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From: Eric Voskuil <eric@voskuil.org>
In-Reply-To: <EB743E28-8486-4CD5-B9AE-09B5693B27FA@gmail.com>
Date: Sat, 29 Jun 2019 14:21:20 -0700
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References: <0DBC0DEA-C999-4AEE-B2E1-D5337ECD9405@gmail.com>
	<7A10C0F5-E206-43C1-853F-64AE04F57711@voskuil.org>
	<EB743E28-8486-4CD5-B9AE-09B5693B27FA@gmail.com>
To: Tamas Blummer <tamas.blummer@gmail.com>
Cc: Bitcoin Protocol Discussion <bitcoin-dev@lists.linuxfoundation.org>
Subject: Re: [bitcoin-dev] Generalized covenants with taproot enable
	riskless or risky lending,
	prevent credit inflation through fractional reserve
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> On Jun 28, 2019, at 12:21, Tamas Blummer <tamas.blummer@gmail.com> wrote:
>=20
> Hi Eric,
>=20
> Thank you for your questions as they show what concepts need further expla=
nation, so you understand the potential of this proposal and how it is helpf=
ul to the ecosystem.
>=20
> Riskless zero bond is in fact the most basic concept of financial engineer=
ing. Yes, there are engineers of finance, those who create and price financi=
al derivatives (e.g. options, swaps) and structure products such as e.g. ABS=
, CDO etc.
> I used to be one of them.
>=20
> A zero bond formalizes the observation that 1 unit of currency in the futu=
re has different value than 1 unit available now. It is called riskless if i=
t is certain to receive the payment in the future.
> If we put this difference of vaue in relation to the amount then we get th=
e =E2=80=9Crisk freee rate of return=E2=80=9D, that you heard of.
>=20
> E.g if one is willing to exchange 1 BTC unconditionally available now for 1=
.1 BTC certainly available in a year but not earlier, then the implied =E2=80=
=9Crisk free rate of return=E2=80=9D is apparently 10% pa. for Bitcoins.

As I implied, I am well aware of the concept of risk free rate of return, wh=
ich is a hypothetical.

> The transaction I construct in the first example achives exactly this, bec=
ause:

Which implies you have created an actual instance of this heretofore purely h=
ypothetical concept.

> Bob forgoes his ability to use his unconditionally available coins by givi=
ng them to Alice with a covenant that ensures that Bob will receive them bac=
k later.
> Bob does this because Alice pays for this in advance.=20
>=20
> Alice can further transfer the coins encumbered by the covenant, but they w=
ill unconditionally return to Bob in the future.=20

Why would Alice pay for this at all?

> The utility of these encumbered coins is that they prove that the loan is f=
ully covered by reserves.

What loan? Alice has paid Bob for something of no possible utility to her, o=
r anyone else.

Bitcoin is a money, not consumable in any way. Its utility arises strictly f=
rom the possibility of eventually being traded for something else. The only r=
eason to accept it in trade is that expectation. Removing that possibility, e=
ven transitively and over time, removes all utility immediately. In my previ=
ous comments I described a necessary discount to NPV, but it=E2=80=99s safe t=
o say that must be 100%.

> How valuable this utility is will be decided by the market

Value is of course subjective, and is determined by individual preferences. Y=
et what is the value one might place on something of no use? Economically sp=
eaking it must be zero, since value is a subjective evaluation of utility (i=
.e. service to a person).

Consider the case of the 1000 and 500 rupee demonetization. Long lines of pe=
ople formed at banks to convert to notes to others of equivalent denominatio=
n.

https://en.m.wikipedia.org/wiki/2016_Indian_banknote_demonetisation

Of course, upon announcement of the demonetization, existing 1000/500 rupee n=
otes were discounted for the cost/risk of accomplishing this conversion (sev=
eral people are reported to have died in the effort). If there was no such c=
onversion possible, making the notes worthless at the future date, the *imme=
diate* effect would necessarily have been 100% discount.

This of course sets aside any consumable value of the =E2=80=9Cpaper=E2=80=9D=
 notes, such as burning for heat or trading as novelties (e.g. demonetized Z=
imbabwean 100T notes currently trading), as Bitcoin is not capable of being c=
onsumed. It also sets aside the possibility that some people were unaware of=
 the demonetization.

