A Peer-To-Peer Options and Futures Exchange using Confidence Chains

[bluemeanie1]

ABSTRACT

Futures and Options exchanges are considered to be foundational to minimizing market volatility and the maintaining price stability of an asset.  This paper describes a peer-to-peer system for the exchange and issue of options and futures contracts meaning that 1) there is no central point of failure 2) control is distributed democratically between many participants on a network.  Any user of the network may issue futures and options, and more advanced systems can be built on top of this functionality(such as a clearing house).  The system utilizes the Confidence Chains algorithm, inherits its underlying characteristics and makes use of other innovations described in [2] and [3].  We also describe an application for a Bitcoin Options Exchange.

http://www.altchain.org/?q=whitepapers/paper4.html

[nwbitcoin]

This is very interesting, but I do see a slight problem in that by making it impossible to spend the bitcoins during the time of the contract, it reduces the contract makers cashflow. This would, theoretically ensure that there was a reduction in the total number of coins in potential circulation and possibly create some form of inflation.

I know this is mostly theoretical risk, and I love the idea of seeing a new market for bitcoins, but I do wonder if the advantage is limited?

Have I misunderstood a crucial element of the plan? ;-)

[bluemeanie1]

This is very interesting, but I do see a slight problem in that by making it impossible to spend the bitcoins during the time of the contract, it reduces the contract makers cashflow. This would, theoretically ensure that there was a reduction in the total number of coins in potential circulation and possibly create some form of inflation.

I know this is mostly theoretical risk, and I love the idea of seeing a new market for bitcoins, but I do wonder if the advantage is limited?

Have I misunderstood a crucial element of the plan? ;-)

you are correct in your assertion that during the duration of the options contract the underlying asset is unspendable.

you can solve this cashflow problem by instead creating an option on a bond derived from the said asset.  This of course introduces the dimension of RISK and DEFAULT.  Naturally the option is going to be worth more if the credit risk associated with that bond is more attractive.  When this technology is ready to roll, there will be a lot of opportunities for financial engineers to create systems to manage such risk.

Bonds are described here: http://www.altchain.org/?q=whitepapers/paper3.html

[nwbitcoin]

Thanks, the info on bonds helped a lot.
:-)