[Cryptography] threat models, was Krugman blockchain currency skepticism

[Patrick Chkoreff]

William Allen Simpson wrote on 08/06/2018 09:54 AM:

>>>    If so, who runs it, and why do you trust them?
>>
>> I will trust some issuers and payment platforms more than others.  Other
>> people will make a different assessment.  That's what makes a market.
>>
> A trust market?  How is that valued?

I'll go ahead and answer that first, even though you do bring up some
valid objections to reputation markets below.

Assume that both you (William) and I (Patrick) have each issued a signed
note pledging to pay $100.00 to the bearer on demand.

Now someone out there wishes to be paid $100.00 in digital notes.  He
happens to be a friend of William.  He will naturally prefer the
William-note over the Patrick-note.

However, he *might* be willing to accept the Patrick-note instead.  Why?
 Because he sees a bid offering $102.00 in William-notes in exchange for
a single $100.00 Patrick-note.  Why would someone offer that?  Because
the bidder has done business with Patrick for a long time and has no
particular history with William.  Why did he accept William-notes in the
first place?  Long story:  market forces, turtles all the way down.

The friend-of-William and the friend-of-Patrick place different
subjective values on the notes (a la Carl Menger), and "that's what
makes a market."


> There's been a bunch of derp about "reputation" floated in this
> thread.  Reputation doesn't exist as a market.
> 
> Heck, I'll go farther: reputation isn't a barrier of any kind.
> 
> Bad actors simply change their names.  Do you trust Academi nee Xi
> nee Blackwater?

It's a good point.  You (William) might simply default on your signed
obligations to redeem your notes.  In which case your friends and
colleagues who hold your notes may approach you and give you a hard time
about it.  People who hold your notes but have no way of getting in
touch with you will simply take a loss, possibly with no recourse.
Perhaps they should have diversified into Patrick-notes, but that's
another discussion.

Meanwhile you (William) simply abscond to Peru, create a new ECC key,
and start signing new notes.  However, that new key has zero reputation,
so your notes might only trade with your new friends in Peru.  After a
few months you will repeat your scam and they too will suffer losses --
and then you'll move on to fleece some new victims.

(Nothing personal here, I'm not accusing you of being a thief, just
using you for rhetorical effect.)

Eventually someone may catch up with you, but the valid point you make
is that trading notes at discount based on reputation is NOT fool-proof.
 It is most likely not even possible in principle to insure against
"fat-tail" Black-Swan defaults like that.  Diversification may be the
only remedy.  People then take their occasional losses and move on with
their lives, assuming no enforcement is possible.  Who knows, those
losses may even compare favorably to the inexorable loss of purchasing
power people suffer routinely today.  I can only decide that for myself.


> Reputation is entirely based upon non-repudiation (to inject a
> little cryptology into the discussion), and liability (provably
> having sufficient real assets to cover their outstanding balance).
> 
> Blockchain currency doesn't have either of those properties.

Well, the "great" thing about a "peer-to-peer electronic cash system"
such as Bitcoin is that there are no real assets to worry about.  That
does not make devotees of the Mises Regression Theorem happy, but
meanwhile people continue to use Bitcoin in spite of the Theorem.
Evidently Satoshi managed to speak value into existence, /ex-nihilo/.


>> I am less concerned about accepting an issue which I trust less if I can
>> trade it for an issue which I trust more.  It may well be that the
>> person on the other side of the trade has exactly the opposite position
>> of trust with respect to the two issues -- or at least has a more
>> pressing need for the one I have versus the one he has.
>>
> And as soon as there is no possible exchange, your asset is valued as
> nothing.

Precisely.  Once William defaults on even a single note, the value of
all his outstanding notes on the market will soon plummet to zero.  Or
maybe your friends buy them up at $0.05 each and have an intervention.
Maybe you possess some of THEIR notes and you can sign them back over to
them to settle the score.  But yes, in general most everyone gets screwed.

The same kind of thing can happen with bank defaults.  Yeah there's FDIC
but they're undercapitalized too.

(Perhaps certain large issuers COULD find someone willing to insure
their notes, given sufficient collateral which they could reliably seize
or keep.)


>> [...] Real assets are so 18th Century anyway.
>>
> Currently, there's a fellow named Manafort who is discovering how
> pertinent mapping of real assets is to liability.

Well, John Levine remarked that notes redeemable for real assets "worked
OK in the 1700s, but there's probably good reasons we've moved beyond
it."  I assume from his comment that he regards a note redeemable for a
crisp $100 bill as a sort of a retro throw-back to a less enlightened
time, when people actually expected to *redeem* an asset-substitute for
an actual asset -- but now we have things like Bitcoin where the
benighted concept of redemption no longer applies in Current Year.  I
may have caricatured his intent but I can't yet guess what else he might
have meant.


> Note there was some other libertarian derp mentioned earlier:
> "[...] taxing needs to be driven out of the market for good."
> 
> Manafort is also learning that just because you've concealed your
> currency and tried to conceal your transactions, that doesn't mean
> they are not subject to taxes.

If you default on the William-notes, you might want to declare your
gains on your tax return.  That is not tax advice, so as always please
consult your tax professional.


-- Patrick