Proposal for a Trading Companies and Specialized Markets Software Platform

Founder (Nilac) Thu Jan 05, 2012 11:46 am

[WORK IN PROGRESS]

Introduction
This is a software platform that I intend to build (open source) and host on a free cloud provider (at first). It will allow establishment of Trading Companies that will mediate specialized contracts (like options, multi-party transactions, loans/banking, but also simple network-mediated fast cross-map transactions) between registered traders and/or other companies. It will work for any MMO with player-run economies like Illyriad, Eve Online, Planet Calypso, and in fact all those web based MMORTSs out there. For simplicity, all operations will be recorded manually, with the future possibility of accessing the game's API, if that is possible. This is intended mostly for advanced trading and the kind of contracts that are not actually possible with the usual in-game mechanics, not as a replacement to the current gold standard system.
In-Game Mechanics
There are serious security issues with creating a banking system and a secondary credit market over the in-game gold standard. Clusters of banks and trade companies can easily create large scale scams, as it is so often in MMOs with player-run economies (eg: Planet Calypso, Eve Online). That is the reason we don't have it built in, game developers fear of losing control of the game, as this is not a technical issue at all (easy to implement). But if it is created by the players themselves on an independent platform, there is a possibility.
Political Trade Union and Claims Resolution
Nevertheless, a political trade union (confederation) is needed to supplement such a platform. In cases large clusters of the system engage in a scam, only a political Trade Union Council could intervene (militarily) to fix it. In such cases exclusion is useless after the damage is done. But the confederation itself is powerless without a centralized software platform, as trade claims cannot be resolved otherwise (you can't prove to a third party that you delivered the goods). Without proof, it is very easy for a secret group of malicious members to force exclusion of a successful competitor by making multiple false claims that the goods have not been delivered. In such a politicized environment I don't want to run a competitive (commercial) trade company in the first place.
Separation of Concerns
The basic idea behind this proposal is to separate transaction resolution (brokerage) from credit creation (banking), and in general, to allow many specialized companies that can gain trust on a single service, not just generic "banks" that provide all services together. Because each transaction is cleared at the time of creation, there can be no build-up of false claims, as the victim can stop all activity until the problematic transaction is cleared by the intervention of mediators/regulators. Also, since the banks do not clear transactions themselves, they cannot make bogus reserves so easily and then give credits without any backup (though this problem is still not solved in the version bellow). Of course, clusters of companies can still run a scam, but the system could include a global visualization of the network, highlighting such credit cliques and helping traders to diversify their portfolios.
System Specs
1. Trading Company Registration
  Illyriad players will login/create account and authenticate with a token received in-game from the player hosting the website. They would then either create or log-in to an existing Trading Company created by their friends or alliance.
2. Trading Hub Registration
  Once in the company UI, traders will register some of their cities as Trading Hubs to be used as part of the network. The type of operations that hub accepts will also be registered. Of course, there will be a challenge to scale such companies and ensure timely delivery when many players will try to run together such a network as it will become harder to decide who will actually deliver a specific order. That is why there will be a healthy competition among such companies.
3. Services Registration
  Company admins will select which services their company provides. Some of the kinds of contracts are listed bellow. My intention is to create a flexible system that allows contract innovation, financial derivatives and so on.
  1. Brokerage: The key service that everything rests upon (in terms of trust). As a simple example, let's assume trader A (or company) wants to send x items (in-game commodities or bank credits, see bellow) across the map to trader B and get y items in return. They will both register a private contract to a broker, send their stuff to any of the hubs in broker's network (the closest), and also register the fact that they sent the goods in the contract's UI. The owners of the hubs get notified by mail, verify in game that the goods are indeed coming or have arrived, and "clear" the corresponding part of the contract in the UI. Once the contract is cleared on both sides, the same or other hub owners will get notified and send the items in the other direction. The traders can then clear the whole transaction. There can be many sub-types here: transactions with multiple parties or multiple kinds of goods, and so on. Banks and other companies can then build more advanced services upon the trusted transactions. The track record of such companies can be consulted by traders.
  2. Banking: Will give loans and accept deposits. Transactions can be mediated by a trusted broker, allowing for many smaller banks, but of course, some large banks can also provide brokerage services for faster transactions. For loans, banks will accept as collateral other debt obligations on this platform (deposits, credits and options registered on other companies). Bank credits can be used as part of a direct transaction, in which case the transaction mediator expects the in-game transfer from one of the hubs of the bank. Each bank will hold a reserve by making deposits at another bank, or buying credits from exchanges. In case of defaulting on a deposit recall request, the system will automatically re-rout the transaction to the reserve after certain broker specific timer. There will be no built-in lender of last resort, as that either creates a false sense of security, or else kill the fun in trading by overregulation. Central banks could emerge from gameplay, if traders want'em.
  3. Loans Exchange: Collateral-backed loan obligations (mortgages) can be used as credits by mediation of a Loans Exchange (of course, banks can also sell the loan contracts directly, without any hedging). If a bank sells such a loan contract to another bank through an exchange, the contract becomes anonymous and the exchange itself gets hold of the collateral and becomes the guarantor in case of default. In this way exchange-specific "credits" become a currency that can be used throughout the network. They can also hold reserves.
  4. Options Exchange: An option is an obligation to sell or buy something (an in-game commodity or a derivative like "credits" or even another option) at some (un)specified time in the future, before an expiration date, at a specified price. The buyer of the option gains the right to exercise it, while the seller the obligation (in return for a premium). The premium will depend on the difference between the exercise price and the expected market price for the underlying asset. The exchange ensures the obligation is fulfilled by using its own reserve. The option can then be transacted on the exchange anonymously.
Major Flaw with Third Party Banking
The problem is that bank owners could use the in-game gold represented by deposits to make secondary personal deposits to other (or the same) banks (that could then loan the money) and thus secretly hedging their debts and inflating the credit without limit.

