Steve Omohundro writes on alt-inst:
I'm intrigued by the notion that in a digital economy contracts might be enforced by design rather than by the good faith of the participants.
I have been intrigued by this possibility as well. See my essay at "http://www.best.com/~szabo/smart.contracts.html". Steve has put his finger on one of the basic outstanding problems in this area, namely the enforcement of credit. Currently there are several partially effective processes: * Reputation (especially credit reports): often effective, but only to a point, as it is often hard for the debtor to accurately judge the future reputational effects of an action (eg failure to pay a bill, taking out too large a loan, etc.) that has clear, local, beneficial effects today. This is more imbalance in knowledge between current and distant consequences among individual consumers, but even among large organizations with high credit ratings it is not an irrelevant factor. * Secured transactions: liens, etc. * Garnishment of future income * Law enforcement, especially to enforce transfer of control over liened assets, garnishment, etc. These processes have a fundamental property in common -- they violate the privity of credit transactions -- they bring in third parties to track reputations or enforce repayment. Credit transactions seem to entail a fundamental imbalance in incentives that can only be redressed by bringing in third parties. Secured credit need not violate privity if the physical control over the securing property can be shared. So that, for example, automobile credit can be secured as long as reposession is possible. The trick is to make repossession by the creditor easy but theft by third parties difficult. I have proposed "smart liens" along these lines, electronic security measures strong against third parties but with a "back door" for creditors. This well-specified, shared control over "smart property" more accurately reflects the agreement involving that property, so that there is less need for third parties. To even more accurately reflect the contract, we need a mechanism to eliminate the creditor control once the auto loan has been payed off. Alas, there is less incentive to provide these kinds of contractual process improvements in a market where government subsidizes the enforcement of contracts. Similar mechanisms might be possible for other kinds of security (houses, escrow accounts, etc.), but many valuable kinds of credit are unsecured, and we run into privity problems when it comes to garnishment of future income. Here, we are invoking third parties, namely the debtor's future contract counterparties. Any mechanism seemingly needs to involve them, but both principals have an incentive to enter a private, ungarnished contract in preference to one involving the creditor. (ie, the amount of garnishment is a surplus to be divided between principals who can route around it). A way to a solution, if it were feasible, would be to give the creditor shared control over the entire scope of of the debtor's income capabilities - or, a bit closer to practicality, over the entire scope of his digital income capabilities. A secondary solution is some combination of wide scope and limited compromise of privity. After all, money itself is a compromise of privity, since the contract parties rely on third parties to clear and maintain the value of the currency. Money's compromise of privity is well-defined, however, not an open-ended release of information and physical control, even over one's own person, as often occurs with credit reports and law enforcement respectively. Our challenge is to find privity compromises with such well-defined limits to enforce credit transactions. One possibility here is a "garnishable currency". All banks have an interest in enforcing credit, so they can make deals with each other to enforce credit via the garnishment of debtor bank account deposits at any participating bank. However, substantial amounts of garnishment (and if it provides a lower cost way of enforcing credit the amounts will be substantial) gives rise to an incentive for banks to fail to participate. Here the need to commonly clear a currency between banks can be used as a barrier to entry for such defectors. The currency is simply declared garnishable, and any banks who wish to deal in the currency must participate in the garnishing process. This currency wins against competitor currencies in a free-banking market because it provides a better means to enforce credit, allowing greater credit expansion at lower isk. On the other hand, traditional coin and currency transfers, and some kinds of digital cash transfers, need not involve deposits to bank accounts linked (usually by True Name, but a "debtor nym" could also work) to one's unsecured debts, and given that there is a market for these kinds of transfers for other reasons, its existence allows banks to defeat auditing of garnishment by other banks participating in that currency. Abuses of financial auditing for the purposes of extortion, inside information, etc. will likely maintain a major market for the non-deposit payment methods. Steve proposes "interval money" that would expire. A similar idea has been proposed by Tim May, a "time release" form of money that becomes good only after a certain date. These can probably be implemented by a digital mint expiring or activating special issues of digital cash, or by a third party issuing escrowed keys at specific times (since these keys are encrypted against the escrow agent, and that agent doesn't know what they will be used for, the escrow agent has no incentive to cheat). A technical issue here is whether the digital signature space is large enough to encompass one unique signature per unique credit transaction deadline into the indefinite future. While these protocols are intriguing, and potential building blocks for a solution, the institutions using them proposed so far seem to still rely on a solution to the deposit garnishment problem as discussed above, that is the problem of sufficiently disincentivizing the debtor from using non-garnishable alternatives while maintaining the privity of payments to those who are not unsecured debtors (the ability for these people to use non-deposit payment methods). Nick Szabo szabo@netcom.com http://www.best.com/~szabo/