Who would accept such a note today that was known to be worthless at a futur=
e date? If they did, who would would accept it from them? It=E2=80=99s liter=
ally an on-chain scamcoin, where the first sucker must find another, and he a=
nother, an so on, as soon as possible, before it expires, leaving the last s=
ucker holding the bag. Given an efficient market (i.e perfect knowledge of t=
he scam), zero initial value is implied.

> and that value will be interest received by those who temporarily give up c=
ontrol. I am guess the value will be low but positive.

Giving up control of money for a period does not imply the money is useful t=
o someone else. Bob might as well lock his coins in a time capsule, for whic=
h he has the only key, and ask Alice to pay him for it.

> Lending does not mandate fractional or full reserves.

I didn=E2=80=99t say that it does. Lending implies no =E2=80=9Cmandate=E2=80=
=9D. But the nature of fractional reservation is inherent in every loan/inve=
stment.=20

> These are choices the market or regulators enforce.

Fractional reservation is not a consequence of statutory or market controls.=
 The level of hoarding vs. lending is a consequence of individual time prefe=
rence.

> Full reserve banking is not a fiction but is how things worked before intr=
oduction of gold receipts. A bank could only lend gold coins it possesed. Pe=
rils of fractional reserve were felt repeatedly by the Bitcoin ecnomy e.g. i=
n the collaps of MtGox.

I don=E2=80=99t believe I called full reserve a fiction. With full reserve t=
here is no possible investment, production or products. Unlikely, and disast=
rous for humanity, but not provably impossible.

A hazard of viewing economic concepts through a financial lens is that those=
 higher order concepts become obscured by a morass of economically-irrelevan=
t regulation and implementation details.

At this point we are going to end up in a discussion on what fractional rese=
rve actually is. I=E2=80=99d be happy to have a discussion on the topic, but=
 this list is clearly not a good forum for that.

Furthermore the question of whether or not this proposal is relevant to frac=
tional reserve is moot unless it can be shown that the assumed utility actua=
lly exists. So I suggest we take this interesting but secondary question on f=
ractional reserve somewhere else.

> The idea to return to full reserve banking is not unique to gold bugs or B=
itcoin but recently a popular vote was initiated in Switzerland to force Swi=
ss banks to full reserves with respect to lending. This popular vote achived=
  24% support [1] which is quite remarkable if considered that the topic is n=
ot trivial as also our exchange shows.

It shows the breadth of economic ignorance which is not surprising given its=
 counterintuitive nature.

