact. Then at least 1 broker/techguy is needed. We have 24/7 presence in the market, that is why 2 brokers is needed in addition to Treasurer, who knows these things. Brokers need not be board members though, and it is just good if they reside in multiple continents.

Reason why there are 5 board members, is that they keep the bail plus BDNA funds well kept. Most of it will be in multiple authentication cold wallets.

BAIL

Since there is 100,000mBTC bail associated with the cost of a 10,000mBTC share, the total amount of bail gathered will reach 50,000,000mBTC. Even though the sum does not seem large, it is large enough to 100% cover indefinitely the remnant of all legitimate trade of bitcoins in the world ever.


OPEN FIXING

Open fixing is contracted in the fixing engine that clears the market of all orderbooks of the market participants. Member orderbooks must be posted to the engine 30 seconds before the fixing. Engine checks if there are market orders, or if somebody want to sell for lower than another one wants to buy. It finds one market clearing price, publishes it, and generates a List of Outstanding Payments (LOP).

The bail is maximum 168 hours anyway, for both participants of the trade. If the Bitcoin-sending party wants to relieve his bail, it can easily be done in 2 hours. Also the fiat may take as little as 24h or as much as 168 hours, with average perhaps 96 hours. This will lead to maximum of trading volume of about 100-150M mBTC per week, fully insured. This operation can for instance buy up all the new mining, and distribute it to the new holders.

The deals made, go to the List of Outstanding Payments (LOP), a list that very simply tells, who must pay what, to whom, and when. One Open Fixing deal that goes through generates two entries:

rpietila   150,000 MBC   rontus   1306190800
rontus   17,200 USD   rpietila   1306190800.

The LOP is visible only to the counterparties of the deal and the brokers.


CLOSED TRADES

Members tell to the broker, which kind of deal they have agreed upon. Broker enters it in the LOP in a similar way as with the automatic fixings. Broker assigns a 100% bail for both. These trades can be just about everything - any currency or altcoin.

rpietila   150,000 MBC   rontus   1306190800
rontus   17,200 USD   rpietila   1306190800.


LIMITS (LOP)

All trades are 100% escrowed with bitcoins. This is achieved by the bail structure that every currency pair traded is fully escrowed twice.

List of Outstanding Payments (LOP)


MEMBER STANDING AND ITS BENEFITS

Members are internally classified to 5 classed according to their perceived risk level. This information is not meant to be public
5 buttons = "Hero Member", may get 300% leverage
4 buttons = "Senior Member", may get 200% leverage
3 buttons ="Member", may get 100% leverage
2 buttons = "Junior Member", may get 50% leverage
1 button = "Newbie", no leverage.

Leverage here is automatic leverage that will be assigned to this member's trades if he has not previously contracted more bail but has assigned trades. This leverage is taken from BDNA and will cost 0.20% per day.

This is not correlated to Member Standing based on the number of stock.


DISPUTE/DEFAULT RESOLUTION

A dispute arises when a member says that he has sent the payment, and that it should have been cleared from the LOP as settled. The counterarty says no money is received. In this case both present their proof and the one-man broker court deliberates the judgement. Likely it was just the bank taking too long. In scam cases the board is the highest court, and they may issue Warnings and execute them.


FEES

membership fee (APR)	1000mBTC	.
life membership	5,000mBTC	.
entry to the fixing orderbook	no fee	1096 fixings per year
matched order (->LOP) fee	no fee	.
fulfilled order fee	200mBTC/no fee(partners)	.
"NOTE"	2,000mBTC	for late payment etc.
"1. WARNING"	20,000mBTC	.
"2. WARNING"	50,000mBTC	.
"3. WARNING & EXPEL"	100,000mBTC	.

1. All values are in minicoins (mBTC = 100,000 satoshi)

2. Stocks are freely tradable but the board may allow/disallow new entrants based on 3/2 vote. This may be done because e.g. the new applicant's history with disputes or other unethical behavior. The board may use maximum 168 hours for deliberation before granting the permission to sell. Nobody has the right or obligation to purchase the stock then, but the seller may auction them out to current members.

[rpietila]

reserved

[rpietila]

Is there going to be any crossover between the BDNA and the Supernode network?

Did you originally plan on combining these two concepts?

The minimum bail amount is currently what I'm pondering about. Is 500,000mBTC too much? Considering that there are only about 20,000 such entities in the world!!

