From: eric@remailer.net (Eric Hughes)
Date: Fri, 18 Nov 94 09:14:14 PST
To: cypherpunks@toad.com
Subject: Re: Islands in the Net
In-Reply-To: <9411171551.AA34415@elfbook.intercon.com>
Message-ID: <199411181712.JAA00827@largo.admate.com>
MIME-Version: 1.0
Content-Type: text/plain


I have rearranged quotations from the original for more cogency of
response.

   From: "Amanda Walker" <amanda@intercon.com>

   Real assets are unique simply by virtue of being physical objects,
   and are liquid (in the long run) by virtue of having inherent
   value.

   The other is that to be successful, digital cash needs to be
   liquid.  For a token to be liquid, it must be backed by real
   assets.

This is just not what "liquid" means.  A liquid asset refers to the
speed with which it can be traded, not what kind of value it has.
"Liquid" is an adjective about timeliness, not about resolution.

There are plenty of liquid assets which don't have "real" value, the
"real" in "real estate", i.e. physical existence.  Promises, for
example, have value, but not "real" value.  A negotiable promissory
note, i.e. a promise to deliver money (money which may be real or
virtual), is a liquid asset, but not a real asset.

   Currency, however, has no inherent value.  Its only value lies in
   its being made up of unique tokens which can be exchanged for real
   assets.

Currency is not just paper money.  Currency also includes minted
specie (e.g. gold coins), other minted coins, silver certificates, and
federal reserve notes.  Sometimes currency _is_ the real asset, as in
Krugerrands.  Sometimes currency is a promise to deliver real assets,
as a silver certificate (the _old_ greenbacks).  Sometimes currency
represents a fiat value, as with today's greenbacks.

If you take a dollar bill to a Federal Reserve Bank, you won't be able
to turn that physical representation of a dollar of fiat currency into
anything that's still money and at the same time backed by real assets.
Just because it's a fiat currency doesn't make it any less a currency.

   Also, if it loses its ability to be exchanged for real assets it likewise 
   loses its value (e.g., Confederate dollars from the Civil War).

Under this reasoning, today's dollar bills should be worthless.  They
aren't.  Real assets are not the only form of value.

   Governments are the classical examples of entities which have
   sufficient resources to back a currency, although cartels in the
   private sector can also do so (VISA/ MasterCard, for example).
   
What currency do Visa or Master Card issue, perchance?

They don't issue currency.  Not all forms of money transfer involve
currency, though, so credit cards can move money around without moving
currency around.

The constitution of the USA reserve currency making power for Congress
and so far they haven't relinquished any of it.

   So far, though, no one has solved either the uniqueness problem or the 
   liquidity problem for digital cash.  As a result, it might be more 
   realistically be called "digital scrip", at least so far.

The uniqueness problem is entirely solved by what Chaum calls the
"spent number database" (a term I abhor).  Some of the other offline
techniques can be used to implement a tradeoff between uniqueness and
identity.

The problem you refer to as liquidity is really the backing problem.
It has also been solved, but not yet implemented.  All it takes is for
someone to incur a legal obligation to return money for digital cash,
which means a functioning digital cash business, of which there are
not yet any.

   Right now, digital currency only works by being a pointer to a
   token, not the token itself.
   
This is an insightful comment.  Its truth is unavoidable with any open
digital money transfer system.  The security of the scheme cannot rely
upon secure channels controlled by the bank (since it is an open
system), so the items transferred must be entirely informational.

Information doesn't obey conservation of mass, and so can't act as a
token.

Eric