Best,
Eric

> I published today a writing in medium, that explains the concept of fracti=
onal vs. full reserve banking in conjunction with this proposal. Please read=
: https://medium.com/@tamas.blummer/full-reserve-banking-with-bitcoin-462b21=
ae9479
>=20
> I would welcome feedback on the generalized covenant construct or its impl=
ementation, as I think it can open up much more uses than the few examples I=
 gave.
>=20
> Tamas Blummer
>=20
> [1] Vollgeld Initiative: https://www.bfs.admin.ch/bfs/de/home/statistiken/=
politik/abstimmungen/jahr-2018/2018-06-10/vollgeld-initiative.html
>=20
>> On Jun 28, 2019, at 19:25, Eric Voskuil <eric@voskuil.org> wrote:
>>=20
>> Hi Tamas,
>>=20
>> There are a number of economic assumptions contained herein. While I unde=
rstand you would like to focus on implementation, the worst bugs are require=
ments bugs. IMO these should be addressed first. I=E2=80=99ve addressed some=
 possible issues inline.
>>=20
>>> On Jun 28, 2019, at 01:27, Tamas Blummer via bitcoin-dev <bitcoin-dev@li=
sts.linuxfoundation.org> wrote:
>>>=20
>>> I start with a formalisation of loans as common in finance:
>>>=20
>>> A zero bond is a contract between two parties Alice and Bob whereby Alic=
e receives an amount less than P and has to pay back P at a later time point=
 called maturity.
>>> The difference between the amount received and P is the interest implied=
 by the contract. E.g. receiving 1 Bitcoin (<P) and agree to pay back 1.1 (=3D=
P) in a year is the same as getting a loan with 10% p.a. interest.
>>>=20
>>> The inherent risk in the contract is that Alice may not honor the agreem=
ent or be bankrupt by then.
>>>=20
>>> If we could programmatically guarantee that Alice honors the contract th=
en we would be able to create a riskless zero bond, the fundation of financi=
al engineering.
>>=20
>> I=E2=80=99m not aware of the basis of this statement. While people use th=
e term =E2=80=9Crisk free rate of return=E2=80=9D there has never actually b=
een such a thing. It=E2=80=99s not clear to me how a unicorn has been the fo=
undation of =E2=80=9Cfinancial engineering=E2=80=9D, but I=E2=80=99m not als=
o clear and what is intended by =E2=80=9Cengineering=E2=80=9D in this sense.=
 Generally engineering is the implementation of higher level concepts. It is=
 those concepts that constitute requirements here.
>>=20
>> At a minimum, interest cannot be guaranteed by this proposal, which impli=
es that at best it guarantees, setting aside changes in purchasing power, a r=
eturn of principle minus economic interest on that principle (ie opportunity=
 cost). Given that purchasing power changes over time, risk increases with t=
he term of the loan. As such this is not riskless - both volatility and oppo=
rtunity cost remain as risks.
>>=20
>>> A systemic problem with loans is that the lender might operate on fracti=
onal reserve, that is lending more than his capital.
>>=20
>> This is not a systemic problem, this is the very nature of lending. Fract=
ional reserve is simply a state banking term used to describe the fact that p=
eople invest (lend) a fraction of their savings and hoard the rest. It matte=
rs not that banks or individuals do this, credit expansion is inherent in ec=
onomy. Without it there is no investment and therefore no production whatsoe=
ver.
>>=20
>>> Unchecked inflation of money supply through fractional reserve is creati=
ng a mess in the world we live in. Bitcoin could overcome this mess implemen=
ting this proposal!
>>=20
>> You seem to be conflating state banking with the effects of investing. Ta=
xpayer support for bank investment creates both a moral hazard (and the resu=
lting misallocation of capital to state-favored projects, creating the famed=
 economic =E2=80=9Cbusiness cycle=E2=80=9D) and is a manifestation of persis=
tent monetary inflation (ie seigniorage is a source taxation. Investment imp=
lies credit expansion, and the level of this expansion is controlled by time=
 preference alone.
>>=20
>>> I stop here with finance speak as the purpose of this mail is not to div=
e into finance, but to show how loans with full reserve check could be imple=
mented in Bitcoin.
>>>=20
>>> 1. Receiving the loan is a payment from Bob to Alice, but we need a rest=
riction how Alice can use the funds, so Bob can get them back unconditionall=
y at maturity, so lending is riskless to him.
>>> 2. Bob wants to receive interest, since he gives up his control of the c=
oins until maturity, he can not use them elsewhere until then. That interest=
 could be paid in advance, this can be solved with Bitcoin as is.
>>=20
>> Interest cannot be paid in advance. This implies nothing more than a smal=
ler amount of principle.
>>=20
>>> How do we allow Alice to use the coins, that is: split/merge and transfe=
r them to others, but still ensure Bob can claim them back at maturity?
>>>=20
>>> We ensure that Alice can only send the coins to outputs that inherit a t=
aproot path of validation (using http://bitcoin.sipa.be/miniscript/): 'and(t=
ime(100),pk(C))' where C is Bob=E2=80=99s key and 100 is maturity
>>>=20
>>> This requires a generalization of the Bitcoin Covenants Idea[1] such tha=
t it nicely fits with taproot as follows:
>>>=20
>>> 1. A covenant in the form of '_ covenant C=E2=80=99 on output means that=
 it can be spent to an output that maches the covenant pattern with placehol=
der _  and the output(s) will be assigned 'covenant C'.
>>> 2. A covenant that mandates an output script with alternate validation p=
aths can also assign alternate covernants to be inherited by the output(s) d=
epending on which path was used to spend the input eg. 'covenant or(c covena=
nt C, d covernant D)=E2=80=99
