Topic: 0.5 BTC Bounty - Creating a Fiat/Bitcoin Exchange without Fiat Deposits - page 2. (Read 4076 times)

I see that there are collateral requirements for opening a position and that the position needs to be well maintained with Bitshare collateral, otherwise it will be automatically closed.

But since Dave is a dealer of cUSD, and cares little for speculation. He just needs a way to transfer $75 of cUSD to Bob upon receipt of $75 in paper money.

So I don't quite get how transfers of fiat balances will work. Who takes on responsibility for the ongoing maintenance of the cUSD collateral?

If the price of Bitshares halves then we will need double the amount of Bitshare collateral backing up all the cUSD.

I think im not really understanding things!

Welcome to the new thread!   I am not sure what that wiki link has to do with with this design.     

Like I stated in my other thread, premiums above / below parity are to be expected based upon the relative demand for deposits and withdraws.  I am fairly certain that the nature of interest-bearing USD deposits will cause there to be a slight premium over actual USD, but perhaps the 'market' will factor that into the exchange rate between cUSD and BS. 

I am looking forward to your attacks on this new design!     

Lets get one thing straight, what would have to crash in value would be BitShares and not $USD.   Ultimately Long's are still trusting in BitShares they just don't have to worry about the volatility.  If BitShares appreciates like Bitcoin does then there is no problem.   The one way to mitigate this risk of 'crash' is to have early adopters post more collateral.  You could actually have  cUSDx2  cUSDx3 and cUSDx4 depending upon how much collateral the various cUSD had backing them.   The cUSDx4 would pay much higher interest rate and thus command a premium price in exchange for USD compared to cUSDx2 which might trade closer to actual USD if not at a slight 'discount' depending upon whether the interest rate justified the risk or not.   

If the market crashes by more than the available margin, then the 'longs' will get to split the collateral.   There is *nothing* I could ever code that would insulate people from market crashes beyond a certain point.   

Dave has $150 worth of BS and then short-sells cUSD worth $75 (100% initial margin requirement).  The network will not allow him to spend his $150 worth of BS.   When the exchange rate changes and now his BS is only worth $100 and thus no longer has sufficient backing for $75 cUSD, the exchange will purchase cUSD on his behalf converting his cUSD short position and leaving Dave with BS worth $100.

This system does not replace escrow for exchanges of fiat.  You even need escrow for exchanges of Bitcoin.  

This system replaces the need to use a 'bank' to actually store your money and gives you freedom of movement without the need to worry about exchange rate changes.

Say two people want to use your exchange: Dave - the cUSD dealer, and Bob the cUSD buyer.

• Dave deposits $150 worth of Bitshares to act as collateral and gets $100 worth of cUSD
• Dave sells the cUSD to Bob for cash and then ceases trading & withdraws the excess $50 worth of Bitshare collateral.
• At this moment Bob's cUSD is backed by $100 worth of Bitshares, since the USD/Bitshare exchange rate has been stable.

But two days later the market crashes and the collateral behind the cUSD is now only worth $10.

Who is responsible for pumping in more collateral when the dollar price of a Bitshare falls?

What have I missed?

I understand how you would send money, I'm just skeptical people would use these methods on any significant scale.  I know I can wire anyone on this forum money, that doesn't mean I'm going to do it.  The issue here is trust, you need to trust someone that the exchange will happen and they won't walk away with your money.  I get that there's no parameters on how the money will be exchanged, but on the flip side, that also means there are no parameters (or guarantees) that you will not get scammed.

As for businesses, wouldn't exchange risk be substituted with counterparty risk?  In this essence it sounds very much like Ripple.  Essentially what you have is an exchange built upon leverage (margin accounts) and trust (off exchange, USD <--> cUSD transfers).


I understand where you're coming from but this is the way all entrepreneurs think.  As someone who is familiar with VC firms, it has been my experience that they tend to stop listening to you once you bring this up because even if you are taking a pay cut, it is your decision to do so, they couldn't care less if it's only a fraction of your old salary.  I'm glad you found a workaround, it was more or less just a bit of advice based on experience.  I commend you for thinking outside the box and being transparent with the community.  IMHO, I wouldn't even mention anything about paying yourself from investors as they're just going to counter with the "sweat equity" adage.

