From: tcmay@netcom.com (Timothy C. May)
Date: Thu, 21 Oct 93 12:52:59 PDT
To: cypherpunks@toad.com
Subject: CRYPTO + REPUTATIONS = A NEW ERA
In-Reply-To: <9310211855.AA09792@illuminati.IO.COM>
Message-ID: <9310211950.AA19355@netcom5.netcom.com>
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Doug Barnes wrote:

> Actually, there is still an element of trust involved, that (as a
> previous poster pointed out) the entity who actually holds your gold
> won't run off with the gold, or give it to someone else, etc. Still
> (in the best of all worlds) rather have more solidly-backed currency, 
> but you still have to trust someone at some point. I'd rather have
> US dollars than gold-backed currency from an even less trustworthy gov't.
> 
> The important freedom is being able to choose whom and what you trust,
> without having to slide into a pure barter economy.

There is _always_ some element of trust involved. Crypto changes this
in a subtle way I'll get to later.

The Swiss bank that holds "your" gold (or whatever) can in theory tell
you "But, Herr Barnes, you of course withdrew your holdings
yesterday!" Likewise, your local bookie can refuse to pay you what he
owes you (I guess you can threaten to break _his_ legs!), or can claim
he already paid "you" the day before. Such "burnings" have always been
possible, and yet these systems work and are actually quite stable.

That these "trust" systems work is related to tit-for-tat strategies
in the iterated Prisoner's Dilemma problem, in expectation of future
business, and in the whole related area of _reputations_. Your local
bookie pays up because to not pay up would eventually have
repercussions for his future business...and he deems his _real_ business
is making book, not burning any one customer. Emergent behavior.
Spontaneous order. 

Secret accounts and crypto make the equation even more interesting.

Anyone depositing money (dollars, gold, who cares, really) into an
account and getting back some form of digital money can:

- test the system by redeeming small amounts of the money

- actually be a service which makes deposits and then redeems the
digital money as a "testing service" (issuing a signed report, for a
fee, which reprots on the reliability of banks...all privately done,
of course)

Digital money is a kind of shell game (with no insult intended to
either shell games or digital money). $10,000 converted into, say, 100
separate pieces of digital money issued by many different banks,
circulating around and being redeemed and reissued....well, it would
be apparent pretty quickly--and word would spread--if the money was
not being redeemed.

Some percentage of all the digital money "in circulation" will
actually be primarily "pinging" money, designed to ping (test) the
system.  (After a while, expect this to go down.) The beauty is that
the untraceability means a bank doesn't know it's being tested by a
"pinger" or by another bank, or if the money belows to some "Little
Guy" who might otherwise be fair game for a rip-off (putatively,
although "Little Guys" are not ripped-off by banks in the current
system, either).

I've said this before: CRYPTO + DIGITAL REPUTATIONS = A NEW ERA.
Crypto researchers like Chaum seem mostly oblivious to the nature of
reputations, of escrow services (untraceable, too). and of this whole
very natural aspect of transactions. Many of the currently "unsolved"
problems with digital money fade away--I contend, and will discuss if
there's interest--when the elements of reputation and reputation
capital are included.

(I can understand the reason cryptologists have for purely
mathematical or formal proofs, but the problems now stymieing them
with digital coins (e.g., the lack thereof) and the like are solvable
by injecting local reptutation considerations.)


The ecology of these banks, transfer channels, etc., will be quite
interesting to study. I expect fairly robust feedback mechanism will
evolve naturally be market forces.

Crypto makes a lot of interesting things possible.


-- 
..........................................................................
Timothy C. May         | Crypto Anarchy: encryption, digital money,  
tcmay@netcom.com       | anonymous networks, digital pseudonyms, zero
408-688-5409           | knowledge, reputations, information markets, 
W.A.S.T.E.: Aptos, CA  | black markets, collapse of governments.
Higher Power: 2^756839 | Public Key: PGP and MailSafe available.
Note: I put time and money into writing this posting. I hope you enjoy it.