Hi BTCLuke,

When I initially read your post, (couple of days ago) I immediately saw the potential, the one thing that does not work however, is fiat -> BTC -> fiat, in the entire scheme you posted. (also really bonus kudos to the guy that basically already wrote the txn scheme on how to handle the p2p exchange, crypto only, as that is the way to go)

^^ We all know this can be done, and perfected as long as we are dealing with crypto currencies, with a blockchain to actually see if someone is able to spend that.

While I wanted to reply earlier, I didn't get to it being very busy. And then again I hadn't solved the fiat -> btc yet. Now I think I have gotten the clue from bitpay after their talk on the conference, and I truly believe that in combination with this p2p exchange it can work.

Forget instant transferring USD, EURO or any other fiat, it needs to digital and verifiable. (as long as there are bankers, they will not allow us to do this.)

So we gotta go outside the box... (bitpay's words)

Grab any gift card you can think of, that is automated verifiable, whether it is still valid or not.

For our example we will use Amazon and Ebay gift cards.

If I go to the store I can most likely buy an Amazon $50 Gift card for $30.

If I can check this card online whether it is still valid, then this cards code is worth $30. (despite being $50 Amazon gift card)

So I have a code, that i can check on the fly, and trade...

Now I hear you say, I don't trust Amazon. Ok fine then go Ebay.

Since there is such a huge market of gift cards, by different companies, all you have to trust is a company you already trust, that has these gift cards.

The most important part here is, to use the existing gift cards from major companies. (who people already trust, to be the intermediary between fiat and BTC)


The other thing to realize is, that crypto exchanges can do the exact same thing on this same platform.

While sharing the same platform, they can benefit from it (easier access to more crypto currencies, all of a sudden your not just exchanging bitcoin, you can exchange anything you have the client plugin for.)

A BTC-E USD IOU, all of a sudden can be traded against a MtGox USD IOU, or MtGox Euro IOU, but at the same time vs an Amazon Gift card, BTC or LTC.


Any exchange can join, and give out IOU, depending on how much reputation they hold, their IOU's will be worth more or less. (you wanna facilitate trading of these IOU's to keep prices down)

Any Gift Card from a Major Medium sized Company can join, as long as they are instantly verifiable as not spend. (aka, you're using your mutual trust in this company, without needing their consent)

Any Crypto Currency can join, as they are backed by a blockchain.

(And many other things that I haven't thought of, that are instantly verifiable over the internet, or have enough reputation, that people start trading their IOU's)

The combination of these 3 on a shared exchange platform, using the security of the bitcoin protocol, has the best chance of success in my opinion.


Last but not least, you could also build a sort of "localbitcoins" into this, though it would technically be nothing more than a message board, asking where to meet, with a reputation system in it. (someone looking to buy BTC, posts a message he wants to buy, the moment they meet and sell, the seller will sign the transaction as being completed, on which the system will see the transaction as completed as they see the bitcoins appear into the persoon looking to buy BTC, and anybody trying to up-rate himself, will be killed by the fees of the network upholding the exchange)

Looking forward on all input on this.

Just the economic barrier that there's no market for this service because nobody cares about altcoins.

Gold dealers are required to report large suspicious transactions in Canada, and likely other countries as well. Gold is also much easier to counterfeit than Bitcoin.

@btcluke

I want to start by saying I appreciate everyone who takes time to post thoughtful responses.  So I will respond to your post stating I fully believe I can satisfy all of your requirements.  So much so that I have posted another thread where I am looking to hire someone to help me and invest $20,000 or more in creating a working system based on my ideas.   But, as a sanity check I am also offering a 10 BTC bounty to anyone who can convince me that the idea will not work and save me time and money.    That said, let me attempt to explain my idea in greater detail.   I am also willing to discuss my ideas on skype with anyone interested in helping or attempting to claim the 1 BTC bounty.   (my handle isn't exactly anonymous because I have tied it to my website the-iland.net and my github account (also bytemaster)), send me a private message for skype (or ichat).

Now that I have your attention let me attempt to address your requirements by first stating that I am a very well read student of mises and austrian economics and thus am basing EVERYTHING on an austrian understanding of economics and will clarify anything I that you think I might misunderstand.  I am actively want to be proven wrong if I am wrong.

First of all we must understand that all forms of USD have different value despite being denominated in USD.  USD on Mt.Gox is less valuable than a paper note in my hand because it costs time and money to move a deposit from Mt. Gox and convert it into a bill in my hand.  It is also less valuable because there is counter-party-risk where the counter-parties are Mt.Gox and various governments and banks that could all prevent me from redeeming my Mt.Gox USD.    Even money in my bank account is of lower value than USD in my hand (provided I need it now) because of ATM fees, daily withdraw limits, and of couse counter-party-risk.

We must also recognize that at other times paper-USD is of less value than Mt. Gox USD such as times when you want to buy BTC NOW to take advantage of the price movement.   Therefore the price of Mt. Gox USD is above or below parity depending upon the relative demand for deposits vs withdraws from Mt. Gox as well as the ease of trading balances within Mt. Gox.

With that understanding we can clearly see that it is only an illusion to claim redeem-ability at 'face value' with any issuer.  Every issuer has a different trust level with every individual and therefore USD notes issued by different issuers are not perfectly fungible nor free of counter-party-risk.  The issuer is always subject to seizure from the government and could default regardless of how honest he intended to be.   The conclusion we can draw from this is that there might as well be a market for crypto-USD that fluctuates AROUND actual USD prices give-or-take a couple of percent similar to the price variance between Mt. Gox USD and paper USD which is what Bitinstant's entire business model is designed to capitalize on.  Thus if we can create a crypto-USD currency that has VALUE recognized by the market yet without any redeemable IOU like contract (like Bitcoin) yet trades at or near parity of paper USD base solely on market forces (not price fixing) then we will have a workable system.

