Almost all exchange volume is related to speculative or hedging purchases by people who regularly move between USD and bitcoin.  My idea addresses this use (but not for HFTs).  I don't have a solution for using VISA cards or bank accounts to buy bitcoin with out facing a reversibility problems. However, not much stuff is sold only for bitcoin, so there isn't much need for this. People can just use USD to purchase things.

Hedging is doubtless a market, and it really need not have anything to do with actual fiat<->cryptocoin exchanges.

Just like one of the bitcoin<->USD conversion rate options sites resolves all balances only in bitcoins, hedging can also balance strike only in bitcoins. All the people hedging need is a way to denominate their holdings in terms of a fiat unit of count during periods then they think the fiat unit of account will lose less actual buying power value than the cryptocoin unit of account will.

It is merely about relative "value" of unit of account. Actually acquiring fiat upon eventually cashing out is totally independent of that.

So far the primary barrier really to doing this as blockchains has been the evident unwillingness of people doing merged mining to merged mine more chains, resulting in merged-mined chains having insufficient security so far to be suitable for this use.

Maybe we should right off the bat distinguish between fiat currency exchanges, cryptocoin exchanges and fiat<->cryptocoin exchanges, as they are maybe three different problems, albeit the first (fiat<->fiat) and third (fiat<->cryptocoins) might be somewhat similar in terms of the regulatory problems they might encounter (though still the third might have more or different regulatory problems in some details from the first).

Since the USD is not the only fiat in the world, and in fact some nations might even prefer that it not even be used as global reserve currency at some point going forward, the whole concept of allowing each Freeciv nation to issue their own blockchain-based currency was intended partly to actually get in place blockchains that could, once sufficiently secured, be used for this hedging type of use even if not directly convertible to fiat. I figured the whole problem of conversion of fiat can be left to bitcoin itself, allowing all other cryptocoins to get on with their own problems internalt to the cryptocoin world. If exchange to and from fiat does turn out to be a massive market, then bitcoin's position as the primary conduit for such exchanges should help keep bitcoin its current place as the pre-eminent cryptocoin. If however such exchange turns out to be a dwindling market as more and more business takes place purely within the cryptocoin world then who knows, maybe bitcoin will find being the main gateway will slowly lose its importance in the cryptocoin economy.

-MarkM-

Where is the "trader bot" running?

Then you should give a look at Jtorchat
It's the Java client with the same protocol

I was questioning the difference in the act of exchange. Regardless of the value, I can buy BitUSD at 1:1 ratio, transfer BitUSD to my wallet, then do a charge back to get my original USD back. The only difference between this and Bitcoin is I have stolen $1 worth of BitUSD instead of $5 worth of Bitcoin. I.e. reversible to irreversible exchange can not be solved by calling Bitcoin by another name, or by pegging its value. So I was wondering why cunicula kept pushing it.

I think you are still missing it.

It is IRREVERSIBLE DOLLARS.  The same irreversibly, decentralized, and peer to peer aspects of Bitcoin but for a "semi-stable" dollar equivalent crypto-coin.

He is pointing out the irreversibility not because it is somehow superior to Bitcoin or that you would need it to get Bitcoins but it is superior than Paypal, credit cards, ACH, checks, etc.

I guess friend to friend is different from peer to peer, since peer to peer seems to mean neither person trusts the other.

It still seems most likely that the problem of converting reversible to non-reversible will be best handled on a friend to friend level.

Once you have irreversible currency of any denomination, converting to bitcoins is suddenly a whole lot easier.

I doubt if you can avoid some degree of centralisation, for example if you use some kind of web of trust it is likely that some people will emerge as more trusted than others. That is a degree of centralisation as they become more and more central the more their trust score outweighs others'.

How do you propose to secure an exchange with no trust without having both currencies being exchanged be blockchain based? Even if some kind of "smart property" is one side of an exchange can you really be sure the "smart property" has not been tampered with or will not be tampered with by the time you take delivery of it? Most likely the proof of ownership used for its smartness will be a blockchain?

-MarkM-

This comes right back to my original point that our main, used by most, currency is NOT blockchain based. Exchanging blockchain to blockchain is very trivial. Exchanging what most people use into blockchain is the holy grail of exchanges.

I think the only possibility for what you want is to have ripple in the middle.

Anyway, I still think that a decentralized exchange btc/usdCoin has many advantages. Even if you still have to convert usd into usdCoins.
For example, some people keep dollars in an exchange and only buy bitcoin when they're going to spend them to avoid price fluctuation risks.
But they have other risks by doing that. For example, the exchange gets hacked, the attacker sells all your usd for btc and they're gone. Fishing attacks, the exchange can easily manipulate the market by showing false data...
They could store the usdCoins on their computer and avoid all those risks and disadvantages. They can backup those dollars, etc.

So, yes, the idea of usdCoins and decentralized exchanges has value even if it's not the holy grail you're looking for.

Although I defended chain based usdCoins earlier, now I think that having a centralized there's not much added value in having decentralized accounting. An OT-like minter can do the accounting himself. If instead of the OT scheme, the coins were sent to public keys, you could have decentralized trades with bitcoin. Those coins would be as traceable as bitcoin (for the minter, much less for others) instead of "OT untraceable". I really think there's no difference, but fellowtraveler hasn't clarify that to me (or he didn't undesrtand me).
I have to rewrite it, but it could be something along these lines.
The idea is mostly inspired in the decentralized ripple protocol and open transactions, but with offers of trade of IOUs instead of credit lines (ripple) and without the so called "untraceable cash" (ot).

Physical commodities are irreversible as well, just like Bitcoin. I guess if we use cash in envelope delivery for exchanges...