expiring bearer documents

[R. A. Hettinga]

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At 12:12 PM -0800 3/26/04, Major Variola (ret) wrote:
>At 01:59 PM 3/26/04 -0500, R. A. Hettinga wrote:
>>At 10:14 AM -0800 3/26/04, Major Variola (ret) wrote:
>>>The point is that the asset (a performance) which the
>>>bearer-document (ticket) grants access to expires.  I think that's
>>>actually orthogonal to the
>>>ticket itself expiring.
>>
>>Okay. The inverse, maybe.
>
>No, they're orthogonal.  You can have a persistant asset,
>your access to which expires; and you can have an ephemeral
>asset, access to which is persistant.
>
>>Maybe you're talking about a derivative then.
>
>Nope.

A contingent claim on an asset is called a derivative. An option, for
instance, buys (or sells) a stock at a certain price before a certain
date, or it's useless. A commodities future claims an asset at a
certain price on a certain date, or its useless.


Now, a ticket on a plane could be called a derivative, I suppose,
but, technically, you're just renting that seat for that period of
time. There's no extra-ordinary conditions under which that asset
becomes more or less valuable. You're not contracting buy the seat if
it's a certain price, for instance. You've bought an actual asset, a
certain set of time-specific seat-miles. If you don't use them, then
the ticket is worthless. It's a contract, and derivatives are
contracts, but as we're seeing, all contracts are not derivatives.

>>>And, like a 10 year treasury note, appreciate with age.
>>
>>Isn't that the opposite of what you just said?
>
>Merely an example of an asset which gains value
>in a known way, the opposite of an asset which
>loses value in known way.

Just to wade out into the financial weeds a little more, :-), most
accepted methods of valuing bonds are to imagine them as options. You
evaluate each coupon (an interest payment on a specific date) and the
final principal payment as separate cashflows, and you use option
pricing to model their total return. It works better that way, you
can calculate what their minimum price should be at the time they
"expire", when the payments are due from the borrower, at which time
a rational investor will cash them in and reinvest the return in
something which make him more money.

The reason I bring that up is that it's fairly simple to create a
bearer bond like that out of chaumian blind-signature notes, one for
each coupon, and one for the final principal payment. When I figured
that out, and I remembered how you actually *calculate* total return
on a bond, it was one of the biggest *Aha!* experiences I've ever
felt. At that point I *knew* we were on to something around here.

In short, you just auction off *each* piece of a bond as if it were a
*separate* security, and let the market price their value. They do
this already with treasuries, they're called "strips", because you
literally strip the coupons off and sell them, but with blind
signatures, they're positively trivial. At that point I knew that the
whole three-orders of magnitude cost-reduction thing was going to be
chump-change compared to the possible market efficiencies of this
stuff. It's breath-taking.

>The point is that any anonymous/finder's-spenders
>document is a form of cash; but some of these
>grant access to time-varying value.

Well, actually, it's a bearer instrument. That is, it executes,
clears, and settles all at once.

And, yes, like any asset, you can *exchange* it for something else,
and electronic forms of any asset make them more exchangeable,
depreciating the necessity for a numeraire ("national currency" for
you philosophy majors) as they got more and more efficient. That's
what Gene Fama (efficient market) Fisher Black (Black-Sholes option
pricing model) and company figured out in the early 80's calling the
"new" monetary economics; in other words, why own dollars that don't
pay a return when you can trade something that does, like, say, a
mutual fund denominated in the S&P 500)

To wade further out into the weeds :-), "cash", if you think about it
in financial terms is, wait for it, :-), a zero-coupon perpetuity
issued and redeemed at par. That means that it is technically a debt
instrument, a bond, issued with an infinite life (a perpetuity),
issued without coupons (doesn't make interest payments during its
lifetime), issued and redeemed at par (its face value, so there's no
implied implied interest, positive or negative).



>(My insight prompted by learning that its legal
>to resell tickets if you go through a licensed
>reseller.  My impression had been that all
>such transactions were called scalping
>and called illegal (despite their being
>mutually voluntary) by the current regime.)

Like the proverbial dog, the state does it because it can. Actually,
the state just does what the ticket-issuer wants, because if the
ticket-issuer doesn't make money, the state can't expropriate any
from him.

The funny part is, if market technology were efficient, the issuer
could *auction* tickets, on the net, in bearer form, and people could
buy them and *resell* them as if they were securities, which is, I
hope, what you're getting at. It wouldn't matter to the ticket
issuer, because he could just play the market with everyone else does
with so-called primary "securities", just like an IPO underwriter
does now. (Primary means the first sale of a given share of stock.
It's what you buy in an IPO. Secondary means that someone's already
got the shares and they're re-selling them.)

>
>(The interesting theme is that the properties
>of ordinary cash are separable and in some cases
>modifiable, as in the above time-sensitive cash
>or the finders-not-spenders variant I once
>described here, viz:
>One could create anonymous "cash" with the property that its
>*not* finder's-spenders because it has a PIN (basically
>a stored-value card); and that it would be recoverable
>if the anonymity were lost.  )

Well, yes. That's what chaumian cash does already. If you sniffed it,
raw, off the net, you couldn't do anything with it because you still
wouldn't have either the owner's key to exchange it for a
good/service, or, ultimately, the underwriter's key to exchange it
into

Again, it's frequently useful when talking about financial
cryptography to use the terms of financial operations when you do so,
since that is, at the root, what you're doing. What you're calling
"cash" sounds to me like it has the properties of any bearer
certificate, and, as we've learned over the years, you can create
*any* financial instrument using financial cryptography: cash,
equity, debt, or any derivative thereof.

Cheers,
RAH

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-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'