The Crypto Winter

[Neil Johnson]

Economics 101 for those who don't/won't check the archives:

The fundamental problem is Trust.

The basic concept of money is to act as a proxy for the exchange of goods
and services.

Say a farmer needs medical attention and a doctor wants pork chops. Without
"money" the farmer would have to pay the doctor with 100 bushels of grain (a
good) for the doctor's expertise (a service). The doctor would then have to
use the grain to pay another farmer for a pig, a butcher to kill it, and on
and on.

Obviously this is extremely inefficient (What's the farmer and doctor to do
if the doctor already has a ton of grain, but really wants pork chops ?)

"Money" allows the doctor to buy what he wants without transporting and
storing a ton of grain, and without having to make several exchanges to
finally get what he wants.

BUT, This only works if everyone involved TRUSTS that the money's proxy
value is stable, meaning that the value X mount of grain = Y dollars = Z
number of pork chops remains relatively fixed over time (at least for the
short-term of the transactions involved).

In the past, this trust was facilitated by utilizing materials that were
scarce and could not be obtained easily (gold, sliver, gems, pearls .etc.).

To further improve efficiency this trust became based on scarce documents
( by virtue of not easily duplicated ) first representing an amount of the
scarce materials mentioned above, and eventually becoming based on trust in
the institution managing it (bank, government, etc.).

Today, we are at the point where even the documents don't even need to
exist, the value is represented as numbers in a computer somewhere. We just
believe that when we use an ATM or a credit card that we will be provided
the goods and services we desire.

However, this trust is still mainly based on faith in the stability of a
government ( with banks being granted a "license" to utilize that trust).

In order for digital currency to become common place it must earn the same
level of trust that existing money systems have.

The problem is that the government has no interest in creating that trust
and in fact has a bigger interest in preventing that trust from forming.

So how do we develop this trust for digital cash ?

Digicash tried tying back to the trust of  existing money systems
(unsuccessfully).

E-gold, digi-gold, etc. are trying to tie back to the trust of scarce
materials (the jury's still out, however they still risk problems with
government interference).

It would seem to me that digital cash would be better off not being tied
either of these trust systems, but somehow develop it's own.

Currently the only viable solution I'm aware of is an electronic version of
"scarcity" by using unique serial numbers (using blinding techniques
to preserve anonymity). However, this requires a "central authority" (either
on-line or via smart cards) in order to determine whether the serial number
has been already utilized and thus no longer has value.

This requires that the users trust this authority to do its job.

The "free-market" solution is to have many central authorities and allow
users to decide which ones to trust. Authorities that maintain/improve trust
will succeed, those that don't will fail. Much like banks long ago issued
their own currencies. However, this won't provide the sort of ubiquitous
trust that "Joe Six-Pack" is going to expect today.

I don't know what the solution is, but I believe resolving this issue is the
next breakthrough cypherpunks will need.

-Neil