One of the biggest problems currently facing the Bitcoin economy is the exchange market. The market suffers from continued concentration and price volatility. In order to maintain their links to the traditional banking world, these businesses have the unenviable task of attempting to shove Bitcoin into the world of bank accounts and anti-money laundering policies. New exchanges are joining the Bitcoin economy but regulatory compliance is no small barrier to entry. The few existing online exchange services continue to be significant points of failure for the Bitcoin economy.
A network of small, peer-to-peer transactions would likely bypass many of these issues and would be a fitting solution for the brilliantly decentralized Bitcoin network. But is such a thing possible? The guys behind MetaLair, a UK based start-up, think so and are working hard to develop the software and find the investors to make it a reality.
Their vision is a decentralised exchange mechanism which will facilitate peer-to-peer exchanges between crypto-currencies and in the future fiat to crypto exchanges. The MetaLair network would be similar in structure to the Bitcoin network featuring…
- No central servers
- Open-source software
- Incentives for all network operators
- A proof-of-work based system
If they are successful in achieving funding, MetaLair will develop both a free open-source version and a pay version with added features. The business intends to make money by charging for the client software with additional features that will include added security, trading and analysis tools. They hope that this could become the defacto standard wallet and trading platform for Bitcoin and other crypto-currencies.
MetaLair’s developers believe that the project will benefit the crypto-currency community as it is open-source and fully decentralized; this ensures that should MetaLair not be around the decentralised exchange will simply carry on.
“For me personally I’m only ever interested in a business if it has a primary social benefit” explains lead architect Johnathan Turrall who just returned from a trip to Cuba and South America. “The reason I went to Cuba was to look at communism and the impact that it had on financial systems, processes, business and industry. … I think potentially this system could be of great benefit to people in those areas so that is one of the motivations behind it.”
Johnathan and his business partner, Kerry Fraser-Robinson, will release their design papers whether or not the business obtains funding with the hopes that the project will eventually be developed even if they are unable to finish it themselves.
MetaLair will create and distribute the exchange software, but will not handle any funds or transfers. All transfers happen between users of the network. The system uses an escrow service in all exchanges; however, all escrow actions are either automated, or are carried out by the human users of the system.
The projects development will be in two phases with initial development focusing on crypto-to-crypto exchange. Theoretically MetaLair can work with any crypto-currency that uses a blockchain and has M of N transaction capability. This allows the exchange software to act as the escrow agent for the transfer of both crypto-currencies in the exchange.
Explanation of M of N Transactions
An M of N transaction is essentially an escrow system built into the Bitcoin protocol that removes most of the need for trust that a traditional escrow would require. This capability allows a party to the transaction to act as an escrow without actually having access to the funds held.
The most common form of an m-of-n transaction is a 2 of 3 transaction. In this case there are three parties and three private keys, any two of which are needed to sign the transaction for it to be valid.
- All parties involved in the transaction can verify that the address belongs to the transaction they are participating in.
- All parties can view the funds in the destination address.
- Escrow requests must be signed first or second by the escrow in the chain of events.
- The escrow is able to grant access to the funds to sender or receiver.
- Escrow is unable to access the funds themselves.
- Sender and receiver can still cooperate so that one party receives the funds without the need to rely on the escrow.
Any crypto-currency using the Bitcoin source code will support this feature and can therefore be used on the decentralised MetaLair exchange.
For example a Bitcoin/Litecoin exchange would begin with two parties entering buy and sell orders via the MetaLair network. The system correlates the matching bid/ask and, using a 2 of 3 transaction, will act as an automated escrow agent for both the Bitcoin and the Litecoin transfer.
Bitcoins are transferred between the parties via the Bitcoin network and litecoins are transferred between the parites via the Litecoin network with MetaLair acting as the escrow agent for both transfers. If MetaLair’s decentralised exchange mechanism notices that double spending has occurred before the maximum specified number of transactions has been reached it reverses the transaction and refunds each party.
In the crypto-to-crypto scenario the MetaLair software is acting as the automated escrow agent, which makes for a very low trust system; but of course fiat to crypto exchanges would be more complicated.
Fiat currencies in their digital form exist only on the servers of banking institutions. As such, fiat to crypto exchanges require the services of those who have access to the banking system. MetaLair sees a number of options for fiat exchange escrow agents. These options include very large and well respected businesses that may use their name and existing banking relationships to bring in a large volume of trades. Of course this scenario might look at lot like existing Bitcoin exchanges that have to take many steps to comply with regulation to appease their banking partners as they cannot offer exchange services with access to traditional banking.
On the other end of the spectrum, there is the possibility of individuals offering escrow services in their spare time. For example you may have an exchange in India that would only involve a small amount of Rupees moving between local accounts and would likely not draw any attention from regulators.
Essentially what MetaLiar is providing is an open protocol to allow anyone to set up as an escrow to facilitate fiat to crypto transactions, complimented with an underlying trust based system. The fiat exchange may simply be a small transaction between individuals or small businesses. “That’s an added benefit of this approach.”
As Johnathan explains, “what we are creating is an open system. The details of how the fiat to fiat transactions occur between the entities are effectively between them, we are just providing an interface by which they can do that.”
Fiat to crypto exchange also require an escrow service, however, due to the nature of the banking system, this escrow cannot be automated via the MetaLair software. Funds will have to be held by an intermediary individual or business acting as an escrow service. “The key innovation with our system is, because it’s fully decentralized, that it lets a lot of different escrows sign up from anywhere in the world and offer their services via an API.” There are many ways in which a fiat to crypto exchange could take place, but below is how possibility might work…
- Bob is looking to sell his bitcoins for Euros and enters a sell order (ask) via the MetaLair network.
- Alice is looking to buy bitcoins in exchange for her Euros and enters a buy order (bid).
- The MetaLair system connects Bob and Alice who both agree to use Ivan as the escrow agent.
- Ivan is a small time Europe based escrow agent who has a good trust rating via the MetaLair network.
- Ivan acts as the escrow agent for the fiat funds and holds Alice’s Euros in his bank account.
- Ivan therefore also acts as the escrow agent for the Bitcoin transfer which is done via the Bitcoin network using a 2 of 3 transaction. (or this may be automated)
- The Bitcoin transaction completes successfully.
- Ivan transfers the Euros to Bob’s bank account.
- Ivan receives a fee for his services.
MetaLair will leave regulatory compliance as a decision for the users of the network and they do not expect to deal with any financial regulation themselves as the business is not an exchange. “In the same way that Satoshi has provided Bitcoin we’re providing the decentralized exchange mechanism. You don’t pay Satoshi for any of the transactions you do on the network. It’s distributed; you pay the people who are working on the network. It’s the same process with our decentralized exchange mechanism.”
This is an attempt at setting up a network in which anyone is free to join and offer their services or exchange currencies between themselves. Should it succeed it could offer a wide variety of options in what is currently a concentrated and under pressure market.
As the big exchanges face regulatory scrutiny and continue to impose more and more conditions on their users, the network that MetaLair is attempting to create could offer much needed options for consumers.