Why not consider adding more tiers to the BDNA, similar to the Supernode network. As of now I think there are probably few people who could afford to commit that amount of money. And it might limit liquidity. I can understand though if you intend the BDNA to be exclusively for people who hold large amounts of coins. But one problem I see there is that many people wish to buy small amounts of bitcoins locally, and these dealers who (from what I gather from reading here) are going to be individuals managing 6-7 figure plus portfolios. So I can't imagine many of them are going to bother trading to make a few dollars in commission. But lots of people with smaller holdings are willing to. One thing that I could not be taking into account is the fact that some of these dealers might have employees working for them.

How do you see the BDNA members running their businesses? Brick and mortar with people employed? Not meeting up at the McDonalds to sell $100 dollars worth of bitcoins I assume

[rpietila]

Please now the tough guys, I need you comments!!

I believe this is the way to centralize the trust (in a way of a bail fund) of all OTC-transactions, and do it in a way that at any given time all outstanding transactions are fully escrowed. Note: by all I mean the residual part, which the local merchants cannot match daily due to the fluctuation of their clients' time-based needs.

I think we need only about 50,000,000 mBTC to do this (and this will be heavily decentralized with multisig authorisation), which is <0.5% of all bitcoins existing. This is by far a better mechanism than the exchange-based one. No new exchanges have an opportunity to gain ground any more. MP, do you have something else in mind?

Even 2weiX can return the comment that was quick-deleted, since I quick-made at least 3 different benefits for him to participate the network, instead of working alone. He is ever should know the importance of dealer network since he is part of one both as metal and as bitcoin already. I don't understand what was the criticism..

[rpietila]

I have read with interest your BDNA proposal. I am in the process of creating a business that will depend on executing trades at a constant exchange rate.

I estimate these trades to be around $10,000 per week during the beta phase of the project ultimately growing to $1,000,000 or more per week.

I am still going back through your proposal to make sure I understand it.

Do I have it correct that if you bought 1 share you would be responsible to pay the 10,000 mBTC cost of the share PLUS a 100,000 mBTC surety bond deposit? And that the aggregate of all btc collected for the surety bonds would underwrite any default on trades within the network?

Put me down as definitely interested!

I am planning that the minimum direct participation (I envision that the direct participators all have respective small networks in their areas/cities) would be as follows:

5 shares for 50,000mBTC
Bail for 5 shares for 500,000BTC.

All trades are between members only. So if prince William comes and wants you to pay first, you just decline and say that you are the member of the dealer network and it is impossible for you to default anyway. THIS is the most potent reason why you want to be a member.

So you can never default a stranger because all trades are members only. It is hard to even imagine how you could default in these conditions, anyway the underwriting order would by your bail first, then any bail you have bought for insurance, only last would be the aggregate bail.

It may sound like much that the minimum you need to surrender is 550,000mBTC. But once you do it, then you never need to pay first, so in essence you don't need BTC anymore for selling it, since you can sell it for "instant cash, future delivery" and then buy it from the network using just the terms that you like.

[rpietila]

Are there any restrictions for BDNA membership based on geographical location?

We plan to have members in all sensible locations. By sensible, hopefully that means "including the U.S."

(I currently run a company, Silvervault, which excludes people from the U.S., Canada and Japan for becoming customers.)

The minimum bail amount is currently what I'm pondering about. Is 500,000mBTC too much? Considering that there are only about 20,000 such entities in the world!!

[Este Nuno]

edit: Redacted a post better suited for PM, apologies.

[rpietila]

Had a phone conversation with Jeremias Kangas, the operator of Localbitcoin. His system actually already reminds this quite much and he is currently in the process of introducing Loaning (which is akin to loaning of the bail capital in my proposal).

He fortunately is fulfilling the Loaning side in his localbitcoins network, so I don't need to do it.

He unfortunately does not currently understand the requirement that the end customer locks-in the price now, and the member of the dealer network has a number of days (8 in my proposal) to fulfil the receipt of bitcoins. This would tremendously ease the inner function of the dealer network and remove the amount of "trust" that his system still must account. My system would both nearly abolish any need for trust, plus almost get rid of all operating capital (even 30-50kBTC total, would be enough to accommodate all bitcoin trade worldwide, no matter how large).

Unfortunately his system is good enough that I cease working on my concept, until situation changes. Perhaps it is too late for the BDNA.