I'm not sure if you mean that in the literal kickstarter (dot com) sense, but when I read this thread that is the first thing I thought of - I would guess it could work there.

Good luck with the project, regardless.

Note:  most of what I post on this forum is based upon me being very open and honest about the development process.  I have nothing to hide and often 'brainstorm in public' so that we can generate new ideas.   I am posting bugs, airing incomplete ideas, and seeking investment all at the same time because I want to encourage everyone to join in the process of creating an amazing new system and *not* because I want to get rich off of investors money.  I would be happy to be an early miner on this new chain.

    Any investor who wants concrete terms can negotiate it and the result would be a signed contract between people.   Clearly before any *serious* money poors in there will be a new business started which will handle all of the invested funds.  I have been talking with some legal experts on how to handle this in the safest manner possible.   In the mean time, this is more of a kick-starter idea.

   Join have fun, and earn some pre-mined BitShares.   If you want to accelerate the process donations are welcome!

Here is how it works, you can send money via the banks, dwolla, or any other system.  You could use gold/silver if you like.  The point is the exchange does not depend upon it.  Keeping money in the exchange will actually yield a higher return and because businesses no longer have to worry about 'exchange risk' they will be far more likely to accept it.   The end result is that the existing banking system will become increasingly irrelevant.




Here is the deal, I can pay someone else to do the work and keep my current job.  I can give the idea away and let the VC pay someone else to do it.  Unfortunately, I am not independently wealthy and have to eat.   So the question is am I paying myself above market rates for the work I am doing?   The answer is no, I would have been my self 50% less than I am currently making.  

In what country? 

If you were to do it centralized (behind a Tor node) then I suspect you would be subject to all SEC regulations regarding naked shorting unless the crypto-currency was considered 'play-money' in which case it would just be an advanced "just-for-fun" betting system.   

The reality is they will make what ever regulations they want apply to the system.

All,
   Here is the list of block-chain rules under active development.  I will payout a 0.5 BTC bounty each time someone finds an 'attack' on this rule set that results in me changing the rules.  Note, I may change the rules at any time in response to my own efforts at finding bugs.    I will then kindly request that everyone who finds bugs re-invest their 0.5 BTC bounty into the project and receive 500 BitShares instead.

1) Anyone may sell short any asset on the exchange provided:
       a) there exists a buyer who is willing to take the other side of the trade *at built-in market price*
       b) after the short sale, they have 3x the value of the short sale as collateral. (actual collateral requirements subject to change)

2) Any short position may be redeemed by the market when the value of the collateral falls to 1.5x the value of the short.
       a) half of the position is sold and the proceeds are used as collateral for the other half of the position (unless collateral would still be insufficient, or the balance would be 'dust')
       b) there is a 5% fee paid by all shorts which force the network to cover their position. The goal is to
          encourage any short to keep their margin sufficient or close out their position early. This fee also
          motivates miners to give closing out of short positions priority over most (all?) other transactions.

4) All 'short' positions must be closed in full before any of the collateral may be spent.
       - as the price of an asset falls, the effective interest rate paid to longs will go up as the ratio between short and collateral grows.
       - this will cause increasing opportunity costs for the short position which will motivate them to cover the entire position
         and re-open their position at a new base.  
    
3) Dividends paid on BitShares held as collateral are redirected to individuals who went Long (taking the other side of the trade).
       a) As a result, crypto-USD pays 1.5x to 3x to dividend rate rate as BitShares.

4) Users place their bids / asks into the blockchain as 'outputs' that can be canceled by spending them, or accepted by
       spending them as part of a transaction that satisfies the bid and market requirements.  

5) No block may execute a trade below the highest bid or above the lowest ask in the block chain.
      -  The order in which trades are executed is based upon 'price' first, 'fee' second, and otherwise up to the miner
      -  If the highest bid is greater than the lowest ask, then the transaction occurs at the *bid* price.

6) No transactions that contain multiple currency units are allowed outside of the bid/ask system.
      -  This requirement may be lifted after a careful audit for potential attacks by circumventing the 'market'.

In the event that the price of an asset changes so rapidly as to blow through all 'margin', the Longs will eat the losses.
      - this is the justification for the higher dividend rates paid to the longs and the opportunity cost incurred by the shorts.
      - No system can gurantee 0 losses and BitShares is no different.

