Topic: 0.5 BTC Bounty - Creating a Fiat/Bitcoin Exchange without Fiat Deposits - page 3. (Read 4076 times)

Investment Update:

So far I have lined up $30,000 investment into making this happen.  This $30,000 will get me through the first 3 months of development. 

Right now I am looking for people willing to pledge follow-on investments necessary to keep me cash-flow positive while I bring this idea to market.   

Because I know it is very 'risky' to invest money with someone at this early stage, I am asking only for pledges that will pay out on alpha-release of the new test-chain.  All investments will result in pre-mined shares in the new chain (1,000,000 limit to pre-mining).   Granted, receiving the money up front would put my wife at ease for this reason the first investors get the most pre-mining.     

Ideally, I would like to set up a company to handle the legal issues and hire additional people to accelerate development, find bugs, and otherwise do things that are not my strong suit. 

The first 500 BTC of investment I receive will be issued 1000 BitShares per BTC.   After that point it will be $1 per BitShare up to a total pre-mining limit of 1,000,000 (about 5% of the ultimate total money supply).  Also remember that owners of BitShares receive dividends equal to 50% of all mining fees so if you *never* sell then you could own a percentage of the total money supply proportional to your initial investment.   In other words, early investors will not be entirely debased by miners. 

Granted a forum post is not a 'contractual obligation', so if you would like more detailed terms and conditions on your investment or pledge then drop me a PM.

Unfortunately, it does require another alt-coin for 3 reasons:

1) The collateral rules must be enforced by the network.  There is no way I know of to 'lock' or 'force the sale' of bitcoins without the private key being kept secret.  That said, this system could work in a 'centralized manner' behind a Tor server using Bitcoin as-is.  You would still have to trust that Tor server and if it was ever found you could lose all of your deposits.   If you know a way of 'controlling bitcoins' while keeping the private key public (on the p2p exchange), then it may be possible...  It may be possible to implement something similar using Open Transactions and the bitcoin voting pools but that approach seems less robust and would take longer to develop.

2) There is no way to pay dividends with Bitcoin.

3) It is very easy to move value between chains.  Those who don't want to use the 'exchange features' enabled by BitShares could just keep Bitcoin.  Eventually people will realize that Bitshares have all of the qualities of Bitcoins + more AND most of their existing infrastructure that uses JSON-RPC to talk to Bitcoin will still work with BitShares.  This creates a smooth, natural, market-based migration path.

Could this exchange not operate on top of Bitcoin? does it necessitate having another alt-coin?

I hope to simplify the process of getting into/out of BitShares by allowing people to trade crypto-USD directly at face value without exchange risk.  This way no one has to worry about finding someone locally with 'reasonable' margins for buying or selling BitShares.

A bit like back square one, isn't it?

edit: trading is not the hard part, it's getting fiat for bitcoins and visa versa.

You can exchange deposits on the exchange for cash.

Imagine you had $100 in Mt.Gox, you could meet someone locally, give them $100 cash to send you $100 on the exchange.

How can anyone give you real USD when the exchange doesn't accept fiat deposits?

When you open a brokerage account you deposit $1000.   Then you want to sell some stock short, so you 'borrow it' and sell it on the market.   Your account is now 'short' the stock and you must maintain enough money in your account to buy back the stock even if the price of the stock jumps by 50%.   If the stock does jump the the broker may use your margin to buy-back the stock and cover your position.

If we consider your 'deposit' owning Bitcoins, then you can 'borrow' USD and sell it on the market provided you maintain enough BTC in your account to repurchase that USD even if the price of USD goes up 50%.

As a result of your margin the person who lent you the USD can be relatively sure they will get their USD back even if the price moves against you.  

The question is 'who' actually lent you the USD that you sold?   The answer is anyone who will give you real $USD in exchange for your digital USD.   Why did they lend you that $USD?  Because they know it was backed by enough money to any changes in the price and that the brokerage firm will liquidate your account to make sure they get their $USD back.

As a result the entire system can operate without any central planner so long as there is a means to enforce some simple margin requirements and a mechanism to exchange.

 

I dont really understand your how that should work. Make a proof-of-concept site and we have something to talk about.

meanwhile, have a look at bitcoin.de , they dont ask for a money deposit, only a BTC deposit from the seller. So in case the buyer doesnt actually pay, nothing is lost and and the BTC can be returned to the seller; on the other side, the BTC from the seller is frozen when a transaction starts, so when a buyer did transfer the money but the seller doesnt confirm, then the exchange-owners can always check and release the frozen amount of BTC.
It is slow (because of banks), but it works.

*EDIT*  I have posted a white-paper explaining this process here: http://the-iland.net/static/downloads/BitSharesWhitePaper.pdf

I will payout a 0.5 BTC bounty each time someone finds an 'attack' on this block-chain algorithm that results in me creating a custom rule to address.


Imagine you wanted to open up a new exchange that did not accept USD deposits but still allowed people to trade USD vs Bitcoin.  How would it work?

First I would have them deposit Bitcoin.  I would let them 'short' dollars by selling them into the market provided the result of executing the trade
would leave their account with  - 1 USD   and  2 * Exchange Rate BTC.   I would then force them to 'cover' once 2* Exchange Rate == 1.5 USD.  We can then be sure that they will *never* be able to walk away with a negative USD balance unless the exchange rate fell "instantly" by over 50% and even then the losses would be limited.

I would then allow users to 'transfer' USD balances between eachother provided any negative balance maintained sufficient collateral. This means that someone could exchange paper-USD outside the exchange and receive a positive USD balance inside the exchange.  For this to work someone has over 1.5x the collateral posted backing that USD.

Then at the end of the day I would allow them to withdraw only via Bitcoin.

The net-result would be an exchange with no ties to the traditional banking system, yet still minimal risk to those who participate.  All prices
would have to be honest or someone will lose their collateral.  It is a kind of Nash Equilibrium backing all exchanges.

I would charge transaction fees and use those fees to pay interest to those with net margin in excess of 1.5x. I would also charge a one time fee
for short selling that would be paid as interest to the holders of USD.   You could only short-sell when there are no longs selling and everyone must compete to win the short position with the highest fee winning.

This would be a VERY traditional margin-based exchange supporting short-selling.   The cool thing about such an exchange is that all of the 'rules' could easily be encoded into a Blockchain and require no 'outside parties' to manage the exchange.

As a result this new structure solves all of the pricing issues with BitShares.   Market participants would all understand that their $USD balances are all backed by collateral and relatively safe.  There is risk involved if the price swings too quickly (USD going up, Bitcoin/Shares going down) and it would have the effect of generating 'short squeezes' that would tend to keep prices in equilibrium with less volatility.

So the question becomes, would you use an exchange based upon these principles?  What if it was entirely encoded into a blockchain?