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Topic: [Proposal] Pricecoin (Read 1344 times)
Pricecoin
Abstract
A system for predicting and controlling price for trading on an open market between two assets is outlined. The system enables a group to act together as a traditional market maker and will enable decentralized exchanges.
Market Making
Typically, a trade in a marketplace does not significantly move the market price. However if a market player controls a significant portion of the traded assets, they can move the market. Market makers move the price with certain cyclical strategies to exploit this effect. Such moves are not without risk as other large actors or external effects can also move the price. In the system we outline less risk is present to the market makers, as the ability to participate in market maker strategies is extended to multiple parties.
Overview
To enable multiple parties to collude and agree on price and market strategies requires solution of the distributed consensus problem. The solution presented is a linked pair of block chains.
Rather than reward a miner on a chain with units of currency as quantified on a public ledger, we reward the miner with the ability to make a shift in the predicted price of an asset at a given time. The mining is at essence proof of work hashing, but the result of the hashing is heavily weighted (>1000-fold) with a proof of ownership of the asset which is under consideration. A miner (market maker) can direct his hash rate (made available by his proof of ownership) toward one chain or use the other asset similarly to mine on the companion chain. This is a proof of stake mining system of sorts. The market pair of assets which we direct our attention must therefore be assets for which cryptographic proof of ownership (digital signature) is possible.
Because block size is smaller we can have much faster blocks. The difficulty adjustments will similarly be more frequent. The basic idea is that a rise in difficulty on one chain will linearly mark an increase in sell pressure of that asset at some agreed upon delay. Ideally the block rate will be fast enough that solo mining remains practical under nominal use characteristics.
Examples
For an example, consider a market of bitcoin traded for litecoin. A simple scenario for pricecoin is when only the communication and prediction aspect is used, leaving it up to the users (nodes) to actually implement the trades. Client software will simply allow a miner to throw his cash-weighted hashes one direction or the other on the chain pair as the miner wishes to. The resulting price as listed in the blockchain could represent a futures price of some duration, which all participants will trade on markets accordingly.
Another way a pricecoin system could be built is as an exchange. The clients will again need access to both coin blockchains to verify miners claims of ownership and proposed blocks, and the motivation for miners to participate will be also to submit trades, to move the price in a direction they prefer, to accept fees valued in underlying assets, and to keep the integrity of the system.
An escrow system would need to be carefully chosen at the heart of the protocol. The block itself created by a miner could include signed transactions to an escrow-ready multisignature address, which the transaction participants can use to add their final signature after checking the transaction and submit to the appropriate network should the transaction be included in a block. Thus a block will contain multiple transactions at a given price as determined by the block miner (and the limits of the traders offers/bids). The further submission of the final trade by individuals using the system is likely to be carried out automatically by client software, so that the system is transparent. This means that as a user, your bid or offer will remain visible in the software, and announced on the network, until a miner agreeing to your trade chooses a price that matches and selects the trade recipient(s) at which point your bid or offer will be matched to another node's bid or offer and the appropriate transaction(s) finalized. Unfortunately we cannot require proof an exchange on underlying asset chains when we build a block.. after all, we are trying to determine the price at which the exchange occurs. A pricecoin exchange miner could also act as an escrow for the traders, holdheing funds until TXs on both underlying networks are verified to the proper level, and then creating further TXs to release the funds. In one flavor of pricecoin exchange, large miners can basically act as bucket shops and so fee incentivization may not be necessary.
Discussion
Pricecoin networks won't work very well until they reach a critical mass and will need some fiddling or training from time to time. Incentivising through the use of coinbase minting (new "pricecoins") is not recommended as it will skew the predictive motivations. The data on the block chains are only useful for maintaining consistency of the network, other than that they do not hold valuable information. For this reason many public ledger security concerns are no longer so important. At some point old blocks could be pruned entirely.
Yes, keyed mining and private pricecoin overlay networks are entirely possible, as are coloured coin trading systems. Each implementation has its own unique security considerations and peculiarities we won't get into here. No, this isn't going to help us with gold or fiat. Yes, I'd be happy to help you build one, send me a message. Yes there are a lot of details left out here, feel free to fill them in and build your own.
