From: Bryce <wilcoxb@nagina.cs.colorado.edu>
Date: Mon, 13 Nov 1995 18:20:50 +0800
To: cypherpunks@toad.com
Subject: technical and social structures in the pseudonymous economy
Message-ID: <199511100450.VAA26914@nagina.cs.colorado.edu>
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When a person does business pseudonymously (where I consider
pseudonymity to be == anonymity & non-repudiation & two-way
communication (where non-repudation presupposes some sort of
identifier of the actor)) then that person is exempt (for the most
part) from the threat of physical retribution, the force of law,
etc.  Thus in order to be trusted with some valuable information
such as money this person needs to offer up some collateral which
can be debitted in the case that they violate their contract.  Of 
course this raises the question of who holds the collateral, and it is
a big open spot where statists might jump in with their tired old 
rhetoric (as soon as they clue in to what's going on here), but 
I sincerely hope that a highly redundant, interdependent, robust set 
of private "lien, escrow and arbitration" agencies take up the job.


As a simple example, pseudonymous E-bank customers can be required to 
keep positive balances in their accounts, and in the case that they
are caught trying to double-spend or commit other fraud, a fine can be
withdrawn from this account by the bank.  This model can be applied to
any pseudonymous transaction or contract.  It is important to note 
that this technique does *not* eliminate the risk of fraud--  it 
reduces the likelihood that the pseudonymous customer can commit fraud
successfully and it *increases* the likelihood that the bank can do
so.


Of course this is not necessary if we are not giving the pseudonym any
opportunity to cheat us (because we are using all on-line clearing 
etc.) but for most (I think) applications it is necessary to extend to
the pseudonym some amount of trust, in the form of a "loan" or other 
credit, or, in the form of other digital credentials, access to 
information etc. etc.


I consider this to be a very important idea for the development of
the cyberspace economy/community/libertaria and as I mentioned it
is a point where it would be more easy for the statists to attempt 
an inroad into said community.


I envision a situation in which a pseudonym cannot cheat anyone out
of more money than he has already put up as collateral on his
contract.  Thus mere cyber-fraud is never profitable.  Instead, the 
only way to cheat people is to subvert the escrow&arbitration agencies
into ruling unfairly in your favor, allowing you to abscond with your 
collateral and so forth.  This, unfortunately, moves the whole mess of
"law and society" from the elegant cryptographic solutions that we all
love back into the realm of politics, social ideology and so forth, 
but I think we are in a better position to insure fair dealings now
that we have these cryptographic capabilities like non-repudiation
& privacy, and the currency & transaction protocols which follow
from them.


Note that because the escrow&arbitration agencies are likely to be 
large, redundant and interdependent a petty criminal will not have 
much chance of subverting them, but a major one-time heist is 
theoretically effective, as is the organized, large-scale extortion 
which does not heist it all at once but which instead siphons off an
extortion (tax) payment at regular intervals.  (Note strong 
resemblance between this last criminal strategy and the behavior of 
most governments.)


Of course I'm not the first to think about these kinds of things.
 Nick Szabo 
(szabo@netcom.com) in particular has thought a lot about making the 
escrow&arbitration process mathematically deterministic, when he talks
about his "liens" and "smart contracts", but my intuition is that the 
domain of contracts which are amenable to mathematically-controlled
escrow&arbitration is much smaller than the domain of contracts which 
need a trusted intelligence to do the escrow&arbitration.  (Nick also 
discusses the trusted-intelligence issues, such as using n-of-m key 
splitting to distribute the arbitration power.)


In summary:  lien, escrow and arbitration agencies, which are endowed
by the principals with the authority to adjudicate fraud cases, and 
which are entrusted by the principals with the electronic cash, crypto
keys, and so forth to enforce their decisions, will be essential to 
the operation of the pseudonymous economy.  These agencies will
themselves be the targets and/or the perpetrators of theft, however.
Concerned citizens of the world need to start thinking about how to
minimize these risks.  Factors to consider include:  The relatively
low start-up costs of such agencies, the role of governments, mafia, 
or other force-wielding organizations, and "the problem of 
pseudonymity" (can't tell if two pseudonyms are under same True 
Person's control) possibly leading to a single organization 
controlling a large enough share of escrow&arbitration services that 
it can initiate heists or extortion.


I'll be trying to write these ideas of mine into a set of HTML
documents for display on my web pages.  I appreciate all
constructive correspondance.


(P.S.  Of course a pseudonym's reputation may be considered by some
to be valuable enough to use as this "collateral" or "lien".   
It wouldn't be so considered by me.  I'd take cash.)


Regards,

Bryce

signatures follow


            "To strive, to seek, to find and not to yield."   
    <a href="http://www-ugrad.cs.colorado.edu/~wilcoxb/Niche.html">

                          bryce@colorado.edu                   </a>



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