From: rah@shipwright.com (Robert Hettinga)
Date: Mon, 22 Aug 94 05:44:01 PDT
To: Jason W Solinsky <rah@shipwright.com (Robert Hettinga)
Subject: Re: In Search of Genuine DigiCash
Message-ID: <199408221240.IAA29673@zork.tiac.net>
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At 11:36 PM 8/21/94 -0400, Jason W Solinsky wrote:

>> Of
>> course, the issuer could publish the prices based on the compounded
>> interest accrued *for each certificate*, for the time period it's
>> outstanding, possibly complete with the compounding factors for each
>> compounding period used. (a day, a month, a year, or even continuous over
>> the life of the instrument)  Lot of overhead there, but mutual funds do it
>> all the time. You'd want to just take their word for it, I suppose, and
>> trust their price, right?
>
>OK, I see the problem. You are assuming that certificates will be issued
>at a consistent set of notional values. (like ten bucks, five bucks ect.)
>The correct way to do things [:-] is to set the notional value of new
>certificates based on the trading value of old certificates. Suppose the
>first certificate had a principal of $10 and is now worth $11, then the
>new certificates that I issue will have their principal adjusted so that
>including the effect of interest rates, my new certificate is worth as much
>as your old certificate. Thus, there is only ONE value that needs to be
>published at any given time.

Open-end mutual funds do this now, every share is issued at a the price of
a dollar. The problem comes when the value of the suspension pool (it's
starting like water treatment plant) backing up that certificate increases.

A digital cash operation is another open-ended mutual fund. If you don't
price it in terms of something real, like a dollar, not in terms of itself,
then you introduce an unnecessary level of complexity, not to mention
regulatory gobbledegook, because that really is a scrip mechanism.

I just think that it's easier all around to keep a constant notional value
(a buck is a buck is a buck). Then to mess with a fluid pricing mechanism
for something which is supposed to enhance convenience and liquidity in
internet commerce.  Let banks and governments worry about the relative
prices between their currencies, and let that price be the price of e-cash
for now. An e-cash issuer has to worry about his competition and the price
of their cash.  That's bad enough. Occam's razor, KISS principle, and all
that.

In theory, though it probably won't happen, an underwriter could issue a
greater amount of digital cash than regular cash paid for it (e$1.00 for
$0.95, for the sake of argument).  The cash flow from the interest on the
suspension account (due to long cash lifetimes on the net, for example)
would be paying for operations, and profits, and a competitive market
forces the underwriter to sell at a slight discount. See?  This is exactly
the way you price bonds.  The case of zero interest digital cash is exactly
like that of a zero-coupon bond. The ecash is then spent one or more times
on the net at its "par" or face amount, and then the underwriter makes
money or eats the difference when it is redeemed.

>
>Seting prices based on convenience instead of value derived? *BLECH*. That
>sort of thing is anathema to free markets.

There's probably the hoariest old saw in economics which says "The cost of
anything is the foregone alternative." Convience *is* value derived. Market
liquidity is convience (more like necessity, actually, certainly not
anathema, but who's quibbling).  Market liquidity is value derived.

Cheers,
Bob Hettinga

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