What if bitcoins were used in high-frequency trading?

[ano-nym]

Hi bitcoiners,

I am an avid bitcoin supporter and have previously posted using another account.  I post anonymously this time because I would like to ask a few questions that relate to my line of work, but at this time I cannot associate my company with bitcoin.

I work as a software developer at a (significant) high-frequency trading firm. I'm exploring different ways that I might have a positive impact on the bitcoin economy, and am seeking ways of introducing bitcoin to my associates.  I'd like to share some of my ideas, see if they might stir your own thoughts, and also ask some technical questions.

Idea #1: Suppose a company can issue its own version of the bitcoin concept as "stocks" (bitstock?).  I know this has been talked about on other threads as well.  What would be the implications of high-frequency trading on the infrastructure borrowed from bitcoin?  For example, we trade thousands of stocks at a rate of thousands of messages per second (i.e. not all messages result in trades).  We deal in terabytes of data per day.  Is it even reasonable to consider a proof-of-work blockchain in this context? How would this disrupt the trust mechanism for resolving conflicting claims (e.g. could I send some "bitstock" shares to one person, but then change my mind an instant later by sending the same bitstock to another recipient, and then trying to convince the rest of the network that the second transaction was the valid one)?

Idea #2: What if bitcoins could be used as an internal tip system to help associates track performance? When one associate wants to thank another one anonymously, the first could drop bitcoins in the second's tip jar. At the end of the bonus period, tips are amplified by actual group performance and bonuses paid out. Since there are no transaction costs, everyone wins and individual performance gets a little bit of measurement. Is there any reason we should consider a point-based system rather than use bitcoin?

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

Idea #4: Does bitcoin need a market maker in its exchange markets? Market makers usually help narrow the spread between the "bid price" and "ask price" by taking some of the risk in moments when there are no natural market participants (e.g. if you want to sell, but at this moment no one is willing to buy, you either have to lower your price to gain attention, or wait a while for more buyers to show up). My sense is that bitcoin is too young to need a market maker, and perhaps does not yet have enough volume to make the role worthwhile. What are your thoughts?

I look forward to hearing your thoughts.

Thank you,
ano-nym

[1715572014]

1715572014

[1715572014]

1715572014

[S3052]

This is just great.

As a bitcoin market analyst, I think all ideas are very interesting, and particularly the 3rd one is probably the most urgent and the one with the biggest short term positive impact.

As much as I like the current bitcoin exchanges, they lack the trust backing in the "non-bitcoin" world. A true forex market, back by a trusted institution would probably make bitcoins much more believable.

my few bitcents of wisdom...

[gusti]

This is just great.

As a bitcoin market analyst, I think all ideas are very interesting, and particularly the 3rd one is probably the most urgent and the one with the biggest short term positive impact.

As much as I like the current bitcoin exchanges, they lack the trust backing in the "non-bitcoin" world. A true forex market, back by a trusted institution would probably make bitcoins much more believable.

my few bitcents of wisdom...

what is your idea of a "trusted institution" ?
a regulated one ?

can they adopt bitcoins under the same umbrella ?

[S3052]

I mean an officially registered and regulated financial institution.
Currently, many investors shy away getting into bitcoins because the exchanges are not trustable enough (even if I think they are great and I have full trust in them). What they lack is the credibility of i) a good history of acting as exchange and ii) the lack of transparency that they are "legal" and obey the needed processes.

[­­­Atlas_]

...regulated financial institution.

http://cdn1.knowyourmeme.com/i/000/076/537/original/Super_FUUU_Face.jpg

[S3052]

if we like it or not, this is the only way to keep bitcoin growing. what is wrong if a bitcoin exchange / forex market is under the umbrella of such an institution, which does the same as the current exchanges (MtGox, bcm, bcex, b2cash...) but provide the infrastructure and scale of the needed compliance with the processes?

unlike other financial assests, they can not change a bitcoin, nor the number of bitcoins in the universe.

[­­­Atlas_]

if we like it or not, this is the only way to keep bitcoin growing. what is wrong if a bitcoin exchange / forex market is under the umbrella of such an institution, which does the same as the current exchanges (MtGox, bcm, bcex, b2cash...) but provide the infrastructure and scale of the needed compliance with the processes?

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement? It would be wonderful to see it succeed on its own.

[N12]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement?

Keep dreaming.

I totally agree with S3052.

[jgarzik]

Idea #1: Suppose a company can issue its own version of the bitcoin concept as "stocks" (bitstock?).  I know this has been talked about on other threads as well.  What would be the implications of high-frequency trading on the infrastructure borrowed from bitcoin?  For example, we trade thousands of stocks at a rate of thousands of messages per second (i.e. not all messages result in trades).  We deal in terabytes of data per day.  Is it even reasonable to consider a proof-of-work blockchain in this context? How would this disrupt the trust mechanism for resolving conflicting claims (e.g. could I send some "bitstock" shares to one person, but then change my mind an instant later by sending the same bitstock to another recipient, and then trying to convince the rest of the network that the second transaction was the valid one)?