9) All trades on the built-in exchange incur a 0.05% transaction fee that contributes to mining fees / dividends.  This fee is
   designed to minimize the profitability of 'rapid trading' and generate profits for the BitShare holders.
      - minimum transaction size limits will also be imposed (like Bitcoin) to prevent dust spam.
      - minimum transaction fee just like bitcoin also applies.

10) All dividends paid to 'transaction outputs' in the last 120 blocks are recaptured as mining fees, spending these unconfirmed
dividends would result in chain-splits invalidating the tranaction.
      - as a result, those who spend money rapidly will receive no dividends, while those who save will receive the dividends.

11) Users may transact in any currency just like they do Bitcoin (provided all non-market transactions only deal with a single currency).
      - this includes trading of their short position.

12) No block may clear out more than 5% of the value of all open bids/asks for a particular asset.
      - this prevents certain classes of attack in 'thin' markets.

13) A maximum reduction in exchange rate of 5% per block.  The goal is to give market participants time to add collateral or buy the
dip.  It would also prevent certain types of attacks based upon 'rapid manipulation' of the price.

14) No trade may occur unless there are at least N? bids/asks capable of 'reversing' the position.
      - this aims to prevent attacks on new issuance and insures that there exists a deep enough market to justifiy creating
      a new asset class.  It also 'halts' trading when the market gets thin.
      - the definition of 'capable of reversing' is still TBD

15) You must wait 10 blocks before spending the output of a trade.
      - if we allow people to immediately spend with the proceeds of a trade then, chain forks could be exploited to
        reverse trades, manipulate prices, and cause losses.

All of the rules above ultimately mean that trading can only occur at 'human speed' and all high-frequency trading will be
forced off-chain.  Trading is not 'free', but cheaper than any current exchange.  


In particular I am looking for ways that the market can be manipulated that do not also apply to traditional markets.  Some avenues of
attack that must be considered:

1) What would happen if someone had 51% of the hashing power?
   - they could control what bids made it into (or out of) the blockchain.
         * prevent people from canceling bids.
   - they could control who got want bids.
         * play favorites
   - they could do anything they could do with Bitcoin.

2) What would happen if someone had 1% of the hashing power?
   - they may gain some advantage in picking/choosing bids.
   - would this motivate professional traders to invest heavily in mining?
   - would the competition ultimately be good for the network?

3) What weaknesses would be exposed by having all short positions and margin available as public information?
       * Somone with significant capital could 'trigger' a short-squeeze by bidding up the underlying asset.
           - is this mitigated by not allowing uncollateralized shorting?
       * The short-squeeze would then enable new shorts to sell at higher prices (offsetting their attempt to push it up)
       * In theory someone could take advantage of such moves... but only if they could move fast enough between
         short and long positions to 'head-fake' the network.  Because all positions require 6 confirmations before they can be adjusted does it
         make it difficult or impossible to benefit from this kind of manipulation?

4) In theory all 'shorts' are naked, but backed, and are ultimately settled in BitShares.  What are the implications?
   - don't trade in illiquid, rare, or non-fungibile/divisible items.  It would be up to the Longs to assess this risk.
   - the total 'short' position for any asset class is public and therefore can be audited.  If the total short position
   is too-large the market will respond by discounting the 'long' position from face value.
   - how does 'naked' shorting enable manipulation?  In theory, someone with a large amount of capital (BitShares) someone
   could keep selling into a market.  This would result in pushing the price down but would also drive the dividends paid
   to longs up.  
   - Because longs are not buying with leverage, short-selling to push the price down CANNOT trigger margin calls and further selling.
   - another way this can be viewed is that the 'shorts' are 'borrowing' the USD from the longs and are posting collateral and
   paying interest to do so.  
   - any naked-short is ultimately has to cover and thus 'unwinds' his position.  He can only profit if supply and demand
   actually creates a fall in prices independent of the action of the short-seller.