[Matthew N. Wright]

This seems a lot like the principles behind Ripple, except with locking of funds (a good idea) and making sure those funds are active before a trade can be made, instead of just assuming they are because "trust". Please correct if wrong.

[rpietila]

Do you plan to integrate your bitcoin dealing business in to Localbitcoin when you've reactivated it?

Localbitcoin is only a fiat<->bitcoin thingie.

I have gold, silver also, and established businesses (Hopea.fi & Silvervault). So likely I will register to Localbitcoins.com also, but that will not consist 100% of my dealings.

[rpietila]

You will soon see how Silvervault liberates trading between:
- physical investment gold
- physical investment silver
- bitcoins
- euros.

Click the link and see that you can directly trade between gold and bitcoins, or with bitcoins and silver. If your trading volume of 6 months exceeds 100,000 EUR, you pay only 0.3% fees one way (0.6% two-way if your currency pair does not contain fiat at all).

All the stuff is safely in a vault in Tallinn, Estonia. Established 2010.

EDIT: You can vote for the new products here. The service is in development and new products will be launched in the first half of 2014.

[KS]

Had a phone conversation with Jeremias Kangas, the operator of Localbitcoin. His system actually already reminds this quite much and he is currently in the process of introducing Loaning (which is akin to loaning of the bail capital in my proposal).

He fortunately is fulfilling the Loaning side in his localbitcoins network, so I don't need to do it.

He unfortunately does not currently understand the requirement that the end customer locks-in the price now, and the member of the dealer network has a number of days (8 in my proposal) to fulfil the receipt of bitcoins. This would tremendously ease the inner function of the dealer network and remove the amount of "trust" that his system still must account. My system would both nearly abolish any need for trust, plus almost get rid of all operating capital (even 30-50kBTC total, would be enough to accommodate all bitcoin trade worldwide, no matter how large).

Unfortunately his system is good enough that I cease working on my concept, until situation changes. Perhaps it is too late for the BDNA.

I woudn't drop the ball on the BDNA if I were you. Competition is good, choice is good. Maybe your idea needs tweaking but the ecosystem needs more actors.

If you simply join LBTC, the system won't have gained much, if at all. If you launch your BDNA, the system will have gained a new actor, an alternative to LBTC, with the potential to complement LBTC and thus grow the ecosystem overall. With your system, bigger, more numerous trades can occur as you remove the trust necessity - and the more trades happen, the more the system grows and the more the system grows, the higher the value of the BTC, which brings more people etc.

[rpietila]

I will come back!

[rpietila]

I am back. Things look like the same as I left them.. 

[katie1348]

I think your share pricing is too expensive.

You are expecting people to put down the equivalent of what about $50,000.

Perhaps to a Bitcoin-millionaire that is not a huge amount of money, but it will keep many people out of the network, who would be interested.

I am not sure you have provided anywhere enough information to warrant that kind of investment.

K

[rpietila]

I think your share pricing is too expensive.

You are expecting people to put down the equivalent of what about $50,000.

Perhaps to a Bitcoin-millionaire that is not a huge amount of money, but it will keep many people out of the network, who would be interested.

I am not sure you have provided anywhere enough information to warrant that kind of investment.

K

Thanks, when I wrote it, it was more like $10k...

Anyway - is there a way to make this work without the shares? I don't like them as a concept... The bail and the clever way of allocating it should be the centerpoint of this structure.

[katie1348]

I think your share pricing is too expensive.

You are expecting people to put down the equivalent of what about $50,000.

Perhaps to a Bitcoin-millionaire that is not a huge amount of money, but it will keep many people out of the network, who would be interested.

I am not sure you have provided anywhere enough information to warrant that kind of investment.

K

Thanks, when I wrote it, it was more like $10k...

Anyway - is there a way to make this work without the shares? I don't like them as a concept... The bail and the clever way of allocating it should be the centerpoint of this structure.

I understand your dilemma.

It is vitally important that the managers of the network are trustworthy and upstanding, as the reputation of the system will ultimately be theirs to reflect and shape.

I am not sure that simply making it available to the highest bidder is the best way to get the kind of trust I think is needed.

If this is the case, what other options are there.

K

[User705]

Interesting concept.  So all deals would get done 3 times a day?  Or is the fix price valid in between as well?  If it is wouldn't that invite arb problems if exchange rates move sharply in between fix times?