Yes, a highly interconnected, high bandwidth network -- such as those already used by HFT'ers -- could support a proof-of-work chain at such rates.  You're looking at about 600,000 - 1,000,000 transactions per 10-minute block, I'd say.

The main hurdles will be efficient TX broadcasting, and trying not to be CPU-bound doing ECDSA signature verification.

Also, the proof-of-work algorithm would need to not regenerate its mining block on every TX, but upon every $N TX's.

Idea #2: What if bitcoins could be used as an internal tip system to help associates track performance? When one associate wants to thank another one anonymously, the first could drop bitcoins in the second's tip jar. At the end of the bonus period, tips are amplified by actual group performance and bonuses paid out. Since there are no transaction costs, everyone wins and individual performance gets a little bit of measurement. Is there any reason we should consider a point-based system rather than use bitcoin?

If you're talking about using the main block chain, that would be fine, albeit it costs you money to allocate points.

If you're talking about a totally separate block chain, then you must consider how much you wish to investment in the "strength" of the block chain.  A tiny chain would be easily vulnerable to double-spend attacks, compared to the main chain, if some naughty HFT trader decides to plunk down $100,000 to game the system.

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

I cannot see how this would cause problems.  It would greatly benefit bitcoin... go for it!

Idea #4: Does bitcoin need a market maker in its exchange markets? Market makers usually help narrow the spread between the "bid price" and "ask price" by taking some of the risk in moments when there are no natural market participants (e.g. if you want to sell, but at this moment no one is willing to buy, you either have to lower your price to gain attention, or wait a while for more buyers to show up). My sense is that bitcoin is too young to need a market maker, and perhaps does not yet have enough volume to make the role worthwhile. What are your thoughts?

You are correct, there is very little volume in bitcoin's current exchange markets, as compared to any "real" market.  I guess bitcoin is roughly analagous to a super-thinly-traded penny stock, without a single market maker.

A player that narrows spreads would be a welcome addition, IMO, as long as the market maker(s) policies and actions are open and transparent.

[deadlizard]

[­­­Atlas_]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement?

Keep dreaming.

I totally agree with S3052.

His statement has standing but it is still possible Bitcoin exchanges can form a sustainable amount of trust on their own.

[dust]

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

I'm excited.

[MacRohard]

[snip]

Idea #1: Suppose a company can issue its own version of the bitcoin concept as "stocks" (bitstock?).  I know this has been talked about on other threads as well.  What would be the implications of high-frequency trading on the infrastructure borrowed from bitcoin?  For example, we trade thousands of stocks at a rate of thousands of messages per second (i.e. not all messages result in trades).  We deal in terabytes of data per day.  Is it even reasonable to consider a proof-of-work blockchain in this context? How would this disrupt the trust mechanism for resolving conflicting claims (e.g. could I send some "bitstock" shares to one person, but then change my mind an instant later by sending the same bitstock to another recipient, and then trying to convince the rest of the network that the second transaction was the valid one)?


I don't currently see any benefit in having stocks in a bitcoin like system. It's probably better to just have companies subcontract out their shareholder registry management to a company specialized in doing that sort of thing (exactly how they do now infact). Ultimately the investors are required to trust the company they invest in - if they don't there are a million ways things will go wrong and having the shareholder registry in a block chain won't stop that. With bitcoin as a currency there is now no single point of failure, with company stocks there is always a singe point of failure - the company. Having the company manage it's shareholder registry (or more likely subcontract it out to a register management firm) doesn't make any difference. If people want to invest in totally black companies that aren't registered with any government the same thing applies - the black company can still manage the shareholder registry with no additional risk. You're just trusting the management.. but you have no other option.


Idea #2: What if bitcoins could be used as an internal tip system to help associates track performance? When one associate wants to thank another one anonymously, the first could drop bitcoins in the second's tip jar. At the end of the bonus period, tips are amplified by actual group performance and bonuses paid out. Since there are no transaction costs, everyone wins and individual performance gets a little bit of measurement. Is there any reason we should consider a point-based system rather than use bitcoin?

bitcoin is already being used for anonymous tipping quite extensively.

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

It would probably be a good thing. There still is a problem depositing money into the exchanges. Paypal and liberty reserve and even wire transfers don't cut it.. people need to be able to log into their online banking and transfer money directly without incurring large fees. If they have to call the bank and organize a wire transfer it is a barrier to entry as well.. in the UK there is the 'fast payments' system that allows transferring money between UK bank accounts at zero cost and in under two hours. In Canada there is hyperwallet which seems to work quite fast well and in the US I believe there are various ACH schemes that people can operate from their online banking, or if the exchange could be setup to actually debit accounts from within the exchange (ie: users register their bank account and then the market can debit it -- much like paypal does).

Idea #4: Does bitcoin need a market maker in its exchange markets? Market makers usually help narrow the spread between the "bid price" and "ask price" by taking some of the risk in moments when there are no natural market participants (e.g. if you want to sell, but at this moment no one is willing to buy, you either have to lower your price to gain attention, or wait a while for more buyers to show up). My sense is that bitcoin is too young to need a market maker, and perhaps does not yet have enough volume to make the role worthwhile. What are your thoughts?

