From: Anonymous <nobody@replay.com>
Date: Sat, 12 Dec 1998 02:44:28 +0800
To: dbs@philodox.com
Subject: Re: alternative b-money creation
Message-ID: <199812111722.SAA29143@replay.com>
MIME-Version: 1.0
Content-Type: text/plain



Bill Stewart writes, regarding Wei Dai's b-money protocol:

> It still doesn't solve the fundamental problem with the b-money idea,
> which is that there's no reason anybody should want to accept it,
> any more than they should want to accept dead-president fiat paper money.
> It fixes some symptoms of fiat money, but not the fundamental problem,
> because it's still fiat money, just with mathematically interesting 
> artwork printed on the front.

B-money is not fiat money.  It is better to think of it as commodity
money.  Unlike most commodity money, in this case the commodity is not
intrinsically valuable.  However it is scarce, and more can be created
only at a considerable cost.  An analogy might be money based on a rare
earth element like Terbium (which, let's suppose, has no industrial uses).
Terbium based money would be immune to inflation, like gold backed money,
but the element is not valuable in itself; it is only valuable for its
role as money.

This leads to an important difference between b-money and fiat money.
The value of b-money is not set by fiat.  The value is determined
automatically by the workings of the market and the workings of the
protocol.

There is no centralized agency to make b-money legal tender, or to set
its value in terms of other currencies.  Most importantly, there is no
agency which can issue new b-money, inflating and devaluing the currency.

Money is a store of value and a medium of exchange.  B-money is admirably
suited for these purposes, much better than fiat money.  The quantity of
b-money in a mature system is, roughly speaking, constant.  (The quantity
may grow, but it will do so slowly, based on the increased demand for
b-money.)  B-money is an investment which will hold its value.  Because
it can be exchanged electronically, it is much more flexible as a medium
of exchange than existing forms of money.

> One of the big problems with fiat money is that someone who
> can get other people to trade it for real goods has an
> incentive to print lots of it and acquire a very large share
> of the real goods in the economy, leaving the rest of the people
> with unredeemable artwork and only able to get their share
> of goods by giving the fiatmeister labor or other real goods.
> 
> Wei Dai's b-money proposals reduce the incentive to create
> lots of b-money by requiring the creator to burn lots of
> valuable CPU time to create the mathematical artwork on the notes,

Think of this CPU-burning as the effort to mint or mine new b-money.
Like other commodity based money, and unlike fiat money, b-money cannot
be printed.  New b-money can only be added to the money supply by virtue
of expending work.  This is what insures that there is no inflation.

> In some ways, it's even _worse_ than traditional fiat money,
> because creating it uses up CPU time that could otherwise be
> calculating things that have value for the rest of the economy,
> like optimizing airline routes or circuit-board designs,
> or less valuable cool things like rendering bug pictures for movies
> or calculating the next Mersenne prime or cracking MongoBank's keys,
> or, well, drawing space-war pictures real fast on your Nintendo.

You could say the same thing about gold mining, in the days when gold
was money.  Most gold went into circulation as coins, not adding beauty
or value to the economy.  Its only utility was as an increase in the money
supply.

But, of course, adding to the money supply is an important contribution.
To have a stable commodity money, it must be costly to create more,
and the cost must be "wasteful" in the sense that it is not compensated
other than by the monetary value of the newly produced money.  Otherwise
you will get excessive inflation.

It's ironic for people to complain that b-money is inferior, in a world
in which fiat money is universal.  Once the mathematics of b-money are
better established and understood, and once the technical issues are
clarified and problems solved, this appears to be a very attractive
alternative to fiat money.  Unlike commodities such as gold, it can be
easily exchanged electronically.  And unlike fiat money, it is immune
to attempts to manipulate the money supply.

B-money could easily attract investment as an inflation-proof store of
value.  This may be enough to initiate the bootstrapping process.  People
can buy b-money as a store of value, and once they hold it they will want
to be able to spend it.  This will lead to a demand for merchants to
accept it, and the process has begun.