artem_yurevich
New member
Introduction
States can’t control cryptocurrency, but it can be a sentinel who controls the gates between two worlds – fiat and crypto, because any exchange is just a server and an account in a bank, and therefore could be subdued or closed. Moreover, a centralized exchange, even if located in stably favorable jurisdiction, is always a chance to be hacked or cheated. So, there is a need for decentralized exchange that allows to trade fiat money for cryptocurrency and vice versa, and do it safely. The companies, that stepped in the right direction, do not solve the problem. Ones of LocalBitcoins style do not have a bank account, but remains a server that means a centralized exchange. Bitsquare uses a P2P network and therefore is decentralized, but the safety of on-line deals depends on an arbitrator that means a decision of a person. Furthermore, both the models can’t protect the "live" trades, during which banknotes are handed. Below could be a solution.
Concept of the Decentralized Crypto-Fiat Exchange
The Exchange is a P2P network consisting, for instance, of 1000 nodes (any node of the Dash network can be a node of the Еxchange network). The nodes manage a multisig wallet located on the Dash network, and each node has one private key, so the total number of the keys to the wallet is 1000. However, all the keys are not required to perform a transaction. It is enough if 500 of them signed it.
How it works?
Alice wants to sell, and Bobby wants to buy 1 DASH for USD 1000. Alice sends 1 DASH to the multisig wallet. Alice and Bobby create, sign and send her/his own order to the Exchange network. Comparing the incoming orders, one of the nodes matches the orders of Alice and Bobby, unites them into a deal, and sends Alice and Bobby the internal network addresses of each other for further messaging inside the Exchange network. Alice and Bobby agree how Bobby will pay to Alice. Fiat money can be transferred by any possible way: cash from hand to hand, bank transfer, etc. The way of transfer doesn’t matter for the Exchange. Bobby creates, signs and sends a message to the node that the money was transferred to Alice.
Alice creates, signs and sends a message to the node that money from Bobby has been received. In the multisig wallet, the node creates a transaction to Bobby in amount of 1 DASH and signs it with its private key. At the same time, the node sends the deal to the Exchange network and asks all the nodes to sign the transaction as well. The nodes see the transaction and check if Alice and Bobby's signatures comply with their internal network addresses. If everything is okay, the nodes sign the transaction. As soon as the transaction picks up 500 signatures, the multisig wallet sends 1 DASH to Bobby.
Main security issue
Bobby sends a message to the node that money was transferred to Alice. But Alice sends a message to the node that money from Bobby was NOT received. Who of them is a joker? Bobby, who actually sent nothing to Alice? Or Alice, who actually received money from Bobby? In the fiat world, such an issue would be resolved by third party – an arbitration system with all its defects that sometimes leads to wrong judgments.
Inside the Exchange network, the arbitration will work in much better way. If Alice sends a message to the node that no money received from Bobby, then the node initiates the arbitration. It tells all the nodes of the Exchange network about the dispute and asks them to take part in the proceeding. Any node confirms its participation, if it wishes. The number of the nodes needed for the proceeding can be calculated according to the following (just for instance) formula: 1000/24*11/12=38, where 1000 is the total number of the nodes, 1/24 of them do not sleep for sure at this time, but 1/12 of the sleepless are now relaxing. One of the nodes takes the administrating function: arranges investigative actions and communicates with Alice and Bobby.
The rest of the nodes play the role of jurymen: they get acquainted with the data obtained during the investigation, consult with each other, and each of them makes its own judgment. The majority defines who is right, Alice or Bobby.
Economical aspect of the arbitration.
The Exchange network produces profit by taking transaction fees. The profit is distributed evenly between the nodes, but a part of it (like 10% of the coins produced on the Dash network) may only be used for the needs of the network, in our case, for the expenses related to the arbitration activities:
- rewards to the jurymen,
- rewards to the administrators,
- payment of the disputable amount to Bobby in case of lack of the jurymen, or no administrator (if during the fixed time the arbitration can’t collect the required number of jurymen or find an administrator, then both Alice and Bobby are satisfied: 1 Dash of Alice remains at her disposal, Bobby gets 1 Dash at the expense of the Exchange treasury),
- investigation actions (we can imagine that in some cases, in order to find the truth, the arbitration will require help from outside experts: lawyers, financiers, detectives);
- development of recommendations for the customers of the Exchange concerning fiat money transfer/handover technology for more reliable, quick and simple finding of the truth if a dispute arises.
Conclusion
The arbitration system of the Exchange network consists of the jurymen and administrators who are interested in the expansion of the Dash and Exchange networks, since they get profit from them.
The expansion of the network is its acceptance by society, and it’s possible if the network is safe. So, the arbitration system will strive exceptionally to find the truth when resolving disputes. We add the sufficient financial resource that works only in the interest of the system, and get the most effective arbitration model, under which fraud will go to zero with time.
This model can stand against the efforts of states to suppress the development of the cryptocurrency.