I would say yes, it does. However, making a market across the existing bitcoin markets basically means moving money through Liberty Reserve, Webmoney and Paypal.. there are margins, but the fees for converting these other digital currencies are high and the process tedious so it's perhaps not surprising that there isn't a whole lot of arbitrage going on at the moment.

[N12]

So what, Atlas? Should we abandon important opportunities like these just so you can have a greater e-penis for not relying on any established institutions?

We need this for further acknowledgement of Bitcoin as well as incoming funds, and I don’t care about any ideologic views that may suffer from it. They are just a hindrance.

[­­­Atlas_]

So what, Atlas? Should we abandon important opportunities like these just so you can have a greater e-penis for not relying on any established institutions?

We need this for further acknowledgement of Bitcoin and I don’t care about any ideologic views that may suffer from it. They are just a hindrance.

I want to see it done in the name of SCIENCE. Political experiments must be done and, frankly, part of the bitcoin economy being influenced by government kind of taints it, heh.

Anyways, people can do what they like. I just don't prefer it.

[Matt Corallo]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement?

Keep dreaming.

I totally agree with S3052.

His statement has standing but it is still possible Bitcoin exchanges can form a sustainable amount of trust on their own.

True, but for bitcoin to accelerate its growth into full use by a subset of the mainstream, we need someone who already has trust to come along and back it.  Evan if its not an exchange, someone with an existing name needs to come along and accept bitcoin in some form.

Idea #1: Suppose a company can issue its own version of the bitcoin concept as "stocks" (bitstock?).  I know this has been talked about on other threads as well.  What would be the implications of high-frequency trading on the infrastructure borrowed from bitcoin?  For example, we trade thousands of stocks at a rate of thousands of messages per second (i.e. not all messages result in trades).  We deal in terabytes of data per day.  Is it even reasonable to consider a proof-of-work blockchain in this context? How would this disrupt the trust mechanism for resolving conflicting claims (e.g. could I send some "bitstock" shares to one person, but then change my mind an instant later by sending the same bitstock to another recipient, and then trying to convince the rest of the network that the second transaction was the valid one)?

Yes, a highly interconnected, high bandwidth network -- such as those already used by HFT'ers -- could support a proof-of-work chain at such rates.  You're looking at about 600,000 - 1,000,000 transactions per 10-minute block, I'd say.

The main hurdles will be efficient TX broadcasting, and trying not to be CPU-bound doing ECDSA signature verification.

Also, the proof-of-work algorithm would need to not regenerate its mining block on every TX, but upon every $N TX's.

Possible? yes.  Easily workable, not at all.  Also, to run your own blockchain you would need sufficient mining power at which point the prospect of companies making their own starts to look like a bad idea IMHO.  (either they let the "community" mine, which IMHO would never work out when many companies start to do that, or mine themselves which becomes very costly).  

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

Idea #4: Does bitcoin need a market maker in its exchange markets? Market makers usually help narrow the spread between the "bid price" and "ask price" by taking some of the risk in moments when there are no natural market participants (e.g. if you want to sell, but at this moment no one is willing to buy, you either have to lower your price to gain attention, or wait a while for more buyers to show up). My sense is that bitcoin is too young to need a market maker, and perhaps does not yet have enough volume to make the role worthwhile. What are your thoughts?

YES, YES, YES, YES, YES.  Please do, one of the biggest necessities in the bitcoin market is just size right now.  Adding major (or even medium-sized) players right now would add a ton of momentum behind bitcoin.

[Matt Corallo]

So what, Atlas? Should we abandon important opportunities like these just so you can have a greater e-penis for not relying on any established institutions?

We need this for further acknowledgement of Bitcoin and I don’t care about any ideologic views that may suffer from it. They are just a hindrance.

I want to see it done in the name of SCIENCE. Political experiments must be done and, frankly, part of the bitcoin economy being influenced by government kind of taints it, heh.

Anyways, people can do what they like. I just don't prefer it.

Although I see where you are coming from, I disagree that bitcoin is the place to do it.  Bitcoin is not designed as an experiment but as a currency (or at least that is what it has become).  The majority of the community (or at least those who want more money for their coins) would disagree that it should be an experiment. 
Also, you can continue to use bitcoin without government intervention.  I'ts not like they are able to start rejecting transactions or checking that you are paying taxes on your bitcoins.

[nanotube]

+1 to macrohard on all counts.

[gusti]

So what, Atlas? Should we abandon important opportunities like these just so you can have a greater e-penis for not relying on any established institutions?

We need this for further acknowledgement of Bitcoin as well as incoming funds, and I don’t care about any ideologic views that may suffer from it. They are just a hindrance.

do you want to see how is the future of bitcoin + regulations ?
see paypal ... no thanks

[jgarzik]

+1 to macrohard on all counts.

Except for his appalling inability to quote properly...