>>> 3. The resulting covenant of outputs should be reduced following boolean=
 algebra, e.g. or(b,or(b,a)) to or(b, a)
>>> 4. express transitivity with 'covenant transitive=E2=80=99 which means t=
he output will have the same covenant as the input
>>> 5. allow to omit covenant on the output with 'covenant drop'
>>>=20
>>> The covenant Bob would assign to the loan output sent to Alice is: 'cove=
nant or(and(time(100),pk(Bob)) covenant drop, _ covenant transitive)' which m=
eans:
>>> - Alice can send to an output script where she is free to chose the embe=
dded script at the placeholder _ and that output will again have the same co=
venant as the input.
>>> - After maturity Bob can claim any coin that is transitively rooted in t=
he loan (more on this later) and the covenant will no longer be assigned to h=
is new output(s).
>>>=20
>>> Assuming Alice wants to send some of the borrowed coins to Charlie:
>>>=20
>>> for shorter notation lets use b=3D'and(time(100),pk(Bob)) covenant drop=E2=
=80=99 for the script that gives Bob control after maturity.
>>>=20
>>> Alice can not send to pk(Charlie), but she can send to or(b, pk(Charlie)=
 covenant transitive)
>>> Sending to pk(Charlie) would be sending cash, sending to or(b, pk(Charli=
e) covenant transitive) is a promissory note issued by Alice to Charlie, her=
e is why:
>>>=20
>>> If Charlie accepts an or(b, pk(Charlie) covenant transitive) output then=
 he trusts, that Alice will offer a regular payment in exchange for it befor=
e maturity, since that output is worthless to Charlie after maturity as Bob c=
an just take it.
>>>=20
>>> It seems at the first sight that there is no value in these outputs for C=
harlie, since he still has to ensure Alice replaces them before maturity.
>>>=20
>>> The value of these outputs to Charlie is the proof that he has exclusive=
 control of the coins until maturity.
>>=20
>> At a minimum, money that predictably depreciates (to zero in this case) m=
ust be discounted accordingly. How much is money worth today that is worth z=
ero tomorrow? This can be observed with both inflation and demurrage money. T=
his also implies that each encumbered coin is not fungible with any other of=
 a distinct discount schedule.
>>=20
>> What is the economic consequence of lending discounted money? Lower inter=
est rates. How much lower? The rate of depreciation. This can also be observ=
ed with inflation and demurrage, but observation isn=E2=80=99t required. Thi=
s is a necessary outcome.
>>=20
>> So when one lends 1 demurrage coin for a term one cannot earn interest on=
 1 coin, one is earning interest on a fraction of a coin. That fraction crea=
tes credit expansion and reduces return in direct proportion to the risk tha=
t has been offset. In other words, the risk cost has been converted to oppor=
tunity cost. The discounted fraction earns no interest.
>>=20
>> So credit expansion and risk remain, in the same proportions as without s=
uch a system. However lack of fungibility introduces an additional overhead c=
ost.
>>=20
>> e
>>=20
>>> Alice can not issue promissory notes in excess of own capital or capital=
 that she was able to borrow. No coin inflation or fractional reserve here, w=
hich also reduces the credit risk Charlie takes.
>>>=20
>>> Due to the transitive covenant Charlie could pass on the coins to an oth=
er temporary owner until maturity when Bob would re-collect them uncondition=
ally.
>>>=20
>>> Should Charlie no longer be comfortable with Alice=E2=80=99s promise or n=
eed final coins (cash) immediatelly, then he could turn to Dan and do a re-p=
urchase (repo) agreement with him.
>>>=20
>>> Charlie would receive final coins from Dan in exchange for the temporari=
ly controled coins and Charlie's promise to replace them with final coins be=
fore maturity.
>>> Dan would thereby charge high interest through a discount since as he ha=
s to bear the credit risk of Charlie. This is not a riskless but a plain zer=
o bond.
>>>=20
>>> Why would Dan want to take temporary control of the coins at all? Again,=
 to ensure Charlie is not doing yet another repo with Frank on the same coin=
s, the sum of Charlie's repo deals are not in excess of his claims against o=
thers.
>>> This again avoids lending in excess of coin supply and reduces the credi=
t risk Dan takes.
>>>=20
>>> Here are the sketches for the transacions for above alternate actions:
>>>=20
>>> lets use shortcut c for 'or(and(time(100),pk(Bob)) covenant drop, _ cove=
nant transitive)=E2=80=99
>>>=20
>>> the transactions offer a fee of 0.0001
>>>=20
>>> Bob gives a riskless credit to Alice:
>>>=20
>>> Input            Output
>>> 1 pk(Bob)        1 or(b,pk(Alice) covenant c)
>>> 0.1 pk(Alice)        0.9999 pk(Bob)
>>>=20
>>> Alice could send a 0.5 promissory note to Charlie:
>>>=20
>>> Input                    Output
>>> 1 or(pk(Alice) covenant c)        0.5 or(b,pk(Charlie) covenant c)
>>> 1 pk(Alice)                0.5 or(b,pk(Alice) covenant c)
>>>                   0.9999 pk(Alice)
>>>=20
>>> Alice could make good of the note before maturity, pay some interest and=
 get back temporary control of the coins with:
>>> Input                        Output
>>> 0.5 or(b,pk(Charlie) covenant c)        0.5 or(b,pk(Alice) covenant c)
>>> 0.5101 pk(Alice)                0.51 pk(Charlie)
>>>=20
>>> alternatively Charlie borrows from Dan at high interest:
>>>=20
>>> Input                        Output
>>> 0.5 or(b,pk(Charlie) covenant c)        0.5 or(b,pk(Dan) covenant c)
>>> 0.3001 pk(Dan)                0.3 pk(Charlie)
>>>=20
>>> and Charlie re-purchases the temporary coins before maturity, making goo=
d of the repo with Dan:
>>>=20
>>> Input                            Output
>>> 0.5 or(b,pk(Dan) covenant c)            0.5 or(b,pk(Charlie) covenant c)=

