From: Wei Dai <weidai@eskimo.com>
Date: Wed, 6 Dec 95 11:44:11 PST
To: Nathaniel Borenstein <nsb+limbo@nsb.fv.com>
Subject: Re: Geodesic Payment Systems? (was Re: Meeting notes from ANSI X.9 Meeting on Electronic Payment)
In-Reply-To: <wklMcgyMc50eEbskld@nsb.fv.com>
Message-ID: <Pine.SUN.3.91.951206104553.24528A-100000@eskimo.com>
MIME-Version: 1.0
Content-Type: text/plain


On Wed, 6 Dec 1995, Nathaniel Borenstein wrote:

> I had assumed that there was a market discount, but it's still not quite
> that simple.  It's very hard for markets to deal with *unbounded* risk. 
> The biggest problem I see with most of the crypto-cash schemes is that
> there is a legitimate scenario -- however low-probability you might
> assess it to be -- of break-the-bank catastrophic failure, i.e. in which
> someone gains the keys that allow him to essentially print money.  This
> kind of low-probability, infinite-cost risk is the kind of thing that
> gives underwriters the heebie jeebies.  There's a good reason that most
> companies have "Ltd" after their name instead of "Unlimited", in those
> countries where that's the naming convention.

I find this argument totally unconvincing.  No risk is unbounded.  The 
worst thing that can possibly happen is that a nearby star goes supernova 
and completely destroys the earth.  Yet markets handle this 
low-probability risk quite well.

The direct cost of a break-the-bank catastrophic failure is bounded by the 
amount of capital the bank has.  This is because the market will not 
accept more liabilities (real or forged) from the bank than its capital.  
There may be other indirect costs resulting from dislocations, but these 
should also be proportional to the size of the bank.  Therefore your 
argument is really against centralization and for diversification and 
distribution.

Wei Dai