We would either need them to use BitAssets or a common UIA like OPENBTC for example. Other than that it doesn't really change anything.
Now what if your reserve currency tokens were good in many other exchanges and you got transaction fees from everyone using your currency? Transfers between member exchanges is a simple matter of exchanging IOU tokens, bypassing all the slow non-real-time blockchains out there. And giving your customers another reason to do all their business with you.
In the current model the customer has to trust the centralized exchange but the exchange doesn't have to trust anybody.
They only credit a customer with an IOU once they've confirmed the actual alt-coins have been received in their wallet.
While I'm sure I've misunderstood something, does your paragraph above mean an exchange would have to redeem IOUs from other member exchanges?
If so that would create a situation where a Cryptsy default would fall on other member exchanges or worse a rogue member exchange could issue IOUs out of thin air and redeem them on other member exchanges?
They shouldn't be able to issue assets out of thin air, because if they have a shared order book with the same asset, all services using that asset would need to have a weight on it to prevent that. I think that would be good in the sense that they would monitor each other too to avoid abuse, plus the would need everyone's permission.
As for the first point... you make a good case. Unlike you I only saw it from a user's pov, which means that for me if an exchange went rogue,I could still redeem my IOUs with another exchange meaning I would never loose my BTC, ever.
However, like you pointed, from an exchange's pov, it's a completely different view that I haven't thought about! I didn't give it too much thought but my first reaction upon reading that is it could be exploitable....
If we have 5 exchanges. All with 100 btc on their addresses and the equivalent on our chain, meaning 500 OPENBTC for example.
If one exchange goes rogue, there will be 100 extra BTC on the market that cannot be redeemed. I mean, they can but then we will see stuff like Gox and Cryptsy all over again which is what we're trying to avoid. I think we really should thought this through first since it's has the potential to jeopardize the entire DEX...
The only solution atm is having exchanges locking BTC in collateral... So when a client deposits BTC on their account, the exchange should use that btc to by the respective amount of BTS at lock it, maybe in a multi signature or account with permissions... Then we get to the same problem as bitAssets, what if the price of BTS goes way up or way down? That can mess up the collateral, that's why we need 200% to create bitAssets.... and now we're back to the same initial step, where exchanges might not be able to keep up with the collateral.
Even if they would place only 100% collateral, I doubt they would do all of that, it's too complex. Plus, how would they buy bts? They would need to use an external exchange for that LOL.
They could share a multisignature BTC, LTC, DOGE, etc accounts with other exchanges to prevent that... But again, I just don't see exchanges willing to do that. The only ones who might be willing to do this is either an exchange that sees the potential in this or is just a very small one. Then we would work our way to the top till we have many small exchanges...
There might be another way, but atm the only way I see it is having them sharing all wallets with multi-signature. However only small exchanges would accept that. No one will want other exchanges to give them permission to use their funds... but then again, it's not THEIR funds, it's not the exchange's funds. It's USER'S funds, so they should do this in good faith..
This is the only option I see atm. Otherwise we can't prevent an exchange from going away with user's funds. We need to turn the game around. Make the exchanges WANT to join us and not the other way around. Because we are the best option. That will make them "give us" something in exchange, which they really aren't because funds are not theirs, are from their users. Imo this argument makes sense, but exchanges can be just stubborn and refuse it. We just have to go with people who trust us, see potential in this project and are willing to provide the best services for their users.
This scheme would make it even easier to audit! For example if there are 1569 OPENBTC issued on the DEX then with a simple click they can check the multi account address and check there are 1569 BTCs there. For the sake of transparency.
Edit: We also need that bug that rounds up the order values not letting you match other orders. This is essential. No exchange can operate or join us if we dont fix that.