From: Jim Hart <hart@chaos.bsu.edu>
Date: Sun, 28 Aug 94 12:55:16 PDT
To: cypherpunks@toad.com
Subject: Re: Golbal Econ.
In-Reply-To: <9408281835.AA11165@getafix.oasis.icl.co.uk>
Message-ID: <199408281949.OAA18389@chaos.bsu.edu>
MIME-Version: 1.0
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	All payment mechanisms require a basis of trust - so 
	that the seller knows s/he will get paid .

With an online clearing system, four elements of trust are
needed:

+ both the vendor and the customer need to trust the bank
+ the customer needs to trust the vendor to deliver the
goods and change once the vendor has been paid
+ any one out of n of the digital mixes (proxy servers) used
to communicate between the parties needs to be trustworthy
+ independent auditors for the bank

This kind of trust comes through repeated relations: if the
vendor has delivered in the past, and benefits from staying
in business in the future, they will deliver the goods today.
Same for the bank issuing and honoring currency.  Regular
money supply figure updates and independent auditing of a
free bank are important, so that they cannot take hidden
actions to inflate the money supply.   (Alternatively,
an online bank can peg the value of its tokens to, and
facilitate conversion to and from, a widely issued currency
such as the dollar).

Also, note that trust is unbundled. Each agent is only
trusted with certain aspects of the transaction; no agent
is trusted to carry out the entire transaction, or with
the knowledge of all aspects of the transaction.

There are entry and exit problems: it costs to gain a
reputation, and if one's need for a future reputation is
small it pays to abscond.  These can be overcome
by the agent trying to gain the reputation, via offering
up-front subsidies to use their services (like sign up 
bonuses), by sponsorship and introduction of new services
by known reputable agents, by keeping maximum transaction sizes
low, and by other means.  Many of these techniques are
well known and commonly used by businessmen.

Trust can also be gained by knowing someone personally.  Many
cypherpunks do, and this will remain important.  But it's also
a risk for controversial services, as being personally known puts
them at greater risk of being shut down by intolerant force.
So trust based on reputation of agents on the net, and on the 
contstraints imposed by cryptographic protocols -- that is our 
important task; if I might be so bold I'd say that's the essence 
of the cypherpunks vision.

There are also a wide variety of other means of gaining
trust through repeated relation, unbundling/distribution of
trust, and the like.  For example, an escrow is a third 
party trusted to hold transactions, eliminating the need for the 
customer to trust the vendor to deliver.  Escrows are useful when 
the vendor is anonymous, not having established a reputation for its 
nym, and for large transaction sizes.

The above bank/vendor/customer/mix scenario seems the 
simplest to start out with on the Internet at this time.

Jim Hart
hart@chaos.bsu.edu