The purpose of this project is to build a global exchange system backed by bitcoin and p2p technology. This exchange system will host many virtual exchanges created by broker alliances which enables both local and global trading of assets in form of OTC markets. The overall goal of this project is to contribute to a free market economy with the help of bitcoin and decentralization.

This exchange system could be used by this kind of markets:

• FX (Bitcoin & Fiat currencies)
• Precious metals
• Commodities
• Stocks and Funds
• Derivatives
• Auctions
• Bartering

The solution described in this file is derived from a collection of ideas proposed at bitcointalk.org and is still being discussed until we reach consensus of a final solution and a detailed architecture.

github.com/bitcoin, #Bitcoin-OTC, github.com/bitcoinx, github.com/macourtney/Dark-Exchange, github.com/FellowTraveler/Open-Transactions, github/?/p2pool, retroshare.sourceforge.net, Ripple.com, CME Group, Forex markets, OTC-markets, Western Union, https://en.bitcoin.it/wiki/Contracts, https://en.bitcoin.it/wiki/Distributed_markets, http://en.wikipedia.org/wiki/Peer-to-peer_lending, http://en.wikipedia.org/wiki/Over-the-counter_(finance)

• The exchange network is built with the bitcoin network as inspiration.
• The network has a blockchain of orders that gets processed by miners willing to participate and get rewarded from the brokers with one bitcoin for each N orders that are forwarded in to the exchange.
• Each block takes around 1 second.
• Order matching is done once every block.
• Order cancelling is delayed for 10 blocks to discourage market manipulation.
• The order matching is deliberately slow to prevent High Frequency Trading algorithmis having advantage over the rest of the market. The orders are not executed as FIFO but in random order as a second protection against HFT.
• Once the orders are matched it is up to the brokers to settle the traded assets.
• Transaction history of executed orders will be saved in the blockchain as evidence if dispute would occur between brokers and clients
• Brokers need to create unique client ids for each of their clients, but the real identity of the clients will only be known by the broker and can only be revealed to authorities of the jurisdiction where the broker is based.

We should decide on which P2P-model to use:

• One worldwide blockchain for all virtual exchanges and their orders.
• Isolated blockchains for each virtual exchange (similiar to bittorrent, peers can choose which torrents to seed). This model would probably result in faster order processing but less stable and secure - but still better than centralized exchanges. Another benefit is that miners can actively discriminate virtual exchanges with bad reputation and instead provide their computing power to trustable virtual exchanges.

Each virtual exchange will be able to chose from this order processing models:

• Dealers market: clients trade with market makers and not directly with each other
• Double auction: clients trade directly with each other, the price is calculated based on supply and demand. http://en.wikipedia.org/wiki/Double_auction
• English auction with reservation price and time limit: Suitable for sales of huge quantities of an asset, or sales of non standardized assets, such as paintings, cars and real estate.

• Assets can be both digital or physical, example: cryptocurrencies such as BitCoin and LiteCoin, digital fiat currencies, physical fiat currencies, gold coins, silver coins, barrel of gasoline.
• Any asset pair can be traded in the exchange just as in a futures exchange since no real asset is handled through the exchange itself, only orders of assets.
• An asset pair can be: Bitcoin traded in US Dollar, BitCoin in Euro, 1 Oz Gold in BitCoin, 1 Oz Silver in BitCoin, LiteCoin in BitCoin, Euro in Dollar, 1 Barrel of Gasoline in Gold, 100 chicken eggs in Oz Silver, or whatever asset pair the brokers wishes to enable trading in.

"A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions. http://en.wikipedia.org/wiki/Clearing_house_(finance)

• Trust is used instead of a clearing house - the brokers are responsible for the actual transfer of assets between the traders.
• Voluntary rating of the brokers from the clients could be used to indicate the trustworthiness of each broker.

"A broker is an individual or party (brokerage firm) that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed." (http://en.wikipedia.org/wiki/Broker)

• Anyone can become a broker in this exchange.
• A broker must either join an existing virtual exchange or create a new virtual exchange where orders will be executed.
• Each broker wishing to join a virtual exchange must be approved by the founder of the virtual exchange which is done by mutual exchange of certificates.
• When several brokers exist in a virtual exchange their order books will merge for each asset pair they have in common and all of their clients orders will get matched together.
• Creation of a virtual exhange by virtual exchanges is not allowed, therefore trading between virtual exchanges is not possible.
• All brokers should use .bit domains (NameCoin) as a backup domain.
• Two classes of brokers: Class A Broker can settle assets with brokers in other jurisdictions, Class B Broker can only settle assets with a Class A Broker in the same jurisdiction.
• Each broker has its own order book, and its own asset pairs.
• The brokers using this exchange can have clients globally or locally.
• Client orders are always forwarded to the exchange by the brokers. Clients dont need internet access from the exchanges perspective since the clients will never use the exchange directly.
• Settlement of assets should be made on a regular basis (daily or weekly) between brokers in a broker-pool in order to minimize the possible loss off assets in the event of fraud or default.

• Each virtual exchange must comply with local laws in the jurisdictions where the brokers are located.
• Any legal issue is a matter between brokers in a virtual exchange or between a broker and its clients.
• The exchange system itself cannot be held responsible for any legal issues. The exchange system will be distributed among thousands of computers around the world and its role is to host the virtual exchanges.

• Fees are taken from the brokers and virtual exchanges to encourage miners to provide computing power to the exchange and to discourage creation of fake virtual exchanges, brokers and orders.
• Brokers and Virtual Exchanges will have bitcoin wallets created in the bitcoin blockchain where they send bitcoins in advance to pay for the exchange fees. If the broker-wallet or virtual exchange-wallet is empty no orders are processed for that broker or virtual exchange.
• The actual fees must be discussed in the community.

We could apply one of this fee models:

• Predefined fee: Static fee during all circumstances until the community changes the fees manually.
• Parameter based fee: Fee based on the number of one or several of this parameters: number of orders in last N blocks, the VWAP price of BtcUSD the last N Blocks, difficulty of the bitcoin blockchain, difficulty of the exchange blockchain
• Free market model: Fees are decided by each virtual exchange, virtual exchanges paying more fee per order will attract more miners.

Example of fees with the predefined model:

• Broker fee: 1 BTC per 30 days (18 144 000 blocks)
• Virtual exchange fee: 10 BTC per 30 days (18 144 000 blocks)
• 1 BTC per 10 000 Orders forwarded to the Exchange
• 1 BTC per 100 000 Orders cancelled from the Exchange

• If the exchange should work as a stock exchange instead of a futures exchange: How to prevent short selling assets that the client dont own and the broker cannot lend on the market?
• Minimum trading size in each asset to prevent order spamming? (0.1 BTC)
• Even trading sizes? (0.1, 0.2, 0.3 ...BTC)
• Clearing houses or two classes of brokers?
• Market makers?
• Darknet?
• Digital tokens to represent the traded assets and wallets to handle the tokens?
• Allowing creation of alliances between virtual exchanges?
• Which P2P model should we apply? Possible to combine a unified worldwide blockchain for some parts of the system and isolated blockchains for parts that are unique for each virtual exchange?
• What kind of fee model should we use?

Discussion on: https://bitcointalk.org/index.php?topic=172705.0