Within a social context, Peer-to-Peer, or P2P is a specific form of relational dynamic, based on the assumed equipotency of its participants, organized through the free cooperation of equals in view of the performance of a common task, for the creation of a common good, with forms of decision making and autonomy that are widely distributed throughout society in general, or in this case the marketplace.
[Big breath]
The Global Block Chain, Market Place
It is the author's vision, that a Global Peer-to-Peer Marketplace will emerge throughout society, enabled by the Global Block Chain Marketplace business model, and technologies as described herein.
A Peer-to-Peer, Service is a decentralized platform whereby two individuals interact directly with each other, without intermediation by a third-party. A peer-to-peer trading and payment system, cannot be stopped, censored, and cannot be manipulated by power, institutions, or even Flash Boys.
Within the peer-to-peer marketplace concept, there is no central server that takes over the matching of supply and demand, no central server which administers the order book. The result is a highly decentralized, asynchronous, peer-to-peer network. Ideally, every trader will be represented through his peer, which carries out the buying and selling contracts in coordination with other peers. The network is more resilient to system or node failure, than any existing centralized system. The marketplace works without a central coordination unit, thereby enabling everybody on the planet to participate equally in the trading of securities or any dematerialised asset. The network or Inter-ledger datagram protocols, have been designed to fail safe in all cases, and are themselves stateless, hence requiring no concept of a "session" which simply add latency, and centralisation to the marketplace..
Peer-to-peer systems are highly distributed and self-organizing communication networks. This post, proposes to reorganize the trading of securities, away from the existing centralised markets being done up until now at the stock exchange, onto a global peer-to-peer basis. In effect the matching of orders and the trading of securities can be handled in a decentralized way. Within the context of the marketplace, there is no requirement for any bank account or asset custodians, all currency and assets are held directly by the counterparties of the trade. It should be noted, that there is no concept of "post trade", within a peer-to-peer marketplace, there is only the exchange of goods for payment, which is unconditional and final.
From a user perspective the proposed system has the advantage that one can trade securities without paying transaction fees to any intermediary (e. g. banks).
One of the most important strengths of a peer-to-peer marketplace is accelerating the network effect of the marketplace. When a marketplace is peer-to-peer , it means that the users within a marketplace are connecting with like-minded people more often, and in our model, more local, like minded people; this helps to spread the word, the "empowered individual" in action.
The history of markets
There is a growing global movement called "buy local", which is focused on consuming the resources closest to the consumer, and reducing the footprint and resources required for the transportation of all goods across large distances, between the producers and the consumers.
While one would think, this does not apply to the Internet, but the reality is "latency" is always a factor in any marketplace including all digital marketplaces. With a trade execution of ~ 250ns a 10 second latency between Sydney and New York is identical to transporting oranges from San Francisco into the Sydney market, the "buy local" issues still apply.
We all, including third world populations, understand the operation of existing local markets, combined with regional and national markets, this mix has supported the most efficient use of resources and this form of trade has existed for the last 150,000 years in various forms and coverage.
Within the securities marketplace we have the same dilemma, but for some bizarre reason, we only have centralised "national" marketplaces, a truly bizarre result. In the securities world the market producer and consumer is simple replaced by the buyers and sellers above, nothing else changes. Within Australia, this "centralised" marketplace has been artificially created, via a monopoly market provider, there is zero choice,and this bizarre state is enshrined by the various unaccountable regulators, namely ASIC, RBA and ACCC, but Australia is not unique, as this situation occurs globally in various degrees.
The marketplace abstraction
In a typical marketplace (e.g. the public market center above), there are many sellers (typically with stalls) publicly offering their commodities by showing them and advertising the prices. People who want to buy specific goods walk around the stalls, evaluate offers, sometimes perform a short negotiation with a seller, and finally decide to buy the commodity from a specific seller to a specific price. The behaviour of a buyer, as well as that of a seller, is guided by a large number of aspects, making the dynamics of a marketplace quite complex. We can however make some (realistic) assumptions in order to simplify the scenario and make it more suited for a digital environment.
