A procedure for the fair compulsory sale between peers

There are two free parameters, n and p. N should be greater than zero and p should be greater than 1. Reasonable defaults for n and p are 2 and 2.0.

When a group of peers agrees to use the system between each other, they must specify (a) a Item to be traded using the procedure, (b) a Currency (or a (nonempty) set of Allowable Currencies), and (c) values for parameters n and p, (d) when a compulsory sale has been made, how long the Seller has before they must deliver the item to the Buyer.

In order to be used, the Item should be a type of thing such that, if one peer were to owe a second peer some amount of Item, and then the second peer were to incur a debt of the same amount of Item to the first peer, then all would agree that it would be fair if these debts would cancel.

At all times, between every pair of peers using the procedure, an account balance is kept of how much of Item one peer owes another within this system, and of how much of Currency one peer owes another. These balances start out as zero. The absolute magnitude of this debt will never exceed n. This debt can be reduced in two ways: (a) the debtor can (and must, within the Deliver Time agreed upon) deliver some amount of the Item to the peer to which they owe it, or (b) using the procedure below, the debtor can cause a compulsory sale of the commodity from the peer to which they owe it, to them, cancelling the debt. At any time when a first peer is owed Item from a second peer, and the first peer does not owe Currency to the second, the first peer can Demand Delivery of Item, at which point the second must deliver all owed Item within Delivery Time.

At any time, any peer can ask any other peer for a Quote. The askee gives the asker a price for one unit of the Item in terms of any one of the Allowable Currencies. The asker then has three options: (a) to immediately Buy some units of the Item from the askee, at the quoted price; (b) to immediately Sell some units of the Item to the askee, at (the quoted price divided by p), or (c) to pass (to not use the quote). A Buy or Sell causes a change in debt to be recorded in the account balance between these two peers (which means that if the balance becomes non-zero, the peer who afterwards owes the Item to the other must deliver within the agreed-upon Delivery Time). The asker cannot Buy or Sell a number of units that would cause the absolute magnitude of the account balance between them and the other peer to exceed n.

Example: use with a product

The Item is 'one egg'. n is 2 and p is 2.0, delivery time is one week. The only Allowable Currency is dollars. The Delivery Time is one day.

Person A and Person B start with zero balances between them. Person A says to Person B, 'Please give me a Quote for eggs'. The second person says, "$10". The first person says, "I choose to buy one egg from you for $10". The first person now owes the second person $10 and the second person now owes the first person one egg.

Now Person A says to Person B again, 'Please give me a Quote for eggs'. The second person says, "$50". The first person says, "I choose to sell one egg to you for $25" (25 = 50/p = 50/2). The second person now owes the first person $40 and neither owe the other any eggs.

At this point, the first person could Demand Delivery of the money. But instead, they choose to say to Person B again, 'Please give me a Quote for eggs'. The second person says, "$30". The first person says, "I choose to buy two eggs from you for $60". The first person now owes the second person $20 and the second person now owes the first person two eggs.

At the point, the first person would not be allowed to ask for a quote and then Buy eggs from the second, because that would push the account balance over the limit of two eggs. Similarly, the second person would not be allowed to ask for a quote and then Sell eggs to the second, for the same reason. (however, outside the framework of this procedure for COMPULSORY transactions, the parties could mutually agree to transact additional eggs).

Two weeks later, the first person gives the second person $20, and then says, "I've paid you the $20 i owe you. Please deliver my two eggs within the next day."

Example: use with a service

The Item is 'one hour listening to the presentation given by another'. n is 2 and p is 2.0, delivery time is one week. The only Allowable Currency is dollars.

Person A and Person B start with zero balances between them. Person A says to Person B, 'Please give me a Quote for time listening to a presentation'. The second person says, "$100". The first person says, "I choose to Sell half an hour of time to you for $25" (25 = 0.5 * 50/p = 0.5 * 50/2). The first person now owes the second person $25 and the second person now owes the first person half an hour of time during which second person can present and the first person must listen.

Now Person A says to Person B again, 'Please give me a Quote for time listening to a presentation'. The second person again says, "$100". The first person again says, "I choose to Sell an hour and one half of time to you for $75". The first person now owes the second person $100 and the second person now owes the first person two hours of time during which second person can present and the first person must listen.

Now Person A says to Person B a third time, 'Please give me a Quote for time listening to a presentation'. The second person again says, "$50". The second person cannot choose to Sell again, because this would cause the account balance between these two peers to exceed n (that is, it would cause the second person to owe the first more than 1 hour of time). The second person says, "I'll pass".

Note that in the third instance, there is nothing to prevent Person B from quoting a price of $1 million, since there is no chance of Person A choosing Sell again. So, if Person A changes their mind and wants to reverse the transaction they just made, this may not be feasible. Therefore, peers using this system would be wise to never actually cause the maximum amount to be reached; in that case, should they want to reverse the transaction, the other party still has an incentive to give a reasonable quote.

Two days later, Person A wants to Demand Delivery of the hours they are owed from Person B. But they cannot do this as long as they themselves owe currency to Person B. So they pay Person B the $100 that they owe them. Then they say to Person B, "I've paid you the cash I owe you. Now you owe me two hours. Please arrange with me a time within the next week for you to listen to me for two hours".

Commentary

This was inspired by rules that broker-dealers must give a quote at any time.

Note that if the other party always gives the same quote, then reversible a transaction always incurs a loss for the asker, because p is always greater than one. For example, if the quote was $100 and the asker sold 1 unit and then bought it back, they would get $50 in the sale and owe $100 in the buy, so they would have lost $50 (the number of units transacted, divided by p).