The difficult bit is transferring to Real Money, which can't be the subject of smart contracts.

There's EtherDelta running on the live network, and others on the way.

You're pretty much stuck trading ETH and ERC20 tokens with those. Another technology coming is atomic swaps for transfers between chains.

For actual fiat the only decentralized option is stuff like localbitcoins. That's ok for small occasional trades but it's physically risky for large trades and legally risky for frequent trades.

I’ve been thinking, shouldn’t it be possible to exchange Bitcoin for Ethereum trustlessly? It requires that Ethereum smart contracts recognize Bitcoin (secp256k1) signatures over arbitrary hashes, though. It would work like this:

1) create an unsigned Bitcoin transaction that pays 1 BTC from Alice to Bob

2) create an Ethereum address (smart contract) that can be redeemed either a) by Alice using a signature for a pubkey specified by Alice in advance, plus an secp256k1 (Bitcoin) signature over the hash of the Bitcoin transaction or b) by Bob after a timeout (e.g. 7 days)

Bob sends the number of ethers he wants to pay for 1 BTC to this Ethereum address/contract, and if Alice takes the offer she will redeem this amount, thus revealing the signature for the Bitcoin transaction, which Bob can then publish and get his 1 BTC.

I think you independently invented atomic swaps!

Ethereum uses the same signature algorithm; you can sign arbitrary data from Ethereum's javascript library and check it from a contract.

https://ethereum.stackexchange.com/questions/2256/ethereum-e...

https://ethereum.stackexchange.com/questions/710/how-can-i-v...

You can implement a distributed application as an application running on a blockchain. This can achieve comparable throughput to a centralized exchange. Tendermint outlined this use case for their Cosmos network.