5) Why would anyone go 'long' against someone known to be naked-short?   Perhaps you can think of the short-long market as
  a betters market where the winner takes home BitShares.  All market participants are attempting to manipulate the price and
  predict which way it will move.  50% think it will go up, 50% think it will go down and the result is a tug-of-war.  What
  are people really betting on?  They are betting on what *other market participants* will do!  How do you know what the
  other participants will do?  You have to assume they are all expecting the price to follow real market prices. Anyone who
  is out-of-sync with the emergent consensus opinion about what a price should track will ultimately end up making losses
  in this market.

sounds to me like you are now thinking: http://en.wikipedia.org/wiki/Foreign_currency_denominated_account
where the "foreign currency" is dollars, gold, etc. and the actual backing account is BitShares (or BTC if you do it centralized).  

The only way in or out it through the crypto-currency.

Pretty interesting...

I wonder how well the dollar denominated crypto-currency, i.e. crypto-USD will track the USD.  Search these forums for "Goxmoney" -- at times during the bubble people seemed to be willing to pay a premium for "USD" located on Mt Gox as opposed to located somewhere else.  Not so much of a premium that is became an issue though.

Ask your lawyer if there's some loophole where "dollar-denominated" does not count as actual dollars, therefore (in Canada at least) its all "play-dough" crypto-currencies and so not actually transmitting money...

What are your regulatory requirements for opening such an exchange?

The problem as I see it is how do you envision people doing this on any significant scale?  It's rather cumbersome to do face-to-face transactions or some other medium that would be agreeable to by both parties.

Also, this isn't really circumventing or cutting ties to the traditional banking institution.  Lets say you and I meet up to exchange $10k in paper-USD for crypto-USD.  I give you $10k USD and you "transfer" $10K cUSD to me.  The second you deposit those funds into the bank, they're going to file a CTR (currency transaction report).  If it's later questioned where those funds came from, and you say you exchanged cUSD for USD, you're going to need a license or be subject to penalties.  Essentially, you're just transferring the risk from the exchange to all the individuals in the system.  There's no cut ties unless everyone is stashing USD under their mattress.


You realize this is THE #1 red flag/turnoff for VC's, right?  The last thing they want to hear is that you're paying yourself on their dime.  I'm rather surprised you got people to give you $30k to do this (more power to you) but any VC firm worth their salt will stop listening the second you mention you want to pay yourself a salary to further your own project.

I've been following your ideas and find them intriguing, it just seems like you're a bit hasty with your decisions as you seem to be bouncing from one idea to the next rather rapidly.  That's not a bad thing but I think you need to have a solid business plan first before you start seeking out equity investors.

I will be offering shares for work contributed as well.    The rule of thumb will be that I will pay 'market-rates' for labor done at my direction, and then convert those 'rates' into BitShares on the same terms as everyone else.  Any labor performed at your own direction you will have to recoup via mining or purchasing shares.

$30K budget is to enable me to quit my high-paying job and still pay child support.  I will be supporting my family of 3 on $1500 / month and paying $2000 / month in child support.  Everything else will be going into legal fees,  bounties, and hiring others to accelerate development.   Needless to say, I am not looking to 'live rich' on other peoples money, I just want to get this thing built.     

Of the $30K, I am holding $15K as reserve and plan on operating on a $5K/month budget.   So in reality I have 6 months of development covered, but my wife insists I only treat it as 3 months because this will take about 6+ months from launch of continuous support, testing, and marketing to realize some return.

If I can raise $100K I will hire additional developers and grow the team as funding permits.

I have a meeting scheduled with a VC firm that is very interesting in my idea as well.  One member of this firm has already invested $5K personally, but he did not have authority to speak for the entire firm. 

This is a NEW take at solving the same problem.  This is not the same approach I was talking about in my old thread (though I kept the name the same).

I offered to return the investments and everyone has decided to re-invest in my new approach. 

Old Approach:  Complicated, Depending upon unproven economics and some wishful thinking.  Even I suspected I was missing something and was right.

New Approach:  Using proven 'brokerage structure' with crypto-currency as collateral and block-chain implementing margin requirements, automatic covering, and the exchange.

The new approach is so sound and based upon such a well-known practice in the industry that there are no mysterious forces at play.

I thought you had given up on this and returned the investment. What happened?

What does that ($30k) 3 month budget include? How many paid developers would be working on this?

Once I learn more about your new proposal, I might be very interested in helping on the technical side. What about code submissions for shares?