>>> 0.5001 pk(Charlie)                    0.5 pk(Dan)
>>>=20
>>> We need to define further transaction level validations for transactions=
 spending inputs with covenants as follows:
>>>=20
>>> 1. If there are inputs without covenant before the input with covenant t=
han inputs without covenant must be spent exactly with outputs preceeding th=
e outputs with covenants.
>>> 2. A transaction can have inputs with different covenants, their allocat=
ion to outputs should follow input order.
>>> 3. For output(s) that share input(s) with covenant, the sum of covenant o=
utputs must exactly add up to the input(s). This allows merging and splittin=
g them.
>>>=20
>>> Bob would re-collect his coins at maturity unconditionally. Who followed=
 through promises or defaulted down the transitive chain is irrelevant to hi=
m.
>>> Remark: we might also need a covenant attribute defining the minimum siz=
e of output, so Bob is not forced to collect dust, which would be expensive o=
r even impossible. I am not yet happy with this solution, looking for better=
.
>>>=20
>>> I am very excited about the possibilities this proposal would unlock and=
 ask you verify usefulness of this scheme and join working out the details a=
nd how covenants would be integrated with taproot.
>>>=20
>>> Tamas Blummer
>>>=20
>>> [1] Malte Moser, Ittay Eyal, and Emin Gun Sirer. Bitcoin Covenants. URL:=
 http://fc16.ifca.ai/bitcoin/papers/MES16.pdf
>>> _______________________________________________
>>> bitcoin-dev mailing list
>>> bitcoin-dev@lists.linuxfoundation.org
>>> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev
>=20