[jgarzik]

do you want to see how is the future of bitcoin + regulations ?
see paypal ... no thanks

PayPal is a layer on top of bitcoin.

Bitcoin will be a success when PayPal-BTC currency is offered alongside PayPal-USD and PayPal-EUR.

[bittersweet]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement?

Keep dreaming.

Keep dreaming that governments will allow a currency that can't be manipulated by them to compete with their money...
If it will be regulated, it will be done in a way that will make BitCoin basically useless.

[N12]

do you want to see how is the future of bitcoin + regulations ?
see paypal ... no thanks

What’s your problem? You don’t have to use the exchange. Bitcoin will NOT be that decentralized if it will be widespread because people like convenience. Most people don’t want to backup their wallets, be their own bank etc. Seriously, what do you guys imagine?

The real difference with bitcoin is: You have the freedom to be your own bank.

[jgarzik]

I don't currently see any benefit in having stocks in a bitcoin like system. It's probably better to just have companies subcontract out their shareholder registry management to a company specialized in doing that sort of thing (exactly how they do now infact). Ultimately the investors are required to trust the company they invest in - if they don't there are a million ways things will go wrong and having the shareholder registry in a block chain won't stop that. With bitcoin as a currency there is now no single point of failure, with company stocks there is always a singe point of failure - the company. Having the company manage it's shareholder registry (or more likely subcontract it out to a register management firm) doesn't make any difference. If people want to invest in totally black companies that aren't registered with any government the same thing applies - the black company can still manage the shareholder registry with no additional risk. You're just trusting the management.. but you have no other option.

Quite the opposite.

Satoshi's key invention is that bitcoin is really a distributed notary service.

Securely transferring stock from person A to person B is a perfect application for this invention.

As is securely transferring a DNS domain, or another digital entity.

[rebuilder]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement? It would be wonderful to see it succeed on its own.

As long as the Bitcoin system itself cannot be regulated, it demonstrates anarcho-capitalism just fine. In a free market, anything that results in increased profits will be done, right?

Incidentally this is why I'm doubtful a truly anarchist society can function as such very long - there is too strong a profit incentive in using coercion. To  guarantee freedom to any reasonable degree, you must make coercion impossible or at the very least extremely difficult. But then that's what we have crypto and p2p communications for...

[nanotube]

+1 to macrohard on all counts.

Except for his appalling inability to quote properly...

haha yea. i almost missed his replies.

[gusti]

do you want to see how is the future of bitcoin + regulations ?
see paypal ... no thanks

PayPal is a layer on top of bitcoin.

Bitcoin will be a success when PayPal-BTC currency is offered alongside PayPal-USD and PayPal-EUR.

and why do you think nobody in this forum is happy to take paypal when amounts are high ?
if ever BTC have paypal as a model to follow, it is doomed to fail big

[nanotube]

I don't currently see any benefit in having stocks in a bitcoin like system. It's probably better to just have companies subcontract out their shareholder registry management to a company specialized in doing that sort of thing (exactly how they do now infact). Ultimately the investors are required to trust the company they invest in - if they don't there are a million ways things will go wrong and having the shareholder registry in a block chain won't stop that. With bitcoin as a currency there is now no single point of failure, with company stocks there is always a singe point of failure - the company. Having the company manage it's shareholder registry (or more likely subcontract it out to a register management firm) doesn't make any difference. If people want to invest in totally black companies that aren't registered with any government the same thing applies - the black company can still manage the shareholder registry with no additional risk. You're just trusting the management.. but you have no other option.

Quite the opposite.

Satoshi's key invention is that bitcoin is really a distributed notary service.

Securely transferring stock from person A to person B is a perfect application for this invention.

As is securely transferring a DNS domain, or another digital entity.

yes, but having each company start their own chain to trade its units of stock is not feasible, since securing a chain from attack (by throwing a bunch of gpus at it) is much more expensive for your average company than it would be to just pay someone to run a regular centralized database of shareholders.

decentralized databases are great for some things. but in case where ultimately you are trusting $entity to not screw you (such as in investing in a company's stock)... you might as well trust the same entity to maintain a centralized database.

just thinking out loud here.

[gusti]

do you want to see how is the future of bitcoin + regulations ?
see paypal ... no thanks

What’s your problem? You don’t have to use the exchange. Bitcoin will NOT be that decentralized if it will be widespread because people like convenience. Most people don’t want to backup their wallets, be their own bank etc. Seriously, what do you guys imagine?

The real difference with bitcoin is: You have the freedom to be your own bank.

you already have mybitcoin for people wanting convenience

I agree with you if you can convince any traditional institution to adopt bitcoin without introducing
any changes in bitcoin functioning

[jgarzik]

yes, but having each company start their own chain[...]

Who said anything about each company starting their own chain?  That's not distributed, nor decentralized.

The future of satoshi's proof-of-work technology is a chain marketplace.  Multiple chains will exist for different purposes (bitcoin, BitDNS, BitX).  Multiple chains will exist in the same competitive space (bitcoins, jgarzik-coins).

