BitShares:Proposal post

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In June 2nd, 2013, Dan Larimer published the first idea of BitUSD in Bitcoin Forum – Creating a Fiat/Bitcoin Exchange without Fiat Deposits – including a BitShares white Paper. Over the next five weeks, Dan engaged in a series of vigorous forum discussions defending and refining the concept. There he met Charles Hoskinson who helped to vet the idea and develop a business plan. Charles presented the plan to Li Xiaolai in China who agreed to fund the development. On American Independence Day, the Fourth of July 2013, Invictus Innovations was incorporated in the state of Virginia. Invictus introduced the BitShares Vision to the world via presentations by Hoskinson and Larimer at the Atlanta Bitcoin Conference in October 2013.[1]

Bellow follows the reproduction of the first proposal post published by Dan Larimer in the Bitcoin Forum:

0.5 BTC Bounty - Creating a Fiat/Bitcoin Exchange without Fiat Deposits

June 02, 2013, 07:47:34 PM (Read 3750 times until 12/9/2017)

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?

References

  1. The History of BitShares Bitshares.org, retrieved in 7/25/2017

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