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<html><head><meta http-equiv=3D"content-type" content=3D"text/html; charset=3D=
utf-8"></head><body dir=3D"auto"><div dir=3D"ltr"><span></span></div><div di=
r=3D"ltr"><meta http-equiv=3D"content-type" content=3D"text/html; charset=3D=
utf-8"><div dir=3D"ltr"><span></span></div><div dir=3D"ltr"><meta http-equiv=
=3D"content-type" content=3D"text/html; charset=3Dutf-8"><div dir=3D"ltr"><s=
pan></span></div><div dir=3D"ltr"><div dir=3D"ltr"></div><div dir=3D"ltr"><b=
r></div><div dir=3D"ltr">On Jun 28, 2019, at 12:21, Tamas Blummer &lt;<a hre=
f=3D"mailto:tamas.blummer@gmail.com">tamas.blummer@gmail.com</a>&gt; wrote:<=
br><br></div><blockquote type=3D"cite"><div dir=3D"ltr"><meta http-equiv=3D"=
Content-Type" content=3D"text/html charset=3Dutf-8"><div class=3D"">Hi Eric,=
</div><div class=3D""><br class=3D""></div><div class=3D"">Thank you for you=
r questions as they show what concepts need further explanation, so you unde=
rstand the potential of this proposal and how it is helpful to the ecosystem=
.</div><div class=3D""><br class=3D""></div><div class=3D"">Riskless zero bo=
nd is in fact the most basic concept of financial engineering. Yes, there ar=
e engineers of finance, those who create and price financial derivatives (e.=
g. options, swaps) and structure products such as e.g. ABS, CDO etc.</div><d=
iv class=3D"">I used to be one of them.</div><div class=3D""><br class=3D"">=
</div><div class=3D"">A zero bond formalizes the observation that 1 unit of c=
urrency in the future has different value than 1 unit available now. It is c=
alled riskless if it is certain to receive the payment in the future.</div><=
div class=3D"">If we put this difference of vaue in relation to the amount t=
hen we get the =E2=80=9Crisk freee rate of return=E2=80=9D, that you heard o=
f.</div><div class=3D""><br class=3D""></div><div class=3D"">E.g if one is w=
illing to exchange 1 BTC unconditionally available now for 1.1 BTC certainly=
 available in a year but not earlier, then the implied =E2=80=9Crisk free ra=
te of return=E2=80=9D is apparently 10% pa. for Bitcoins.</div></div></block=
quote><div><br></div><div>As I implied, I am well aware of the concept of ri=
sk free rate of return, which is a hypothetical.</div><br><blockquote type=3D=
"cite"><div dir=3D"ltr"><div class=3D"">The transaction I construct in the f=
irst example achives exactly this, because:</div></div></blockquote><div><br=
></div><div>Which implies you have created an actual instance of this hereto=
fore purely hypothetical concept.</div><br><blockquote type=3D"cite"><div di=
r=3D"ltr"><div class=3D"">Bob forgoes his ability to use his unconditionally=
 available coins by giving them to Alice with a covenant that ensures that B=
ob will receive them back later.</div><div class=3D"">Bob does this because A=
lice pays for this in advance.&nbsp;</div><div class=3D""><br class=3D""></d=
iv><div class=3D"">Alice can further transfer the coins encumbered by the co=
venant, but they will unconditionally return to Bob in the future.&nbsp;</di=
v></div></blockquote><div><br></div><div>Why would Alice pay for this at all=
?</div><br><blockquote type=3D"cite"><div dir=3D"ltr"><div class=3D"">The ut=
ility of these encumbered coins is that they prove that the loan is fully co=
vered by reserves.</div></div></blockquote><div><br></div><div>What loan? Al=
ice has paid Bob for something of no possible utility to her, or anyone else=
.</div><div><br></div><div>Bitcoin is a money, not consumable in any way. It=
s utility arises strictly from the possibility of eventually being traded fo=
r something else. The only reason to accept it in trade is that expectation.=
 Removing that possibility, even transitively and over time, removes all uti=
lity immediately. In my previous comments I described a necessary discount t=
o NPV, but it=E2=80=99s safe to say that must be 100%.</div><div><br></div><=
blockquote type=3D"cite"><div dir=3D"ltr"><div class=3D"">How valuable this u=
tility is will be decided by the market</div></div></blockquote><div dir=3D"=
ltr"><br></div><div dir=3D"ltr">Value is of course subjective, and is determ=
ined by individual preferences. Yet what is the value one might place on som=
ething of no use? Economically speaking it must be zero, since value is a su=
bjective evaluation of utility (i.e. service to a person).</div><div dir=3D"=
ltr"><br></div><div dir=3D"ltr">Consider the case of the 1000 and 500 rupee d=
emonetization. Long lines of people formed at banks to convert to notes to o=
thers of equivalent denomination.</div><div dir=3D"ltr"><br></div><div dir=3D=
"ltr"><a href=3D"https://en.m.wikipedia.org/wiki/2016_Indian_banknote_demone=
tisation">https://en.m.wikipedia.org/wiki/2016_Indian_banknote_demonetisatio=
n</a></div><div dir=3D"ltr"><br></div><div dir=3D"ltr">Of course, upon annou=
