Burnt dollar exchange for escrowed (dark) markets.

[trout]

Short description:

Problem: declining BTC price makes escrowed markets too risky for vendors.

Imperfect/ broken solution: Hedging. The escrow (usually the market maker)
sells the escrowed BTC on an exchange for USD. When the escrowed funds are to be released,
he exchanges USD back to BTC.

Proposed solution: A BTC - BUSD exchange, where BUSD is a virtual unit tethered to USD
as follows. To create a unit of BUSD the market maker must provably destroy either 1 USD
bill (burn it on cam) or the corresponding amount of BTC. The escrow is then hedged
on this exchange.

Long description:
Problem  Anonymous markets (the infamous SilkRoad and its lookalikes)
rely on escrow heavily. The reason is that  sellers are anonymous and thus it would
be too easy for them to scam buyers. The escrow is released when the buyer has received
the goods, which may be days or even weeks after the transaction. During this time,
the BTC price may change significantly. If BTC declines, as has been happening
a lot lately, the seller suffers a damage.  In reality they either have to make prices a lot
higher, which cripples the market.

Hedge:  An imperfect solution, that was  actually implemented by the original Silk Road, is hedging on an exchange. Thus the seller has an option to hedge his BTC for USD. The market owner has an account on an exchange,
where he sells the BTC escrowed. When the escrow is released, he exchanges these  USD back to BTC and
give these to the seller, charging a small hedging fee.
The problem - for dark markets - is that this exposes the market maker to a huge risk.
In fact it is hard to imagine a large market operating like this without a possibility to be detected;
whichever way they try to hide their activity, it'd be too different from a typical trader, and would stand out.

Proposed solution: What if there was a completely virtual exchange, but for fiat currency? While this is impossible,
it is possible to get close enough to this for the hedging purposes.
The market maker simply creates a virtual unit, let's call it BUSD, and opens an exchange BTC for USD.
Like USD, BUSD is a centralized currency, which is issued by the market maker. However,
unlike the USD issuer, we want the BUSD issuer not to be able to print as much BUSD as he wants,
since otherwise it'd be hard for the market participants to trust him to keep the supply in check.
In order to constrain the supply, the BUSD issuer is required to provably destroy a unit of USD for each
unit of BUSD he issues on the market. This can be done either by burning the bills or by sending
the corresponding amount  (using the exchange rate at the time of sending) to  a black-hole BTC address.
He then creates as much as needed this way and sells it on the market for BTC.
There will be buyers, since there is a need for the escrow hedging, and the supply can be as small
as needed to keep the price in check.
The price of BUSD will then be kept close (slightly above) to 1 USD for BUSD by the market: shall BUSD become too expensive, the market maker can issue more and sell (for a profit). Shall the price decline, he can buy
back some with the BTC he has in reserve from having sold the BUSD. Clearly he can
also charge fees


What remains to construct is a mechanism  for auditing the exchange, that is, to proving that
it is not selling more BUSD than he had issued. The simple way is what is already
used in the BTC world: the market owner publishes the list of all balances.
This should add up to the amount burnt (for which there's proof). If any participant
notices that his balance amount is not in the list, he will shout out loudly, denouncing
the fractional reserve.

Finally, several markets can unite to create a "burnt dollar" exchange, using colored
bitcoins as a token for BUSD, and making the exchange independent from each individual
market, thereby protecting the hedged funds from any of the markets getting shut.

[Sempruls]

If the dark market has enough capital they could, in theory hold a lot of money at a reputable exchange (like bitfinex) and sell bitcoin for fiat on the exchange when they would be "long" bitcoin based on hedges.

I don't think the idea of an exchange would work via dark markets because it would be difficult to get fiat in or out

[trout]

If the dark market has enough capital they could, in theory hold a lot of money at a reputable exchange (like bitfinex) and sell bitcoin for fiat on the exchange when they would be "long" bitcoin based on hedges.

I don't think the idea of an exchange would work via dark markets because it would be difficult to get fiat in or out

did you actually read the post?  Your  first point is already addressed.
For the second point, in the proposal it's not necessary to get fiat neither in nor out.
That's the whole point.

[Flashman]

Hey, you've just invented teleportation that works. You just have to burn yourself to death, have a friend describe you on the blockchain, height weight, eye color etc, and send that to your destination...

Or am I not understanding your concept of magical object transfer by physical burning?

[trout]

Or am I not understanding your concept of magical object transfer by physical burning?

There's no object transfer.

[QuestionAuthority]

What a strange idea. It might work and the concept sounds reasonable enough but you couldn't really publish proof of burn too many times before you would get a nice big Secret Service investigation started for defacing currency. Maybe you could just emotionally destroy the bills by making fun of their inner child.

[Flashman]

Or am I not understanding your concept of magical object transfer by physical burning?

There's no object transfer.

Then I don't think there's gonna be a high degree of confidence that the value is transferred either.