From: rah@shipwright.com (Robert Hettinga)
Date: Sun, 28 Aug 94 20:15:54 PDT
To: Jim Hart <cypherpunks@toad.com
Subject: Re: Golbal Econ.
Message-ID: <199408290315.XAA27007@zork.tiac.net>
MIME-Version: 1.0
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At  2:49 PM 8/28/94 -0500, Jim Hart wrote:

>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
>

I don't see why an offline system couldn't qualify for all of the above.

>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).

In an offline system, the underwriter's collateral position can be
monitored by a trustee, which is itself audited also. This takes care of
the contents of the "railroad locker". If the currency is consistently
redeemed without the spectre of double spending, then the reputation of the
currency increases. That should be taken care of with proper fraud
detection and enforcement.


>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.

Amen. As I said previously on this list, if I'm an underwriter, and a
legitimate customer comes up to my redemption window with a previously
spent cash, he may be out the money, but I'm out the reputation of my
product.  Prosecuting fraud is the ultimate solution to this problem, but
it's obvious that the above methods make perfect sense to protect the
integrity of either off-line or on-line system.

Thanks, Jim. I agree with Tim. I always learn something when you put
something up.

In particular, I'm now thinking about what happens if the risk of double
spending is small enough to insure against.  That would effectively do what
issuers of credit cards or traveler's checks do when their products are
"double spent". Make the victim whole and run the culprit to ground.  For
credit cards, it's cheap enough (3%) for them to self insure, with a
vigilant enforcement effort.

Unfortunately, there's probably a "frontier" stage at first, where the
currency is more at risk. It is a caveat emptor situation, with Wyatt Earp
for enforcement of the integrity of the underwriter's cash certificates.

The brain grinds away. I hope I'm not stripping gears...

Cheers,
Bob Hettinga

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