Wall Street firms may cooperate on a single "Wall Street NASDAQ chain", where all NASDAQ stocks are traded, for example.  That would be cooperative and super-strong, yet secure against double-spending (aka naked shorting, etc.)

[hozer]

yes, but having each company start their own chain[...]

The future of satoshi's proof-of-work technology is a chain marketplace.  Multiple chains will exist for different purposes (bitcoin, BitDNS, BitX).  Multiple chains will exist in the same competitive space (bitcoins, jgarzik-coins).

Anyone interested in starting a chain for commodities trading? (corn, soybeans, etc..). What would be REALLY interesting is a chain for trading real-time 5-minute LMP electricity price futures.

[eMansipater]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement?

Keep dreaming.

I totally agree with S3052.

+1

BitCoin is a protocol, not a political philosophy.  The latter can be your reason for supporting the former, but don't confuse them.

[Jered Kenna (TradeHill)]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement?

Keep dreaming.

I totally agree with S3052.

+1

BitCoin is protocol, not a political philosophy.  The latter can be your reason for supporting the former, but don't confuse them.

Exactly, while I agree with most of the extreme political views on this board they're not going to help spread bitcoin.
Bitcoin might help spread your views though...

[mndrix]

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

As mentioned elsewhere, the trust a big player could lend to Bitcoin could help enormously.  I can't imagine a big player hindering Bitcoin anymore than GitHub hinders the distributed nature of Git.  Those who want centralization through a big player can have it.  Those who don't can use the natural, peer-to-peer mode.

Idea #4: Does bitcoin need a market maker in its exchange markets? Market makers usually help narrow the spread between the "bid price" and "ask price" by taking some of the risk in moments when there are no natural market participants (e.g. if you want to sell, but at this moment no one is willing to buy, you either have to lower your price to gain attention, or wait a while for more buyers to show up). My sense is that bitcoin is too young to need a market maker, and perhaps does not yet have enough volume to make the role worthwhile. What are your thoughts?

A market maker would be nice.  In my limited experience, the volumes are still too low for it to be profitable though.

[beala]

Call me a dreamer but I would like Bitcoin to demonstrate anarcho-capitalism. You know, without government involvement?

Keep dreaming.

I totally agree with S3052.

+1

BitCoin is protocol, not a political philosophy.  The latter can be your reason for supporting the former, but don't confuse them.

I agree that we need a trustworthy established forex. If a large institution doesn't throw its weight behind bitcoin, all it'll ever be is a highly volatile currency used by a few thousand computer geeks with fringe political leanings. There's no way I can convince my local coffee shop to start using bitcoin if they're totally dependent on small operations like CoinPal to convert their btc earnings to usd (and, as much as we'd like them to keep their btc as btc, they will want to do this). The same goes for operations like MyBitcoin. Maybe we totally trust these organizations, but the view from the outside is much different ("you want me to wire my money all over the world, then convert it on mtgox, then store it in mybitwhat? No thanks, I'll use paypal.").

[MacRohard]

yes, but having each company start their own chain[...]

Who said anything about each company starting their own chain?  That's not distributed, nor decentralized.

The future of satoshi's proof-of-work technology is a chain marketplace.  Multiple chains will exist for different purposes (bitcoin, BitDNS, BitX).  Multiple chains will exist in the same competitive space (bitcoins, jgarzik-coins).

Wall Street firms may cooperate on a single "Wall Street NASDAQ chain", where all NASDAQ stocks are traded, for example.  That would be cooperative and super-strong, yet secure against double-spending (aka naked shorting, etc.)

The thing that you're missing is that with bitcoins the bitcoin is the deliverable. It doesn't represent anything at all and that's what allows it to be settled electronically.

If you want things in the block chain to represent shares (ie: you want the management to count your vote come agm time or pay you a dividend) or you want some farmer to deliver you some corn then they (the management or the farmer) becomes the point of failure. You're relying on them.. the fact that there's a block chain that says they should do something is completely irrelevant. They might as well just keep their shares/corn orders in a very ordinary spreadsheet.

BitDNS is a different matter.. with DNS there is something that can be delivered electronically where the thing itself is stored in the blockchain. This would work.. but you don't really need the whole proof of work thing. If all you want is a first-come-first-served name grabbing model that is basically just a simple distributed database where the p2p swarm stores the zonefile and accepts updates from keyholders and allows new registrations where the name doesn't already exist. I don't see a role for proof-of-works here. Double spending doesn't really exist.. I guess the analogy would be if you tried to transfer (sign away to a new controlling private key) the same domain name to two different new owners.. how much of a problem would that be? Is it really worth doing proofs of work to stop it? Maybe.. but I'm not really convinced. With coins you can doublespend them to anyone.. with a domain name you'd have to find two people who wanted to buy the exact same domain from you at the same time. The motivation for fraud is significantly lower.

[jgarzik]

If you want things in the block chain to represent shares (ie: you want the management to count your vote come agm time or pay you a dividend) or you want some farmer to deliver you some corn then they (the management or the farmer) becomes the point of failure. You're relying on them.. the fact that there's a block chain that says they should do something is completely irrelevant. They might as well just keep their shares/corn orders in a very ordinary spreadsheet.