ncement of the demonetization, existing 1000/500 rupee notes were discounted=
 for the cost/risk of accomplishing this conversion (several people are repo=
rted to have died in the effort). If there was no such conversion possible, m=
aking the notes worthless at the future date, the *immediate* effect would n=
ecessarily have been 100% discount.</div><div dir=3D"ltr"><br></div><div dir=
=3D"ltr"><span style=3D"background-color: rgba(255, 255, 255, 0);">This of c=
ourse sets aside any consumable value of the =E2=80=9Cpaper=E2=80=9D notes, s=
uch as burning for heat or trading as novelties (e.g. demonetized Zimbabwean=
 100T notes currently trading), as Bitcoin is not capable of being consumed.=
 It also sets aside the possibility that some people were unaware of the dem=
onetization.</span></div><div dir=3D"ltr"><br></div><div dir=3D"ltr">Who wou=
ld accept such a note today that was known to be worthless at a future date?=
 If they did, who would would accept it from them? It=E2=80=99s literally an=
 on-chain scamcoin, where the first sucker must find another, and he another=
, an so on, as soon as possible, before it expires, leaving the last sucker h=
olding the bag. Given an efficient market (i.e perfect knowledge of the scam=
), zero initial value is implied.</div><br><blockquote type=3D"cite"><div di=
r=3D"ltr"><div class=3D"">and that value will be interest received by those w=
ho temporarily give up control. I am guess the value will be low but positiv=
e.</div></div></blockquote><div><br></div><div>Giving up control of money fo=
r a period does not imply the money is useful to someone else. Bob might as w=
ell lock his coins in a time capsule, for which he has the only key, and ask=
 Alice to pay him for it.</div><br><blockquote type=3D"cite"><div dir=3D"ltr=
"><div class=3D"">Lending does not mandate fractional or full reserves.</div=
></div></blockquote><div><br></div><div>I didn=E2=80=99t say that it does. L=
ending implies no =E2=80=9Cmandate=E2=80=9D. But the nature of fractional re=
servation is inherent in every loan/investment.&nbsp;</div><div><br></div><b=
lockquote type=3D"cite"><div dir=3D"ltr"><div class=3D""> These are choices t=
he market or regulators enforce.</div></div></blockquote><div><br></div><div=
><span style=3D"background-color: rgba(255, 255, 255, 0);">Fractional reserv=
ation is not a consequence of statutory or market controls. The level of hoa=
rding vs. lending is a consequence of individual time preference.</span></di=
v><br><blockquote type=3D"cite"><div dir=3D"ltr"><div class=3D"">Full reserv=
e banking is not a fiction but is how things worked before introduction of g=
old receipts. A bank could only lend gold coins it possesed. Perils of fract=
ional reserve were felt repeatedly by the Bitcoin ecnomy e.g. in the collaps=
 of MtGox.</div></div></blockquote><div><br></div><div>I don=E2=80=99t belie=
ve I called full reserve a fiction. With full reserve there is no possible i=
nvestment, production or products. Unlikely, and disastrous for humanity, bu=
t not provably impossible.</div><div><br></div><div>A hazard of viewing econ=
omic concepts through a financial lens is that those higher order concepts b=
ecome obscured by a morass of economically-irrelevant regulation and impleme=
ntation details.</div><div><br></div><div>At this point we are going to end u=
p in a discussion on what fractional reserve actually is. I=E2=80=99d be hap=
py to have a discussion on the topic, but this list is clearly not a good fo=
rum for that.</div><div><br></div><div>Furthermore the question of whether o=
r not this proposal is relevant to fractional reserve is moot unless it can b=
e shown that the assumed utility actually exists. So I suggest we take this i=
nteresting but secondary question on fractional reserve somewhere else.</div=
><div><br></div><blockquote type=3D"cite"><div dir=3D"ltr"><div class=3D"">T=
he idea to return to full reserve banking is not unique to gold bugs or Bitc=
oin but recently a popular vote was initiated in Switzerland to force Swiss b=
anks to full reserves with respect to lending. This popular vote achived &nb=
sp;24% support [1] which is quite remarkable if considered that the topic is=
 not trivial as also our exchange shows.</div></div></blockquote><div><br></=
div><div>It shows the breadth of economic ignorance which is not surprising g=
iven its counterintuitive nature.</div><div><br></div><div>Best,</div><div>E=
ric</div><br><blockquote type=3D"cite"><div dir=3D"ltr"><div class=3D"">I pu=
blished today a writing in medium, that explains the concept of fractional v=
s. full reserve banking in conjunction with this proposal. Please read:&nbsp=
;<a href=3D"https://medium.com/@tamas.blummer/full-reserve-banking-with-bitc=
oin-462b21ae9479" class=3D"">https://medium.com/@tamas.blummer/full-reserve-=
