From: dlv@bwalk.dm.com (Dr. Dimitri Vulis)
Date: Thu, 7 Dec 95 18:43:12 PST
To: cypherpunks@toad.com
Subject: Re: Geodesic Payment Systems? (was Re: Meeting notes from ANSI X.9 Meeting on El
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Nathaniel Borenstein <nsb@nsb.fv.com> writes:
> Excerpts from mail.limbo: 6-Dec-95 Re: Geodesic Payment System.. "E.
> ALLEN SMITH"@mbcl.ru (1656)
>
> > 	The risk in question is not infinite-cost. If the person who gets
> > ahold of the keys starts simply making lots and lots of money, in a free
> > market the prices in digital cash for everything will start going up. This
> > phenomenon will be spotted, and those taking the particular variety in
> > question will stop accepting it. Losses are limited to however much was out
> > there at a given time, and if there are multiple systems with free-market
> > interconversion between them, that may not be very much. People will move
> > out of a decaying monetary system if: A. the new system is as easy to get
> > as the old; and B. the new system is as easy to spend as the old.
> > 	If the person who gets the keys simply uses them on a small scale,
> > then the resulting inflation and loss of value can simply be dealt with
> > using the discount mechanism. It's no longer infinite risk.
>
> Basically, the criminal in this scenario has a choice between greed and
> vandalism.  If he's motivated by greed, and he's clever, he'll push
> things slowly in the inflationary direction, as you describe.  If he's a
> vandal or terrorist at heart, however, he might get more satisfaction
> out of generating the equivalent of overnight inflation at the
> billion-percent level.  That's not a decaying monetary system, it's a
> suddenly-collapsing monetary system.   The only difference between those
> two scenarios is the quantity of bad money the criminal chooses to print
> and distribute.  (Note that this is very different from physical
> counterfeiting, where the logistics of actually feeding trillions of
> dollars into the money supply are quite daunting, and make the
> catastrophic-vandal scenario more or less impossible.)

A few rambling thoughts on the same subject:

I see a couple of risks that a potential customer would consider (akin to the
risks of owning a real-world exotic currency):

1. The risk that she'll accumulate some electronic money and won't be able to
exchange it conveniently for something else (goods, services, other forms of
money).

Imagine holding a quanitity of central-african francs or belarusian zaichiks in
a rural area in American Midwest. This currency may be worth a lot in some
geographical areas (like New York City), but no bank will take it in the
accursed fly-over :). (Someone I know brought back some sheqels from a trip to
Israel and had lots of trouble finding a bank willing to exchange those for US
dollars.) Likewise if your interner connection suddently goes under, you may
not be able to trade your electronic cash until it's restored.

2. The risk that the electronic money will lose its value, e.g., because
someone issues a lot of it. In real life, this is comparable to the situation
where you own, e.g., a pile Mexican pesos, and the government of Mexico decides
to print a lot of pesos, while changing the exchange rate so now you can get
more pesos for a dollar than you could when you got your original pile. Hence,
your pile is worth fewer dollars than it did before.

In real world, gold, silver, beads, fishhooks, whale teeth, whiskey, seashells,
cigarettes have all been used as money (medium of exchange / store of value)
because the users could be certain of their scarcity. There's the risk that
someone will find a way to forge electronic money so its exchange rate will
fall.

I see an entrepreneurial opportunity in these risks. I'm not necessarily going
to do it myself, but perhaps someone will find this idea useful.

First, let us recall how in real life currency owners limit their risks by
hedging. A most common hedge is an option. Let's suppose that I hold $1M worth
of DEMs, and can currently readily exchange them for USDs at, say, 1.40. I
enter into a contract with, say, my good friend Alexplore, specifying 2 things:

1. I now pay Alexplore $1,000 (Hey, I'm making this up!!!)
2. At any time during the next 3 months I can give Alexplore my DEM's and he'll
give me back USD's at, say, 1.35. (Of course, the contract specifies the
maximum amount of DEM's I can force him to buy from me.)

If the exchange rate never falls below 1.35 during the 3 months, I let the
option expire and Alexplore keeps the money; my loss of $1000 is his gain. If
the exchange rate does fall below 1.35, I'll probably excersice the option. My
loss is limited to the change from 1.40 to 1.45; any further loss is
Alexplore's (partially offset by the $1000). Alexplore is betting that the
exchange rate won't hit 1.35; I'm just limiting my potential losses.

In effect, Alexplore had sold me an insurance policy with a small deductible.
Another an example familiar to most people is insuring one's car or a house.
Suppose I own a house worth $200,000 (we actually don't) and buy a fire
insurance for $1000. If the house doesn't burn down within a year, the
insurance premium is my loss and the insurer's profit. If it does burn down,
I probably have a claim against the insurer.

Of course, there's an additional small risk that the insurance company will
go under or renege on the contract. Moreover, the insurer can insist that,
e.g., the house be inspected for fire code violations before the policy goes
into effect.

How then can this insurance of assets be emulated with electronic money? Well,
an individual or an organization X that's fairly confident that electronic
money is "safe" could offer offer the following contract: a money-holder Y pays
X an sum of real or electronic money. During a fixed period of time Y may
chooses to ask X to exchange some electronic money (up to a maximum amount
based on the initial payment) for real money at an agreed-upon discounted rate.

For example, Y might pay X $10 for the right to ask X to accept up to $1000 of
(dollar-denominated) electronic money at the rate of 90c of "real" money per
electronic dollar. The exchange rate is discounted so Y won't choose to
exercise the option until there's a real problem with the money (a deductible
of sorts); and the payment required to insure a certain amount of electronic
money is negotiated based on X's and Y's perceptions of the risks involved. If
electronic money works as well as many of us hope it will, then X just made $10
for nothing. But if the money goes bad, then X has assumed most of Y's risk.

X may impose security conditions on Y; e.g., only insure the money that was
received using an X-approved encryption.

For added assurance, X should be independent from the organizations that now
issue electronic money. X also has to convince Y's that he has the resources to
satisfy the claims if the shit hits the fan. Keep in mind that X assumes a
tremendous liability and hopes never to pay up. In the 80's many elderly
investors essentially insured others against a sharp drop in the market.
They were badly hurt during the crashes of 87 and 89.

---

Dr. Dimitri Vulis
Brighton Beach Boardwalk BBS, Forest Hills, N.Y.: +1-718-261-2013, 14.4Kbps