Another aspect of depositing (trusting) money with a 3rd party is the expectation of interest payments in return for the risk associated with lending your money to the bank.  Any bearer-bond contract that does not pay interest will always be subject to immediate demands for redemption and thus put heavy stress on the most expensive difficult part of converting fiat to crypto-fiat (redemption).

1. Be without any central points of failure
  - a crypto-USD that can be traded via systems like localbitcoins at prices near parity with the dollar would lack any central points of failure.  Assuming you could provide a way to imbue value into the crypto-USD independent of any backer or price-fixing.  (It can be done, more on this later)

2. Show everyone a very large number of possible trades to choose from
  - by separating the process of converting paper-USD to crypto-USD and trading crypto-USD for BTC or crypto-USD you enable all trades to occur through broadcasts on the network or offers in the blockchain.

3. Transact trades pretty much INSTANTANEOUSLY
  - assuming there exists crypto-USD and BTC then an exchange could be run entirely from behind a TOR node.  However, there is still value in trades that can occur at the same speed as bitcoin transactions for most people who are not attempting arbitrage.  On the other hand if the exchange were a natively transparent part of a single blockchain then there probably would be much need for arbitrage.  

4. Offer Graphs and APIs
  - considering the entire market would be part of the same blockchain this could easily be added into any desktop client.

5. Have three-user (trustless) trading
  - how about 2-user trust-less trading between crypto-Fiat and 'BTC' and using escrow for remote exchanges of crypto-Fiat for bank-Fiat?

6. Hold and transfer a cryptosecurity that perfectly represents fiat
  - crypto-USD is more divisible, fungible, malleable, and scarce than paper-USD.


I think the #1 criteria is to eliminate counter-party-risk from holding of crypto-FIAT.  

I believe I have done this with my system which I will attempt to describe with more clarity and to PROVE that crypto-USD is not an IOU, has value of its own (like BTC) and that the value is automatically moved toward paper-USD parity by market forces, and that the value of crypto-USD is not at risk regardless of 99% changes in the value of 'BTC'.

More in a follow on post...

I get that what you're trying to do here is much bigger than facilitate USD to crypto-USD but I think you bring up a good point about the relative value of a dollar based on our desired ends.

The simplest way to think of this is the Mt Gox example you gave where USD ready to be exchanged for BTC (or other cryptocurrency) immediately is worth more than USD in my hand. This means there is a market for crypto-USD sitting in an exchange ready to be utilized. If there is a market why isn't it happening?

I think the reason it's not already happening is the trust issue. The fact that regardless of how much I offer you to let me use your crypto-USD in exchange for the USD in my hand, you have to believe you'll actually get my USD before you'll even set a price for your crypto-USD.

To me the central issue is trust. If you solve that problem the market will adjust to the relative value of USD in different forms and to changes in demand.

We need a distributed third-party.

We need to figure out a way to distribute escrow, and to keep the escrowers honest.

I see that with a swarm of gateways that just check if the fiat exists, and sign that with their own btc. I mean like a dominant assurance contract.

I'm still sorting that out...

I am responding to you in another thread because I want to get all discussion on this idea in one place so I do not have to repeat myself...

I think that 7th criterion is entirely reasonable.  I do not think my approach violates this criterion, but would be interested in your opinion.   

I'm someone still convinced by the CV tokens thing.  What made you change your mind?  I would like to know about it.

There are definitely more ways than that to transfer value around in Bitcoin, though they aren't as well known.  You can use scripts to build complex conditions which must be satisfied, and then anyone who can satisfy them can spend the coins.  Just off the top of my head:

-you can build transactions that anyone can claim (has actually been used)
-you can build transactions claimable by some subset of a group of keys ("m of n" signing, actually in use)
-you can build transactions which can be claimed by anyone who knows a secret password or piece of data (could be a file, a word, or an answer to a math problem, not just a private key corresponding to a public key or its hash, and has also actually been used)
-you can build transactions which go to the first person performing some amount of computational work, similar to how mining works (but separate from it)
-you can build transactions that no one knows the output of until they are spent (pay to script hash, where the transaction only has a hash of the script and the person collecting the transaction has to provide a script that hashes to that hash when spending it.  I believe this is already in use, but I'm not sure)
-you could build a transaction that could only be claimed by the owner of a certain pgp key (might be a big script, don't know how efficiently you could implement RSA signature verification in transaction scripting)
-you can build a transaction that isn't valid until after a certain time
-you can build a transaction which only becomes valid when someone else adds more money to it
-you can build a transaction with a sequence number which can later be replaced with a later sequence number
-you can build transactions where a portion of it can be modified later without requiring a new signature as long as the part that was signed remains unchanged
-you can build transactions that can be updated repeatedly without publishing them to the blockchain, and then only publish the final copy when all is said and done
and lots more I'm sure I'm forgetting.  Satoshi built a ton of cool features into Bitcoin--we just have most of them turned off right now because there aren't any commonly used use cases so it isn't worth the risk that the feature has been improperly implemented in one or more clients/miners and might result in a security exploit.

croesus has been light on details, but what she/he describes seems technically possible to me.  Just take a look at the contracts page on the wiki and you will find a whole slew of things that can be done with transaction scripting.