Re: Colored Coins and Coinprism takes Bitcoin to a whole new level
So now Counterparty A has shown they have sufficient reserves to make good on the put options. Next, we must somehow force transfers from the reserve address to the outstanding colored coins, should the puts expire in the money. I dont think this process can be entirely trustless because we need to agree on the bitcoin/USD price; however, I think by using multisig with keys held by neutral third parties, that we could at least make it completely transparent. Any fraud should be obvious and provable.
There is no need to agree on the going rate when using PUT options, if the options are actually settled (and not contract-for-difference). I don't know which kind of options the market participants would prefer, but every time I offer to issue PUTs, I want them to be settled in an actual trade at the strike price, or expire worthless.
Building a synthetic derivatives market on top of something as fickle and easily manipulated as the USD/BTC exchange rate is a call to even more short-term manipulation and volatility.
You bring up a good point. I too wonder if this would increase or decrease volatility. The fact that everything is fully transparent might help to mitigate whales from painting the tape near options-expiration dates. I don't know what would cost more: painting the tape or making a few more bucks on the options.
What I'm trying to do here is brainstorm the lowest-risk decentralized method for hedging against the USD/BTC exchange rate.
Futures (forward contracts) need to be in place before you can build an options market upon them. Just check the gold/silver market in Nymex/Comex.
If you want to decrease volatility, make a market with options that will be settled in the underlying (BTC) instead of $, and no "settlement date", only "expiration date" (I think this is called European style options but not sure).
American Options can be exercised at any time up until the expiration date, while European Options can only be exercised at the time of maturity.
So the counterparty may exercise the option any day. Then it becomes counterproductive to paint the tape eg causing a flashcrash: with a CFD, you would profit, the lower it goes. With a real PUT option, you need to sell your stuff at the agreed price and buy back, which causes buying pressure in the market (first you need to sell to cause the cascade, then you sell the BTC amount in the PUT option you bought, and now you'd need to buy both of these back cheaper, to realize any profit.)
Ah, decentralized. That is the tough point
I would start by removing the USD/BTC exchange rate from the system still, because that is the easiest to manipulate and in a sense the least meaningful part. You either have the coins or not.
Ah, decentralized. That is the tough point
I would start by removing the USD/BTC exchange rate from the system still, because that is the easiest to manipulate and in a sense the least meaningful part. You either have the coins or not.have you seen? : http://www.altchain.org/?q=whitepapers/paper4.html
a basic and very simple way to introduce hedging into the block chain is just allow for credit instruments. If you are long on the cryptocurrency, you loan- if you are short, you borrow(and exchange to another).
-bm