By considering typical buyers and sellers, we can basically assume that a buyer always aims at obtaining the lowest price for the highest quantity and quality; if this is not possible, a buyer tries to achieve a good trade-off among these parameters. On the other hand, a seller always tries to make the highest revenue and thus to sell the lowest quantity of goods at the highest price. Given these considerations, we can assume that the typical behaviour of a buyer, while contacting several sellers, can be summarized as follows. The buyer enters in the market and starts her/his visit. During the journey around the market, one visits one stall at time, evaluates goods offered by a seller by applying one's criteria, and then decides whether (a) to directly buy the goods; (c) to skip this stall and visit another. Any digital market place cannot be any more complex than this.
If we consider such a digital peer-to-peer marketplace , we can think of the peer-to-peer entities as stalls, where a seller process advertises the goods to the buyers, who, traverse this virtual marketplace, trying to obtain the goods they require.
Even if naive, such a consideration suggests a similarity between the marketplace scenario and a peer-to-peer digital marketplace is reasonable, and that buyer’s and seller’s behaviour and dynamics constitute good abstractions for deriving a peer-to-peer digital marketplace.
Rewiring Marketplaces
The proposed solution, is to re-organise the market stalls, so that all apples stalls are grouped together, they are logically the same stall. If one wants to trade "apples" all of the market apples are on a "single" stall. All producers and all consumers simply visit this local apple "stall". Most markets naturally form these market "areas" today. In the securities market or exchanges world this "stall" is called the "order book". The rewired stalls simply have global scope, be it with non-uniform access due to the reality of world wide "latency" and resource limitations. The end result of this rewired marketplace is to allow "buy local" to assume a natural priority within any trade. We expect that this rewiring will also cause a dominance of "market orders" as the natural form of trade execution, as the actual prices at which trades occur are a direct consequence of the execution mechanism in place.
While all "exchanges" today are in fact just the "old boys" network of brokers, the rewired marketplaces are in fact localisations of "sellers", which represents a restoration of the natural order of markets and trade throughout history.
Perhaps the most straightforward parameter of the execution strategy is the order size. Everything else kept constant, it is more expensive to trade larger orders. This result is also well proven within the marketplace abstraction, it is harder(risk vs reward) to sell 20 cases of apples, than a bucket of 10 apples, while understanding that unlike the market for apples, equity markets are fluid and continuous. In the rewired marketplace the removal of transaction fees allows a "natural marketplace" to once again operate at maximum efficiency for both buyers and sellers. One other variable that the trader can potentially control is the time of the day when the execution is performed. Temporal liquidity patterns are well documented: there is more volume right after the open and before the close than in the middle of the day, the rewired marketplace, will restore the natural marketplace liquidity.
It is observed that the probability the best ask price decreases has a strong nonlinear dependence on the volumes at the best ask and best bid. As the best ask volume increases (more selling pressure), the probability of a decrease in the best ask increases. As the best bid volume decreases (less buying demand),the probability of a decrease in the best ask increases. This negative feed back, based solely on the peer-to-peer marketplace participants, is an essential characteristic of a free market.
High assurance P2P, Block Chain Ledger technologies, form the basis for the re-wiring of the global marketplace.
A Free Market
A free market is a system in which the prices for all tradeable assets, are determined by the open access market and consumers, in which the laws and forces of supply and demand are free from any intervention by all forms of economic privilege, monopolies, artificial scarcities or any centralised, price-setting monopoly, or other authority. The prices for assets are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention, in turn free markets are normally deregulated.
The objective of the Block Chain Market Place, is to achieve as close as possible, a free and deregulated, market solution.
The free market is an example of the general equilibrium theory which supports:
- complete markets - No transaction costs and because of this each actor also has perfect information, and
- price-taking behavior - No monopolists and easy entry and exit from a market.
A bottom up analysis of the marketplace, is essential to support a decentralized marketplace without any external coercion or undue influence, this is sometimes referred to as microeconomic based approach, which is well suited to a financial marketplace. It assumes a market system within which the prices and production of all goods, including the time value of money, are interrelated. This implies that a change in price of one good, may affect another price within the market, hence a free marketplace recognizes that the price of any asset or security or money requires consideration of the millions of assets that are available within the marketplace. The underlying assumption within a free marketplace is the market can outpace any individual or group and maintain a free market. This is essence the "network effect" of the marketplace.
