From: szabo@netcom.com (Nick Szabo)
Date: Tue, 19 Sep 95 17:11:55 PDT
To: cypherpunks@toad.com
Subject: Re: Crypto + Economics + AI = Digital Money Economies
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I wholeheartedly agree with Tim that economics should play an important
role in analyzing cryptographic protocols.  It lets us step back and
ask what features are important, and in general what we are trying to
accomplish: usually something very different than the military uses of
cryptography that have given rise to the current methodologies.
To economics, especially game theory, I add a vast body of knowledge 
about human relationships, especially those involving commerce, that 
civilization has accumulated over the years: law, especially business law.

If we step back and look at what many cypherpunks are trying to achieve,
a major idealistic theme is a Ghandian cyberspace where 
violence can only be make-believe, whether in Mortal Komat or 
"flame wars".  Cypherpunks want our telephone networks, Internet businesses,
etc. to be both protected from force, and not dependent on force for
their existence. Our 20th century information commerce systems, from 
publishing to credit cards, have often been very dependent on the threat 
of violence, usually law enforcement, to protect intellectual property 
rights, deter fraud, collect debts, etc.  There is no utopia in sight where 
such threats can be completely eliminated, but we can recognize that they 
exist and carefully work to reduce our dependence on them.

In a far more practical vein, the dawn of international commercial
networks that criss-cross hundreds of jurisdictions with complex, obscure,
and often contradictory regulations, gives rise to a vast market
opportunity for substituting, where possible, network security mechanisms 
for law enforcement dependencies. The recent discoveries in 
cryptographic protocols provide us with a rich toolbox for
solving these problems.

Perhaps the most fundamental building block of business law is the
contract.   Strongly related to Tim's ontology of money is an 
area I have developed quite extensively called _smart contracts_.
The terms of contractual relationships can often be formalized
and standardized, and then performed via network-based protocols.  
These protocols, along with economic incentives, protect the performance of 
the contract from both fraud by the principals and attack from third 
parties.  This is also the basic task of law enforcement in commercial law;
thus smart contracts when successful reduce dependence on law enforcement
as well as losses to fraud and cracking.  Of special interest to 
cryptologists is that the principles of contract provide us with a 
methodology for the use of cryptography that is very different from,
and potentially far more lucrative than, the traditional military paradigm.

I have much more to say about these things in my essays under
http://www.digicash.com/~nick/, and in a forthcoming article
for _Extropy_.

Nick Szabo				szabo@netcom.com