That's true for corn, yes, but not stock, which can be traded electronically, automatically and securely.

And for corn, that is analagous to selling a coffee or a car for bitcoins.  You are relying on an external point of failure.

So what if the corn (or coffee) is never delivered.  Having one element outside the scope of the project does not eliminate the utility of the bitcoin approach.

[iya]

If you want things in the block chain to represent shares (ie: you want the management to count your vote come agm time or pay you a dividend) or you want some farmer to deliver you some corn then they (the management or the farmer) becomes the point of failure. You're relying on them.. the fact that there's a block chain that says they should do something is completely irrelevant. They might as well just keep their shares/corn orders in a very ordinary spreadsheet.

That's true for corn, yes, but not stock, which can be traded electronically, automatically and securely.

And for corn, that is analagous to selling a coffee or a car for bitcoins.  You are relying on an external point of failure.

So what if the corn (or coffee) is never delivered.  Having one element outside the scope of the project does not eliminate the utility of the bitcoin approach.

What would be the difference between coffee and corn? Why do you think the virtual futures would be priced anywhere near their real world counterpart?
Bitcoins and anything like it cannot be backed by something real. If it could, it would have been done.

[MacRohard]

If you want things in the block chain to represent shares (ie: you want the management to count your vote come agm time or pay you a dividend) or you want some farmer to deliver you some corn then they (the management or the farmer) becomes the point of failure. You're relying on them.. the fact that there's a block chain that says they should do something is completely irrelevant. They might as well just keep their shares/corn orders in a very ordinary spreadsheet.

That's true for corn, yes, but not stock, which can be traded electronically, automatically and securely.

And for corn, that is analagous to selling a coffee or a car for bitcoins.  You are relying on an external point of failure.

So what if the corn (or coffee) is never delivered.  Having one element outside the scope of the project does not eliminate the utility of the bitcoin approach.

No, you're still missing the point.

Stock is only useful if honored by the company management. If you have to trust them (which you do) they might as well just maintain the share register (which is exactly how it currently works, although most companies outsource the maintenance of the database).

There's no point in using a complicated proof-of-work system to maintain a simple spreadsheet when at the end of the day you're effectively just going to print off a copy and hand it to someone and just trust that they do whatever it says. They might as well maintain it centrally as it's much simpler. There's no value add for this huge p2p network crunching thousands of Ghash/s when at the end of the day someone can just ignore it.

The only reason the bitcoin network works for bitcoins is there are no external trust dependencies. That won't be true in the case of any of the physical goods trading you described.

BitDNS could be done that way, but it could also be done a much simpler way without proofs of work.

[jgarzik]

What would be the difference between coffee and corn?

None, for the purposes of this thread's examples.

Why do you think the virtual futures would be priced anywhere near their real world counterpart?

I have no idea what a virtual future is.

But if you wanted to trade corn contracts, bitcoin is an excellent notary service for such contracts.

Bitcoins and anything like it cannot be backed by something real. If it could, it would have been done.

Everyone who purchases a real-world good with bitcoins, or fulfills a contract with bitcoins, begs to differ.

With cryptographically-signed digital certificates, you have as much flexibility as you need, to describe anything in the world.

Corporate entities can certainly back digital certificates if it is in their interest to do so.  If I was rich and wanted to back bitcoins with gold, there is no reason why I cannot do that.

[jgarzik]

Stock is only useful if honored by the company management. If you have to trust them (which you do) they might as well just maintain the share register (which is exactly how it currently works, although most companies outsource the maintenance of the database).

There's no point in using a complicated proof-of-work system to maintain a simple spreadsheet when at the end of the day you're effectively just going to print off a copy and hand it to someone and just trust that they do whatever it says. They might as well maintain it centrally as it's much simpler. There's no value add for this huge p2p network crunching thousands of Ghash/s when at the end of the day someone can just ignore it.

And?  At the end of the day, a human can ignore my bitcoins.  At the end of the day, a company can ignore my Charles Schwab stock purchase.  All they are are ones and zeroes in a computer, just like those dollars my bank claims I possess.

A distributed, notarized database of digital tokens has a large number of uses that may extend directly into real world goods.  It is readily apparent that value exists in a neutral, distributed entity maintaining a database rather than a single entity (== single point of failure).

The only reason the bitcoin network works for bitcoins is there are no external trust dependencies. That won't be true in the case of any of the physical goods trading you described.

Not true at all.  Bitcoins would have zero value, if you could not trade them for real-world goods, services and currencies.  People trust that the value of their bitcoins will be there tomorrow.  That is the mother of all external trust dependencies.

[MacRohard]

Stock is only useful if honored by the company management. If you have to trust them (which you do) they might as well just maintain the share register (which is exactly how it currently works, although most companies outsource the maintenance of the database).

There's no point in using a complicated proof-of-work system to maintain a simple spreadsheet when at the end of the day you're effectively just going to print off a copy and hand it to someone and just trust that they do whatever it says. They might as well maintain it centrally as it's much simpler. There's no value add for this huge p2p network crunching thousands of Ghash/s when at the end of the day someone can just ignore it.