Abstract
A system for predicting and controlling price for trading on an open market between two assets is outlined. The system enables a group to act together as a traditional market maker and will enable decentralized exchanges.
Market Making
Typically, a trade in a marketplace does not significantly move the market price. However if a market player controls a significant portion of the traded assets, they can move the market. Market makers move the price with certain cyclical strategies to exploit this effect. Such moves are not without risk as other large actors or external effects can also move the price. In the system we outline less risk is present to the market makers, as the ability to participate in market maker strategies is extended to multiple parties.
Overview
To enable multiple parties to collude and agree on price and market strategies requires solution of the distributed consensus problem. The solution presented is a linked pair of block chains.
Rather than reward a miner on a chain with units of currency as quantified on a public ledger, we reward the miner with the ability to make a shift in the predicted price of an asset at a given time. The mining is at essence proof of work hashing, but the result of the hashing is heavily weighted (>1000-fold) with a proof of ownership of the asset which is under consideration. A miner (market maker) can direct his hash rate (made available by his proof of ownership) toward one chain or use the other asset similarly to mine on the companion chain. This is a proof of stake mining system of sorts. The market pair of assets which we direct our attention must therefore be assets for which cryptographic proof of ownership (digital signature) is possible.
Because block size is smaller we can have much faster blocks. The difficulty adjustments will similarly be more frequent. The basic idea is that a rise in difficulty on one chain will linearly mark an increase in sell pressure of that asset at some agreed upon delay. Ideally the block rate will be fast enough that solo mining remains practical under nominal use characteristics.
Examples
For an example, consider a market of bitcoin traded for litecoin. A simple scenario for pricecoin is when only the communication and prediction aspect is used, leaving it up to the users (nodes) to actually implement the trades. Client software will simply allow a miner to throw his cash-weighted hashes one direction or the other on the chain pair as the miner wishes to. The resulting price as listed in the blockchain could represent a futures price of some duration, which all participants will trade on markets accordingly.
Another way a pricecoin system could be built is as an exchange. The clients will again need access to both coin blockchains to verify miners claims of ownership and proposed blocks, and the motivation for miners to participate will be also to submit trades, to move the price in a direction they prefer, to accept fees valued in underlying assets, and to keep the integrity of the system.
An escrow system would need to be carefully chosen at the heart of the protocol. The block itself created by a miner could include signed transactions to an escrow-ready multisignature address, which the transaction participants can use to add their final signature after checking the transaction and submit to the appropriate network should the transaction be included in a block. Thus a block will contain multiple transactions at a given price as determined by the block miner (and the limits of the traders offers/bids). The further submission of the final trade by individuals using the system is likely to be carried out automatically by client software, so that the system is transparent. This means that as a user, your bid or offer will remain visible in the software, and announced on the network, until a miner agreeing to your trade chooses a price that matches and selects the trade recipient(s) at which point your bid or offer will be matched to another node's bid or offer and the appropriate transaction(s) finalized. Unfortunately we cannot require proof an exchange on underlying asset chains when we build a block.. after all, we are trying to determine the price at which the exchange occurs. A pricecoin exchange miner could also act as an escrow for the traders, holdheing funds until TXs on both underlying networks are verified to the proper level, and then creating further TXs to release the funds. In one flavor of pricecoin exchange, large miners can basically act as bucket shops and so fee incentivization may not be necessary.
Discussion
Pricecoin networks won't work very well until they reach a critical mass and will need some fiddling or training from time to time. Incentivising through the use of coinbase minting (new "pricecoins") is not recommended as it will skew the predictive motivations. The data on the block chains are only useful for maintaining consistency of the network, other than that they do not hold valuable information. For this reason many public ledger security concerns are no longer so important. At some point old blocks could be pruned entirely.
Yes, keyed mining and private pricecoin overlay networks are entirely possible, as are coloured coin trading systems. Each implementation has its own unique security considerations and peculiarities we won't get into here. No, this isn't going to help us with gold or fiat. Yes, I'd be happy to help you build one, send me a message. Yes there are a lot of details left out here, feel free to fill them in and build your own.
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