Quote from: cunicula on July 02, 2011, 01:21:41 AM

I think it might be helpful to explain how an electronic market selling bonds and contingent claims would work.
Just like in a regular market, pricing is determined by bids and asks of market participants.

Say the market is for bonds and contingent claims with 1 year maturity. Suppose the bitcoin software is setup to allow four kinds of contingent claims (in reality you would a wider range of possibilities).
The following are some hypothetical highest bids on the market:

Bids
Bond (all difficulty states): 0.975 BTC
Contingent Claim (diffculty <= 1000) : 0.01 BTC
Contingent Claim (100000>=difficulty > 1000) : 0.3 BTC
Contingent Claim (5000000>= difficulty>100000 ) : 0.68 BTC
Contingent Claim (difficulty>5000000 ) : No existing bids

A bond seller arrives and declares a minimum asking price of 0.97 BTC, what determines the selling price of this bond? Is it broken up into contingent claims or sold in its entirety?

Algortithm compares two possible sales:
1) [divide the bond into contingent claims]
a) Add up non-zero bids at the entire range of difficulty levels (in this case 0.01+0.3+0.68=0.99)
b) return revenue and any unsold contingent claims to the seller
(In this case the seller gets 0.99 BTC and a Contingent Claim for (difficulty>5000000 )
2) [sell the bond in one piece]
a) sell the bond for the highest existing bid (in this case 0.975)
3) If (Revenue (2) > asking price) AND/OR (Revenue (1) >= asking price), then sell bond; otherwise no sale
a) If Revenue (1) >= Revenue (2) [in this case it is, 0.99>0.975], then sell the bond through method (1)
b) If Revenue (1) < Revenue (2), then sell the bond through method (2)

In this case the seller earns more from selling the bond as contingent claims (0.99>0.975). Thus, the algorithm would match the seller to the contingent claims bids instead of to the bid for an entire bond.

Okay, so this is back into the realm of 'let the market sort it out'. I thought you were trying to roll such things into the blockchain by use of some system of linear equations (which adjust prices per difficulty dynamically). So you may have gotten rid of some inefficiency [or 'tax' as you put it] in the first order, but second, third and higher orders (or degrees) would still be traditional markets (with all their pricing inefficiencies)?