And?  At the end of the day, a human can ignore my bitcoins.  At the end of the day, a company can ignore my Charles Schwab stock purchase.  All they are are ones and zeroes in a computer, just like those dollars my bank claims I possess.

A distributed, notarized database of digital tokens has a large number of uses that may extend directly into real world goods.  It is readily apparent that value exists in a neutral, distributed entity maintaining a database rather than a single entity (== single point of failure).

The only reason the bitcoin network works for bitcoins is there are no external trust dependencies. That won't be true in the case of any of the physical goods trading you described.

Not true at all.  Bitcoins would have zero value, if you could not trade them for real-world goods, services and currencies.  People trust that the value of their bitcoins will be there tomorrow.  That is the mother of all external trust dependencies.

And you miss the point yet again. I think I've explained what I meant fairly well already so I'll probably just give up now.

A human could ignore your bitcoins.. for example they could buy some from you and then not do anythin with them. I think you'll agree that isn't really your problem. If you buy something from them using bitcoins and they ignore your request for goods and keep the bitcoins then they're a dishonest trader, and you lose out - but that doesn't affect the rest of the market. There are other honest traders out there that you can deal with.

The difference is, in that situation it's just a bad trader, in the other situation the entire market has to be cleared by a central authority - the corn dealer or company management. If they turn out to be a bad trader the entire market is invalid and it doesn't matter what system you used to record who owns what, because nobody owns anything because the guy that's supposed to ultimately give it to everyone has ripped you all off. Similarly if the guy is honest, it doesn't matter how he records who he owes what too. It could be a block chain, but it could just be a free spreadsheet in google apps.

There probably are some other uses of proof-of-work distributed block databases, just not the ones that you've presented so far.

[Anonymous]

Sure I would mine your block chain as long as you paid me 50 bitcoins for each block I solved on your chain

If a sufficiently large company wanted to they could buy enough bitcoins to cover paying them to miners to ensure their chain was strong and miners could shop around for weaker block chains to support to earn more bitcoins for themselves.

A marketplace for miners would spring up where they advertise the hashing power they bring to the table and companies could buy it in bitcoins.

Essentially miners become security and companies could advertise the amount of hashing power backing their chain. Such security would be verifiable.

If the accepted payment for these competing chains was bitcoin wouldn't that create a massive demand for the main bitcoin currency  ?

[nanotube]

BitDNS is a different matter.. with DNS there is something that can be delivered electronically where the thing itself is stored in the blockchain. This would work.. but you don't really need the whole proof of work thing. If all you want is a first-come-first-served name grabbing model that is basically just a simple distributed database where the p2p swarm stores the zonefile and accepts updates from keyholders and allows new registrations where the name doesn't already exist. I don't see a role for proof-of-works here. Double spending doesn't really exist.. I guess the analogy would be if you tried to transfer (sign away to a new controlling private key) the same domain name to two different new owners.. how much of a problem would that be? Is it really worth doing proofs of work to stop it? Maybe.. but I'm not really convinced. With coins you can doublespend them to anyone.. with a domain name you'd have to find two people who wanted to buy the exact same domain from you at the same time. The motivation for fraud is significantly lower.

in bitdns land, a 'double spend' would be someone trying to register a domain that has already been registered.
the bitcoin chain is not just a distributed database, but also distributed timestamping service. if there's no block chain... how do you know that person1 registered the domain before person2? in bitcoinland, the sequence of blocks is the 'timeline'.

[jgarzik]

The difference is, in that situation it's just a bad trader, in the other situation the entire market has to be cleared by a central authority - the corn dealer or company management. If they turn out to be a bad trader the entire market is invalid and it doesn't matter what system[...]

If the "entire market" is a single corn dealer or one lone public company, that may be true.  But that's a dumb way to set up a stock system anyway (strawman?).  No one in their right minds would want a block chain for every company on NASDAQ -- over 2,000 block chains for that one market.

The bitcoin decentralized notary system would be well suited, however, to the task of transferring shares of stock for multiple companies, between untrusted parties.

[marcus_of_augustus]

Idea #3: What if our company could provide a "forex" marketplace for BTC/USD? This has certainly been done already (MtGox, etc.), however it seems there is still a lot of barrier to entry for many participants. How might a big player help? Would it hinder bitcoin's progress in any way?

Idea #4: Does bitcoin need a market maker in its exchange markets? Market makers usually help narrow the spread between the "bid price" and "ask price" by taking some of the risk in moments when there are no natural market participants (e.g. if you want to sell, but at this moment no one is willing to buy, you either have to lower your price to gain attention, or wait a while for more buyers to show up). My sense is that bitcoin is too young to need a market maker, and perhaps does not yet have enough volume to make the role worthwhile. What are your thoughts?

Bitcoin could do with as many exchanges and market makers as are willing to have a go ...

... especially a market maker that could have multiple exchanges in diverse locations dealing in separate currencies.