States can’t control cryptocurrency, but it can be a sentinel who controls the gates between two worlds – fiat and crypto, because any exchange is just a server and an account in a bank, and therefore could be subdued or closed. Moreover, a centralized exchange, even if located in stably favorable jurisdiction, is always a chance to be hacked or cheated. So, there is a need for decentralized exchange that allows to trade fiat money for cryptocurrency and vice versa, and do it safely. The companies, that stepped in the right direction, do not solve the problem. Ones of LocalBitcoins style do not have a bank account, but remains a server that means a centralized exchange. Bitsquare uses a P2P network and therefore is decentralized, but the safety of on-line deals depends on an arbitrator that means a decision of a person. Furthermore, both the models can’t protect the "live" trades, during which banknotes are handed. Below could be a solution.
Concept of the Decentralized Crypto-Fiat Exchange
The Exchange is a P2P network consisting, for instance, of 1000 nodes (any node of the Dash network can be a node of the Еxchange network). The nodes manage a multisig wallet located on the Dash network, and each node has one private key, so the total number of the keys to the wallet is 1000. However, all the keys are not required to perform a transaction. It is enough if 500 of them signed it.
How it works?
Alice wants to sell, and Bobby wants to buy 1 DASH for USD 1000. Alice sends 1 DASH to the multisig wallet. Alice and Bobby create, sign and send her/his own order to the Exchange network. Comparing the incoming orders, one of the nodes matches the orders of Alice and Bobby, unites them into a deal, and sends Alice and Bobby the internal network addresses of each other for further messaging inside the Exchange network. Alice and Bobby agree how Bobby will pay to Alice. Fiat money can be transferred by any possible way: cash from hand to hand, bank transfer, etc. The way of transfer doesn’t matter for the Exchange. Bobby creates, signs and sends a message to the node that the money was transferred to Alice.
Alice creates, signs and sends a message to the node that money from Bobby has been received. In the multisig wallet, the node creates a transaction to Bobby in amount of 1 DASH and signs it with its private key. At the same time, the node sends the deal to the Exchange network and asks all the nodes to sign the transaction as well. The nodes see the transaction and check if Alice and Bobby's signatures comply with their internal network addresses. If everything is okay, the nodes sign the transaction. As soon as the transaction picks up 500 signatures, the multisig wallet sends 1 DASH to Bobby.
Main security issue
Bobby sends a message to the node that money was transferred to Alice. But Alice sends a message to the node that money from Bobby was NOT received. Who of them is a joker? Bobby, who actually sent nothing to Alice? Or Alice, who actually received money from Bobby? In the fiat world, such an issue would be resolved by third party – an arbitration system with all its defects that sometimes leads to wrong judgments.
Inside the Exchange network, the arbitration will work in much better way. If Alice sends a message to the node that no money received from Bobby, then the node initiates the arbitration. It tells all the nodes of the Exchange network about the dispute and asks them to take part in the proceeding. Any node confirms its participation, if it wishes. The number of the nodes needed for the proceeding can be calculated according to the following (just for instance) formula: 1000/24*11/12=38, where 1000 is the total number of the nodes, 1/24 of them do not sleep for sure at this time, but 1/12 of the sleepless are now relaxing. One of the nodes takes the administrating function: arranges investigative actions and communicates with Alice and Bobby.
The rest of the nodes play the role of jurymen: they get acquainted with the data obtained during the investigation, consult with each other, and each of them makes its own judgment. The majority defines who is right, Alice or Bobby.
Economical aspect of the arbitration.
The Exchange network produces profit by taking transaction fees. The profit is distributed evenly between the nodes, but a part of it (like 10% of the coins produced on the Dash network) may only be used for the needs of the network, in our case, for the expenses related to the arbitration activities:
- rewards to the jurymen,
- rewards to the administrators,
- payment of the disputable amount to Bobby in case of lack of the jurymen, or no administrator (if during the fixed time the arbitration can’t collect the required number of jurymen or find an administrator, then both Alice and Bobby are satisfied: 1 Dash of Alice remains at her disposal, Bobby gets 1 Dash at the expense of the Exchange treasury),
- investigation actions (we can imagine that in some cases, in order to find the truth, the arbitration will require help from outside experts: lawyers, financiers, detectives);
- development of recommendations for the customers of the Exchange concerning fiat money transfer/handover technology for more reliable, quick and simple finding of the truth if a dispute arises.
Conclusion
The arbitration system of the Exchange network consists of the jurymen and administrators who are interested in the expansion of the Dash and Exchange networks, since they get profit from them.
The expansion of the network is its acceptance by society, and it’s possible if the network is safe. So, the arbitration system will strive exceptionally to find the truth when resolving disputes. We add the sufficient financial resource that works only in the interest of the system, and get the most effective arbitration model, under which fraud will go to zero with time.
This model can stand against the efforts of states to suppress the development of the cryptocurrency.