Eg: let's say I am a bank and have 10 gold, I lend them to you (a friend) and record a 10-gold debt which I insert into the global credit system by selling the loan on a loans exchange. But then you can send in-game the 10 gold back to me directly, bypassing the brokers. I can then lend those 10 gold again to you and add yet another 10-gold to the global credit. Nobody can verify the reality behind those credits on a third party platform and thus, all indicators registering total sums (of deposits) become meaningless, together with any concept of "reserve", or "collateral" based on them.
Possible Solutions
1. There is only one trusted central bank controlled by a player run political organization or, most often, the game developers themselves. Avoiding this possibility is the whole point of this proposal. For example, the game Empire Avenue has such a central bank that mediates all transactions and imposes rules (the game simulates a stock market grounded in social networks activity measurements). In the beginning the rules were not very strict and credit bubbles on zero activity accounts like the Pedo Bear bubble were possible. Many people lost huge amounts when the mass sale started that day.
  
  But then, they made the rules more strict and speculation/gambling almost impossible, turning the game into a classical social network measuring system. I stopped playing at that point. But it was very fun as it lasted.
2. The banking is built in the game, or the third party platform can access the game's API and verify at all times the actual amount of gold in the bank. This can enforce a fractional reserve and limit inflation at any desired level.
3. A Web-of-Trust system for traders and companies and strict rules for reserves to be kept in highly trusted banks. Also all credit information should be public, and traders could verify precisely the structure of the portfolios off all banks. Also some trustworthiness indicators computed from the WoT information combined with the global credit network info. Or something along these lines.
But Does Credit Creation Make Sense?
In RTS/RPG MMOs like Illyriad you can't really use the gold to increase production, and more credit can only lead to more army and eventually more pvp destruction, quite the opposite of the "growth stimulus" the credit is supposed to provide. The real currency here is time (prestige), not gold. By comparison, in Eve you can use the ISK to buy mining ships and then use those for mining and making more ISK (the PIB of the world is increasing as a result of using the credit). What can be done?
- One thing that could allow credit creation to make sense in Illyriad is a gold-prestige exchange. With prestige cities (and thus the whole economy) will grow faster. This of course does imply the gold is convertible in RL money with all the difficulties that entails (exposing the game to cyber attacks attempting to manipulate the exchange rate for RL money gains, like it happened in Second Life).
- Another possibility would be the introduction of craftable & tradeable mining/harvesting units with no limits on their number, like in Eve or Entropia. You can harvest with caravans, but their number is limited and the quantity of res gathered is small, making them useful just for boosting a little the growth of small cities.
Conclusion
The only financial service that makes sense in the current version of Illy is brokerage provided by a large trading network, for increasing market liquidity and decreasing the buy/sell spread, which is usually quite high. Loaning makes sense only inside alliances/confederations, as a form of welfare, or "help in time of need", and not as a competitive form of trading gameplay.
Feed-back
I would greatly appreciate feedback on the current version and new ideas that could help in making the system more secure. Especially from actual high-volume traders! Please describe what are the most annoying problems in the current in-game system. Thanks!

**Janosch** Tue Feb 07, 2012 1:42 am

I will give some feed-back soon.

Why did you not leave this as part of the Trade Union?

Naxos was particularly interested in the banking system (here).

Founder (Nilac) Wed Feb 08, 2012 1:24 am

Ok, I moved it back, but as I explained in the conclusion, I think this whole idea is impossible on a third party platform. A political bank backed by the military may be possible, but not a free market of competitive banks. Such central bank would require an entirely different (much simpler) design, and could be managed even on this forum.

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Proposal for a Trading Companies and Specialized Markets Software Platform

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