The basics
The process of a security transaction has been historically divided into:
- Registration of the order and its routing ƒ
- Matching and price determination ƒ
- Clearing and settlement
A peer-to-peer based trading system should analogously fulfil certain technical and functional requirements to ensure the acceptance of all participants in trading and therefore to make a practical usage of the system possible: Performance,ƒ Decentralization /Availability, ƒ Scalability, ƒ Safety, ƒ Extendibility.
The matching of the counterparties is the core of the trading system so that the performance is determined through the period in which matching transaction partners are found and adjusted against each other.
Trading systems require permanent availability in the course of trading; therefore one must minimise any commonly used components in the system, and that the required redundancy is achieved. Additionally, the number of users in the trading system must not be limited, rather ideally be able to admit an unlimited number of users. That means the system has to be scalable. An important criterion for the acceptance of the system is its safety. It has to be ensured to a known confidence, that there is no possibility of manipulation or that fake orders can enter into the system.
Peers. The peers are the permanent actors during the securities transactions. A differentiation between the person who demands and the supplier of securities will not take place. Every trader is represented through a peer.
How it works?
Proclaiming Demand and Supply
The first step of a peer-to-peer transaction is that a trader declares demand or supply of securities (orders). Because there is no central unit in which supply and demand come together, the order has to be saved decentralized on the peers. A simple suggestion would be to calculate the hash value of the asset, what we call the global AssetId and yes for legacy purposes this includes an ability to map all securities into this space. An example would be SHA256(ISIN), to instantly bring all existing securities in the new peer-to-peer world. But this gets us nowhere, as this would require centralisation around AssetId's or securities (ISIN) which is just the same old centralised exchange process.
Within the Block Chain Market Place the order for all global assets is disambiguated via a simple concept (assetId, price, qty). The actual encoding is a bit more complex, but this demonstrates the principles involved. An example SIN,assetId, price, qty,validTo.
Within a typical implementation, the Application Datagrams are multi-cast within our global network message bus, sharded by AssetIds. This aligns the produces, with the consumers,and is not conceptually different to becoming a participant within a abstract marketplace.
The Contract
On a peer-to-peer network, fitting orders of supply and demand have to be connected to each other. The result of fitting orders of supply and demand is called a contract.
It is obvious that every single order has to fit to each other according to its temporal AssetId, quantity and price.
Like the abstract marketplace above, the fitting of buyers to sellers is done via a buy side set of rules or algorithms, identical to the last 150,000 years there is no need to have any limited set of standardised market orders, the negotiated contract is determined solely by the seller and buyer on a individual basis without any centralized restrictions or limitations. We would expect the development of an "algorithm economy" to supply specialised and custom matching algorithms to buyers to enable anyone to trade within the marketplace which can be quite complex for many buy side investment strategies.
Trade Execution
In a P2P network the trade is the settlement[2], hence this phase replaces the old world clearing and settlement process, via trade execution, using BIS DVP Model 1, unconditional finality[1].
This is the atomic and instantaneous exchange of asset and payment[1,3]
Important considerations of the above
- There is no "static" or persistent order book, all orders are ephemeral in so far as they exist totally within the communications ether[6]. This is conceptually identical to all existing UDP traffic commonly used in all exchange or market data, distribution feeds today.
- Global marketplace performance is predicated on the ability of Peers to find other peers, local markets matching local buyers and sellers will always provide better latency this is by design.
- Flash Boys will deprecate as the ability to "dominate" decentralised local markets (latency) will become resource bound and hence commercially not viable.
- Decentralized peer-to-peer systems have resource allocation and protection requirements, all elements of the distributed system must be secure[5].
- The total MIPS, storage or bandwidth provided by the sum of all peers is still finite.
- Protect against the "tragedy of commons"[7]
Principles
- not use any price information not derived from actual asks provided by users of the marketplace
- no exchange or transaction is ever in a partial, incomplete, or reaches an invalid state, all transactions must succeed, or fail safe.
- must scale to handle any volume without compromising the other principles of the marketplace nor shall the scaling require the introduction of centralized actors
- must neither create nor destroy value and every profit by one party is matched by a loss of another party. No party is ever in debt to the marketplace
- all trade executions must result in the unconditional exchange with reliable legal finality.
