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Author Topic: ATTENTION: Any exchange right now can act like a bank  (Read 2353 times)
Jered Kenna (TradeHill)
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July 04, 2011, 04:40:55 AM
 #21


If everyone knows the exchange has a fractional reserve it's not a bad thing.
If they're doing it without saying so that's another issue.

We've talked about doing something along those lines (the wallets).
I don't write the code so I'm not sure how difficult it would be to have individual wallets.
I would be interested in any solutions people can come up with though.

-Jered
 

The system is useful because it provides transparency. The question of whether fractional reserves are desirable is not relevant.
Transparency is useful with a fractional reserve too.

E.g.
Suppose that the exchange promises to hold a minimum of 30% as a BTC reserve against all its bitcoin liabilities. Each customer is assigned a unique block explorer address that holds exactly 30% of their account balance.

If this account is not at exactly 30% of the account balance, then the customer will know that either:
a) the exchange has been hacked, or
b) the exchange is not holding a 30% BTC reserve.

Again, customers should be able to audit exchanges using block explorer. That is what the technology is there for.



Your turning an exchange into a bank, which isn't what we want, though with this you can also do what your saying as well.

Not sure if that's directed at me or cunicula. We're holding 100% and if we move away from that we'll make it very clear with enough time to pull out if you want.
Currently that isn't in the plans.

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July 04, 2011, 04:44:16 AM
 #22

ok - so now I think I understand that you are suggesting the exchange manage an exchange-side wallet per trader.

This would be fine - except for transaction speed.
Traders can theoretically do multiple trades per second - especially if controlling via an API.

Perhaps it could be done if these server-side wallets were updated with the balance due to trading.. on say an hourly basis. (and upon withdrawal/deposit by trader)

I'm coming round to the idea in that case.  
It wouldn't stop a hack of the system in between wallet-update-ticks  - but may give people long term confidence that the exchange is solid.
The previously mentioned database total compared to wallet total checks would still need to be done anyway.

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July 04, 2011, 04:45:30 AM
 #23

We're holding 100% and if we move away from that we'll make it very clear with enough time to pull out if you want.
Currently that isn't in the plans.

That's good to hear. Would be nice if you could also prove it though, not saying I don't trust you guys, just that transparency would be really good for the community.
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July 04, 2011, 05:02:04 AM
 #24

Mt. Gox and Tradehill are performing the functions of an exchange, a broker, a non-bank depository institution, a clearing house, and a stock custodian. In the real world, those functions are usually separated.  (Sometimes they're not. See Bernard Madoff. That didn't end well.)

A completely distributed exchange is quite possible. You first need some way to do an atomic transaction in two commodities between two untrusted parties. One approach is to split transactions into tiny ones, each one being done separately and completed before the next one starts. That way, any rip-off is limited to the size of one transaction.

Once you can do that, you just need a way to broadcast "buy" orders. Only one side needs to be broadcast, although it's useful to broadcast both. Orders can't be anonymous, since you have to know who the other party is to deal with them.  If you see a buy order you like, your client contacts their client and does a deal. First client to get through wins.

There are some problems. Transactions cannot be undone, except by mutual consent of the parties. There can be no "rollbacks". Any gains from market manipulation stand. (So you had better have enough cash reserves to handle a mistake now and then.)

A party can broadcast buy orders but not respond to matching sell offers.  Since orders are not anonymous, this behavior is detectable. You need a reputation system to kick out traders who do that. (Which is exactly how live commodity trading floors dealt with it.)

Lag is a problem. Network transit time and local processing delay affects your trading profitability. (This is a problem in real-world trading. Look into "high frequency trading" and the efforts made to cut lag to microseconds.)

It's not as orderly a market as a system with centralized processing of limit orders, but that's the price of a distributed, mutually mistrustful system. 
walidzohair
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July 04, 2011, 05:19:34 AM
 #25

I agree with that and as I said before a distributed currency needs a new distributed exchanges.
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July 04, 2011, 05:22:45 AM
 #26

I agree with that and as I said before a distributed currency needs a new distributed exchanges.
Don't multiple independent exchanges count as 'distributed'?

Though I agree a common API with automatic order routing would be nice.

Bitcoin Core developer [PGP] Warning: For most, coin loss is a larger risk than coin theft. A disk can die any time. Regularly back up your wallet through FileBackup Wallet to an external storage or the (encrypted!) cloud. Use a separate offline wallet for storing larger amounts.
Jered Kenna (TradeHill)
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July 04, 2011, 05:59:46 AM
 #27

We're holding 100% and if we move away from that we'll make it very clear with enough time to pull out if you want.
Currently that isn't in the plans.

That's good to hear. Would be nice if you could also prove it though, not saying I don't trust you guys, just that transparency would be really good for the community.

More than happy to do it if we can agree on a relatively simple and accurate way to do it.
Blockexplorer showing our wallets would only work if you knew how many our users are supposed to have and you'd need to trust us on that.
I don't see individual wallets being easy to pull off but I'll look in to it. Listing user balances and totaling it presents privacy issues and once again you might have to trust us.
There should be a way to get it done though.

Open to suggestions.
-Jered

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Nagle
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July 04, 2011, 02:38:42 PM
 #28

I agree with that and as I said before a distributed currency needs a new distributed exchanges.
Don't multiple independent exchanges count as 'distributed'?
Not when the "exchange" holds your funds and can stall on releasing them. You can't pick any exchange for your next transaction.
davux
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July 04, 2011, 08:26:34 PM
 #29

A completely distributed exchange is quite possible. [...]

This is a very interesting analysis IMHO, thank you. The forum is a frustrating place to throw good ideas at, because they get forgotten very quickly, but you should start a wiki page for a decentralized exchange brainstorming/proposal. I have seen other neat ideas floating here and there (e.g. from grondilu, IIRC).

Please someone get those great ideas together. I can't do it myself because I suck at trading, but I do think we have an important matter here.

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