From: tcmay@got.net (Timothy C. May)
Date: Fri, 1 Sep 95 17:07:53 PDT
To: <cypherpunks@toad.com
Subject: Re: A problem with anonymity
Message-ID: <ac6cec3b010210049826@[205.199.118.202]>
MIME-Version: 1.0
Content-Type: text/plain


At 10:45 AM 9/2/95, David Murray wrote:

>I've often thought that in a system of digital pseudonyms, where no-one need
>trade with a negative reputation (a reputation deficit?), something like
>Akerlof's Market for Lemons will arise, and _all_ pseudonyms will be treated
>as (reputationally) worthless.

Doubtful, as we already have evidence that people are treating some digital
pseudonyms as reputationally valuable. Examples abound.

>[Akerlof, if I remember my economics right (and I am confident that I will
>be corrected if I don't) analysed a market for used cars. There were two
>types of cars: good ones, and lemons. A purchaser couldn't tell the difference
>until she had bought the car. Since the expected value of a used car was less
>than the value of a good car, purchasers wouldn't pay the good car price.
>But that would mean owners of good cars wouldn't offer them for sale (in
>this market). So the only cars for sale would be lemons :-)]

I haven't encountered this example, but it clearly misses some important
real-world issues. First, people buying used cars are strongly advised to
take the car to an independent mechanic to be checked out (a kind of
variant of the "cut-and-choose" protocol at work). This often reveals
lemons. Second, people take test drives, look under the hood, kick the
tires, etc. This also often reveals lemons. Third, the reputation of the
used car dealer is, despite nearly a century of jokes to the contrary,
often very important.

The last two cars I've bought I bought used--albeit with low mileage on
each--from car dealers. I took test drives and got a limited warranty in
each case. The first car I drove for 12 years with essentially no problems,
the second I've been driving for almost 3 years.

Like a lot of simple game-theoretic models, the application to the real
world is quite different.

But I certainly agree that crypto will reignite interest in analyses of
such game theory questions. Another way of viewing anonymity vs.
non-anonymity is that knowing the True Name of a party with whom one trades
is just _one element_ of a transaction. By no means is it essential.

(Think of various trading situations where one has no idea of the True Name
of the other parties: cash-and-carry transactions, flea markets, many
international trade arrangements, etc. As we have discussed in past
discussions of anarchy, the international trading regime is essentially an
anarchy, in that no Higher Authority exists to resolve disputes in a
top-down way...the so-called "Law Merchant" evolved to resolve disputes in
such trading situations.)


>As Tim points out, this is a non-crypto problem as well, and devices such as
>bonds or (which are game-theoretically similar) expensive advertising or
>plush premises [if they spent an unrefundable $20million on the Rolling
>Stones, they're not likely to throw it all away by ripping you off for
>$100 ;-)] are used to convince potential customers of one's bona fides.
>
>How these transfer to the world of cyber-finance, I'm not sure, but I suspect
>it leaves a role for True Names in the management of credit risk: as escrow
>agents, middlemen, clearing houses etc. [Although, having said that, if the
>Akerlof analysis applies, you just *can't* grant (unsecured) credit to
>pseudonyms - the percentage of defaulters will be 100...] But these Names are
>True only in the sense that they are juridically persistent (that is, if
>they transact today, they can be sued tomorrow), and need not be traceable
>to any True People (Warm Bodies?) - anonymously held corporations, for
>example.
>
>If you can't rely on the unsecured promise of a digital pseudonym, and you
>can't accept reputation as 'security', how do you extend credit?

I am willing to extend some amound of credit to PrOduct Cypher, Black
Unicorn, etc., based on their past reputation and on the fact that I can
show to others the transactions into which their pseudonyms entered and
thus expose them if they default. Now _how much_ I'm willing to extend is
of course a more complicated issue, but the principal is still there: a
purely digital pseudonym, with no possibility of being tied to a True Name,
can still be extended credit....I just said I would do so.

--Tim May

---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
Corralitos, CA              | knowledge, reputations, information markets,
Higher Power: 2^756839      | black markets, collapse of governments.
"National borders are just speed bumps on the information superhighway."