I believe it can be done using derivatives.
Then you don't understand the problem.
Fiat liquidity in a P2P exchange means that I can take my digital representation of dollars and reliably and consistently turn those into a physical $100 bill in my hands to put gas in my car and buy groceries.
Solving this problem means coordinating actions in meatspace; a complete solution requires very little coding and a lot of HR.
I understand the problem. It consists of two parts:
- 1. we need some kind of digital tokens exist in the blokchain and have their value pegged to the value of asset they represent
- 2. an ability to exchange tokens for the asset
it is important to understand that these are two separate issues. You focus on the second one, but I believe it isn't particularly interesting: something similar to LocalBitcoins can be used here.
Basically,
once you have digital tokens with stable value, the rest of the system is inherently decentralized as people can simply trade these tokens with each other... Of course, there will be people who will do this professionally, and there will be companies which provide this kind of service.
We already know that it works. This approach is/was used by a number of digital currencies such as LibertyReserve, WebMoney, e-gold etc. For example, there are several WebMoney exchangers in my city (it is kinda popular here), so getting money in/out of WebMoney isn't a problem, at all.
If this kind of exchange is profitable, people will do it. Consider it solved.
Wait a bit, why do we need this mumbo-jumbo with USD-coins, can't people exchange bitcoins directly?!
Of course, they can, but volatility make is extremely risky. It isn't an exchange business, it is a daytrader business.
Moreover, price discovery doesn't work very well within these peer-to-peer trading networks. Please check this chart:
http://bitcoinity.org/markets/localbitcoins/USDIt just fluctuates wildly.
Now, again, suppose we have some kind of trustworthy USD-coins. Their price is certain, so there is no need for price discovery. Maybe you will pay 1.05 USD for 1 USD-coin, but if somebody wants 2 USD for it, it's an obvious rip-off (cf. LocalBitcoins: high: 500.15 low: 173.91).
If they are sufficiently trustworthy, local exchangers will be glad to work with them, as it is very simple business: they earn their commission and do not need to worry about price fluctuations.
Price discovery can happen on a decentralized exchange for digital tokens. Basically, we can make a global order book, and if it works properly, it will have one price.
So we need to focus on implementing digital tokens with stable value, as they can be used for buying/selling bitcoins.