More than marketing hype?
This space is dominated by two polarised "groups" the "thought bubbles" and "incumbents pushing old world thingies", both are motive rather than technology driven.
Thought bubbles are simple to produce, but long on the delivery, the objective of the incumbents is to ensure zero change, hence both are less than useful strategies.
It is acknowledged that this solution "cheats" by reengineering the core marketplace business models, bringing the best of the past into the future, rather than just messing with "flashy" technologies.
The vision within this post, is encoded within a set of high assurance Block Chain Ledgers, these technology "Rails" will "empower" a Block Chain Marketplace coming to your local marketplace in 2017, the first Rail or infrastructure, is the alternative Global Cash Coin Currency, via commercial entities within your community, no different to your "local markets today", but interconnected to form a global continuous marketplace, the "Internet of Trade" powered by "individual traders"..
The Global Regulators Role?
Technologists are wise to stay out of politics and "power plays" which regulators represent.
Good regulatory outcomes depend on more than well designed rules and regulations, Regulation is a key tool for achieving the social, economic and environmental policy objectives of governments. [OECD 9].
It's a simple observation, that by definition, there are no centralised entities to regulate.
Hence making any assessment of about the relationship between a P2P Block Chain Marketplace and regulators is fraught with "inaccuracies and rat holes", primarily due to the inability of most regulators worldwide to actually understand the technologies involved. It's a simple fact that Fair Markets are by definition "Unregulated Markets" all regulation distorts markets.
The objectives of a fair market are:
- to promote fair, orderly and transparent markets
- to facilitate efficient markets for the allocation of capital and the transfer of risks
- to reduce counterparty and systemic risk
- provide non-discriminatory access to market facilities and information
- does not favour any one participant over others.
The premise, is this solution deprecates all regulations and in particular all specific legislation enacted since ~ 1930, when the current marketplace mess appears to have originated, in other words we have simply continued on using the legal, and social fabric that existed for the last 150,000 years, but brought into a modern digital world.
All regulators brought into existence since ~ 1930, should be deprecated.
In summary there is no need for any regulators or regulations, this is in essence a marketplace where two parties trade goods for cash, based upon a 150,000 years of experience, and legal precedence, no new law or regulation is required for the proposed solution. The new Fair marketplace is "powered" by individual market traders and investors.
This post proposes that all solutions should meet the relevant BIS, Financial Market Infrastructure Principles, as a means to bridge the gap to an marketplace with zero centralised regulatory command and control structure, which technically cannot "exist" within such marketplaces.
The first commercial release of the marketplace in 2017, will make use of the Australian Government exemption:
"From today, all eligible businesses will be able to test a range of financial or credit services with up to 100 retail clients and unlimited wholesale clients for up to twelve months without the need to apply for an Australian Financial Services Licence or Australian Credit Licence and without seeking approval from ASIC" -- Treasurer, Scott Morrison, 5 December 2016 .
It's a prefunded Marketplace?
This is true, the Marketplace has always been based upon the pre-existence of goods and cash, and the transfer of both simultaneously and unconditionally. It is essential within a digital marketplace to provide BIS DVP Model 1, unconditional trade, as the settlement, with legal finality, anything less is simply manifested as systemic and counterparty risk.
This does not mean that a form of banking or loans cannot exist "external" to the marketplace, where "instant" loans can support pre-funding. We are working with partners to provide such "instant" (less than 1ms) loans to enable a real time unconditional trade within this marketplace.
These new form of "banks" will form what can best be described as ‘Private Investment Banks’, who will adopt the P2P lending model on a much wider scale. Providing a fully rounded service provided wholly separate to the established banking model. Through countless private debt and equity providers the supporting structures and technology is built upon the Block Chain Payments Rail.
No-one can engineer any of this to happen. It will happen organically, in its own time, the Block Chain Market Place is the catalyst.
The global and border-less Market Place
Just because one lives in a particular geography, should not restrict one's ability to conduct trade with any individual on the planet. Indeed, individuals are increasingly mobile between nation-states and could benefit from one overall governance system rather than the host of inefficiencies directly related to complying with multiple nation-state based marketplaces which exist today.
