From: Hal <hfinney@shell.portal.com>
Date: Mon, 2 May 94 22:31:12 PDT
To: cypherpunks@toad.com
Subject: the value of money
Message-ID: <199405030532.WAA01571@jobe.shell.portal.com>
MIME-Version: 1.0
Content-Type: text/plain


What is Magic Money?

Magic Money is an implementation of one of the first "digital cash"
proposals, described by Chaum, Fiat and Naor in Crypto 88.  It is an
"online" system.  This means that the money must be checked with the
bank at each transaction to make sure it has not been spent before.
It was written by the pseudonymous Pr0duct Cypher, author of the PGP
Tools library.

What is digital cash?

Digital cash (aka digital coins) is a cryptographic technique for creating
information packets which can be authenticated as belonging to the issuing
agency, but in such a way that no one can link a piece of digital cash to
the transaction in which it was created.

In other words, the user is issued a piece of digital cash by communicating
with the bank via a special protocol.  This cash bears a digital signature
by the bank which can be verified by anyone, and which cannot be forged.
However, the cash creation protocol is such that neither the bank nor anyone
else will recognize that piece of cash as having been withdrawn at that
particular interaction.

This combination of characteristics makes digital cash an attractive
option for electronic payments.  The digital signature makes it unforgeable,
while the lack of traceability protects the privacy of the person spending
the cash (in contrast, say, to credit card use, where the credit card
company learns many details about the spending habits of its customers).

What gives digital cash value?

That is what I am hoping people will discuss.

Here is what Pr0duct Cypher wrote in his introductory message about Magic
Money:

> Now, if you're still awake, comes the fun part: how do you introduce real
> value into your digicash system? How, for that matter, do you even get
> people to play with it?
> 
> What makes gold valuable? It has some useful properties: it is a good
> conductor, is resistant to corrosion and chemicals, etc. But those have
> only recently become important. Why has gold been valuable for thousands
> of years? It's pretty, it's shiny, and most importantly, it is scarce.
> 
> Digicash is pretty and shiny. People have been talking about it for years,
> but few have actually used it. You can make your cash more interesting by
> giving your server a provocative name. Running it through a remailer could
> give it an 'underground' feel, which would attract people.
> 
> Your digicash should be scarce. Don't give it away in large quantities. Get
> some people to play with your server, passing coins back and forth. Have
> a contest - the first person who (breaks this code, answers this question,
> etc.) wins some digital money. Once people start getting interested, your
> digital money will be in demand. Make sure demand always exceeds supply. 

As I indicated at the start of this thread, this model does not seem to be
working.  What steps could we take to give digital cash value?

What are Tacky Tokens?

Mike Duvos has been running an implementation of Magic Money that he calls
Tacky Tokens.  Sending mail to <mpd@netcom.com> with the word "Bank" in the
subject will cause it to be processed by a Magic Money server and the result
returned to the sender.

How do you actually use Magic Money?

First you get a client program.  ftp to /pub/mpj at ftp.netcom.com to find
a DOS client.  Sources to allow you to build Unix clients can be found at
csn.org by ftp; start in the /mpj directory, read README.MPJ, then cd to
the crypto directory.  cd to pgp_tools, get mgmny10e.zip and pgptl10d.zip.
Build these on your system.  I also made a half-hearted Mac port which still
uses a console window.

The client is pretty easy to use.  First you initialize it, which involves
creating a special public key which will be used for your communications
with the bank.  Then, whenever anyone sends you some Magic Money, you run
the client with the name of that file; the client shows you the denominations
of the incoming Magic Money digital "coins", and lets you choose new
denominations for when you turn these in at the bank.  This creates an
output file which you mail to the bank.  You'll get back another mail message
from the bank which you save to a file and run the client on, and the new
money is added to your collection.  To spend money run the client with the
withdraw option, pick the coins you want to spend, and they will go into
a disk file.  Send this to the person you are giving the money to.

There are things that could be improved about this; the interface could be
nicer, or it could be integrated better into the mail system.  But I doubt
that anyone has used it enough that they are tired of constantly switching
back and forth between their client and email system.  If we had that much
cash being circulated then it would make sense to work on these UI issues.
But I don't think these are the fundamental hurdles.

I hope this gives those who have not heard of the software some idea of
how it works and what its capabilities are.

Hal