Consider the utility and desirability of a single trusted exchange entity whereby a local cash or electronic bank transfer (EFT), in say Germany, France, Switzerland or U.K. can be made to acquire Bitcoins and then using an agent of the same trusted exchange partner located in another country say USA, Canada, Hong Kong or Australia can be used for a Bitcoin to cash or for local EFT.

[QuantPlus]

A market maker would be nice.  In my limited experience, the volumes are still too low for it to be profitable though.

I've been a bond MM for 15 years, small hedge fund...
Right now the $0.03 spread is nice (0.73 - 0.76)...
But an MM might make 50% of that...
So with 12,000 volume last 24 hours...
The total potential net for an MM might be $200/day (a pittance).

But people are also making directional bets on this...
Like that UK guy selling fixed payout contracts must be making a bullish bet.

Also the market is being manipulated and gamed...
Which is par for the course at this stage...
And, after all, no one is forcing you to trade BT.

If total size goes 100x from $5 mm to $500 mm...
Small Market Makers will come out of the woodwork...
And that USD spread will be < $0.01...
Trading is >> 90% automated these days...
It would take only days or weeks to adapt forex software for BT.

[matonis]

A market maker would be nice.  In my limited experience, the volumes are still too low for it to be profitable though.

If total size goes 100x from $5 mm to $500 mm...
Small Market Makers will come out of the woodwork...
And that USD spread will be < $0.01...
Trading is >> 90% automated these days...
It would take only days or weeks to adapt forex software for BT.

Volumes will increase. True, it would only take a few days to adapt forex software for BTC, but clearing and settlement from/into national currencies is where it touches the "KYC" anti-money laundering world, including OECD/FATF and Fincen.

[Mike Hearn]

Idea #1: Suppose a company can issue its own version of the bitcoin concept as "stocks" (bitstock?).  I know this has been talked about on other threads as well.  What would be the implications of high-frequency trading on the infrastructure borrowed from bitcoin?

In a private email exchange some time ago, Satoshi had the following to say about HFT:

I haven't fully understood why sequence numbers are a property of the tx inputs rather than the tx itself.

It's for contracts.  An unrecorded open transaction can keep being replaced until nLockTime.  It may contain payments by multiple parties.  Each input owner signs their input.  For a new version to be written, each must sign a higher sequence number (see IsNewerThan).  By signing, an input owner says "I agree to put my money in, if everyone puts their money in and the outputs are this."  There are other options in SignatureHash such as SIGHASH_SINGLE which means "I agree, as long as this one output (i.e. mine) is what I want, I don't care what you do with the other outputs.".  If that's written with a high nSequenceNumber, the party can bow out of the negotiation except for that one stipulation, or sign SIGHASH_NONE and bow out completely.

The parties could create a pre-agreed default option by creating a higher nSequenceNumber tx using OP_CHECKMULTISIG that requires a subset of parties to sign to complete the signature.  The parties hold this tx in reserve and if need be, pass it around until it has enough signatures.

One use of nLockTime is high frequency trades between a set of parties.  They can keep updating a tx by unanimous agreement.  The party giving money would be the first to sign the next version.  If one party stops agreeing to changes, then the last state will be recorded at nLockTime.  If desired, a default transaction can be prepared after each version so n-1 parties can push an unresponsive party out.  Intermediate transactions do not need to be broadcast.  Only the final outcome gets recorded by the network.  Just before nLockTime, the parties and a few witness nodes broadcast the highest sequence tx they saw.

The nLockTime feature is not used in BitCoin today. However it is apparent that Satoshi considered this use case ahead of time, as he did with so many others.

[eMansipater]

Satoshi is such a genius.

[gigabytecoin]

do you want to see how is the future of bitcoin + regulations ?
see paypal ... no thanks

PayPal is a layer on top of bitcoin.

Bitcoin will be a success when PayPal-BTC currency is offered alongside PayPal-USD and PayPal-EUR.

Agreed.

PayPal is a payment processor. Bitcoin is a currency.

[crispy]

Bitcoin could do with as many exchanges and market makers as are willing to have a go ...

Definitely.  Let them be as ubiquitous as coffee shops. 

There are already some open source projects for exchanges: Bitcoin-central and Intersango are two that I'm aware of.

[Phinnaeus Gage]

How did a Newbie, with only 1 post (and still has only one post), get to post here? ...whick has over 50 comments and yet to add more to the discussion?

Great post, BTW!

[TraderTimm]

High Frequency Trading is market cancer.

Quote-stuffing algorithms which have been exposed by firms such as NANEX, show alarming patterns of bid/offer running, pulling orders after using their algos to 'ping' what is in the order book. This results in 'vapor liquidity' as none of the orders put in the book for the thinnest of timeslices is actually intended to fill.

Woe unto the exchange that allows these parasites into their API's. The last thing we need is some "ghost liquidity" from algos that get pulled when all bids disappear.

[crispy]

Wonder if a nominal charge for quotes, orders, and/or cancels, on the order of a few Satoshi or so would counteract the harmful effects.