Today global trade is limited by physical cross border controls, which in practice no longer exist within a global digital marketplace. The linkage of state based fiat currencies is the prime means of enforcing these old world physical borders between many marketplaces. Like most regulations these simply distort a free market and lead to suboptimal usage of capital and resources.
While this post envisions the ongoing support for fiat based currencies, it also supports a borderless Global Digital Currency, where there are no cross border controls or any FX considerations, this approach is designed to enhance the availability of capital within all local marketplaces across the globe.
The result is a global marketplace which never closes and has no concept of Herstatt systemic risk.
For the techo's
Ok, time for some meat on this post..
Message Bus
A Message Bus is a combination of a common data model, a common command set, and a messaging infrastructure to allow different systems to communicate through a shared set of interfaces. In this use case the Applications are the individual P2P traders, the bus represents an indivdual stall in our rewired solution, it is the meeting place for sellers and buyers. The message bus enables separate P2P parties to work together, but in a decoupled fashion such that P2P parties can be easily added or removed without affecting the others. Message bus have existed in many forms for decades and is analogous to a communications bus in a computer system, which serves as the focal point for communication between the CPU, main memory, and peripherals.
The core technology of the rewired marketplace, is the Locally sited, but globally accessible, and scalable, multi-party message bus. Within our Block Chain Rails, this is a reliable application layer message bus. The peer to multi-peer bus supports a wide range of methods, across a wide range of platforms today. As mentioned, these will exist within the local marketplace, and implement the sharded order book, in the same way as a marketplace provides physical infrastructure to stallholders, and shoppers today.
The message bus coordinates and manages the delivery or sending of messages to subscribing endpoints or clients. There are two types of clients—publishers and subscribers—also referred to as producers and consumers. Publishers communicate asynchronously with subscribers by producing and sending a message to a logical access point and communication channel representing a specific AssetId in the order book. Subscribers consume or receive the message or notification via either an instantaneous or reliable transport, over one of the supported protocols, when they are subscribed to the orderbook. The message bus matches the orderbook to a list of subscribers who have subscribed to that orderbook, and delivers the message to each of those buyers or orderbook subscribers.
Let's take a look, at how it works.
Publisher
MPlace= CreateMeABus.InRegion(RegionEndpoint.MarketPlaceName.AssetId) MPlace.Publish(new Order { OrderId = 123456 });
Consumer
MPlace=CreateMeABus.InRegion(RegionEndpoint.MarketPlaceName.AssetId).WithMessageHandler(new OrderNotifier()).StartListening();
Get the point, each order book can support unlimited producers and consumers, as the market orders are multi-cast messages to all subscribers to the specific order book or message bus. The Message Bus is temporal, and has no long term persistence, we have embodied "guaranteed delivery" into the bus, but this is not essential. Both local and remote subscribers are supported, it's just that there will be different latencies between the various subscribers. In general we aim to have identical latencies to all "local subscribers". This design is basically a distributed version of the existing centralised "order matching engine".
The current implementation of the message bus works on a massive scale, processing billions of messages per day on a per order book/marketplace basis, allowing scaling to the world's first truly global instantaneous marketplace. Global scalability and reliability, something only a decentralized P2P marketplace can offer.
At a implementation level, it is recognised that, any practical high speed (low latency) message bus does not preserve message ordering. Internal optimizations, routing, buffering, or even the underlying transport mechanism might affect how the messages travel to the receiving applications. Therefore, the order in which messages reach each buyer is nondeterministic, a by product is this minimises "flash boy" type front running. While strict ordering could be technically achieved, the associated increase in latency would commercially deprecate such solutions, a nondeterministic ordering marketplace is still a fair market, the market alone shall decide.
An interesting side effect of this approach is that the traditional centralised and limited market, limit, etc, order types are replaced by an infinite set of buyer "negotiations" or order matching algorithms. Within a fair marketplace a buyer can once again, individually, determine the conditions upon which they trade, there is no intermediary limiting the conditions under which parties can execute a trade. This brings us to a new topic the algorithm economy but another topic and another day..
The Post Trade world, is now a "dead man walking".
Sorry, but the application of technology, to rewire marketplaces, will always side track me.
