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