banking-with-bitcoin-462b21ae9479</a></div><div class=3D""><br class=3D""></=
div><div class=3D"">I would welcome feedback on the generalized covenant con=
struct or its implementation, as I think it can open up much more uses than t=
he few examples I gave.</div><div class=3D""><br class=3D""></div><div class=
=3D"">Tamas Blummer</div><div class=3D""><br class=3D""></div><div class=3D"=
">[1] Vollgeld Initiative:&nbsp;<a href=3D"https://www.bfs.admin.ch/bfs/de/h=
ome/statistiken/politik/abstimmungen/jahr-2018/2018-06-10/vollgeld-initiativ=
e.html" class=3D"">https://www.bfs.admin.ch/bfs/de/home/statistiken/politik/=
abstimmungen/jahr-2018/2018-06-10/vollgeld-initiative.html</a></div><br clas=
s=3D""><div><blockquote type=3D"cite" class=3D""><div class=3D"">On Jun 28, 2=
019, at 19:25, Eric Voskuil &lt;<a href=3D"mailto:eric@voskuil.org" class=3D=
"">eric@voskuil.org</a>&gt; wrote:</div><br class=3D"Apple-interchange-newli=
ne"><div class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; f=
ont-style: normal; font-variant-caps: normal; font-weight: normal; letter-sp=
acing: normal; text-align: start; text-indent: 0px; text-transform: none; wh=
ite-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px; float:=
 none; display: inline !important;" class=3D"">Hi Tamas,</span><br style=3D"=
font-family: Helvetica; font-size: 12px; font-style: normal; font-variant-ca=
ps: normal; font-weight: normal; letter-spacing: normal; text-align: start; t=
ext-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0p=
x; -webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: Hel=
vetica; font-size: 12px; font-style: normal; font-variant-caps: normal; font=
-weight: normal; letter-spacing: normal; text-align: start; text-indent: 0px=
; text-transform: none; white-space: normal; word-spacing: 0px; -webkit-text=
-stroke-width: 0px;" class=3D""><span style=3D"font-family: Helvetica; font-=
size: 12px; font-style: normal; font-variant-caps: normal; font-weight: norm=
al; letter-spacing: normal; text-align: start; text-indent: 0px; text-transf=
orm: none; white-space: normal; word-spacing: 0px; -webkit-text-stroke-width=
: 0px; float: none; display: inline !important;" class=3D"">There are a numb=
er of economic assumptions contained herein. While I understand you would li=
ke to focus on implementation, the worst bugs are requirements bugs. IMO the=
se should be addressed first. I=E2=80=99ve addressed some possible issues in=
line.</span><br style=3D"font-family: Helvetica; font-size: 12px; font-style=
: normal; font-variant-caps: normal; font-weight: normal; letter-spacing: no=
rmal; text-align: start; text-indent: 0px; text-transform: none; white-space=
: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br=
 style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; font-=
variant-caps: normal; font-weight: normal; letter-spacing: normal; text-alig=
n: start; text-indent: 0px; text-transform: none; white-space: normal; word-=
spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><blockquote type=3D=
"cite" style=3D"font-family: Helvetica; font-size: 12px; font-style: normal;=
 font-variant-caps: normal; font-weight: normal; letter-spacing: normal; orp=
hans: auto; text-align: start; text-indent: 0px; text-transform: none; white=
-space: normal; widows: auto; word-spacing: 0px; -webkit-text-size-adjust: a=
uto; -webkit-text-stroke-width: 0px;" class=3D"">On Jun 28, 2019, at 01:27, T=
amas Blummer via bitcoin-dev &lt;<a href=3D"mailto:bitcoin-dev@lists.linuxfo=
undation.org" class=3D"">bitcoin-dev@lists.linuxfoundation.org</a>&gt; wrote=
:<br class=3D""><br class=3D"">I start with a formalisation of loans as comm=
on in finance:<br class=3D""><br class=3D"">A zero bond is a contract betwee=
n two parties Alice and Bob whereby Alice receives an amount less than P and=
 has to pay back P at a later time point called maturity.<br class=3D"">The d=
ifference between the amount received and P is the interest implied by the c=
ontract. E.g. receiving 1 Bitcoin (&lt;P) and agree to pay back 1.1 (=3DP) i=
n a year is the same as getting a loan with 10% p.a. interest.<br class=3D""=
><br class=3D"">The inherent risk in the contract is that Alice may not hono=
r the agreement or be bankrupt by then.<br class=3D""><br class=3D"">If we c=
ould programmatically guarantee that Alice honors the contract then we would=
 be able to create a riskless zero bond, the fundation of financial engineer=
ing.<br class=3D""></blockquote><br style=3D"font-family: Helvetica; font-si=
ze: 12px; font-style: normal; font-variant-caps: normal; font-weight: normal=
; letter-spacing: normal; text-align: start; text-indent: 0px; text-transfor=
m: none; white-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0=
px;" class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; font=
-style: normal; font-variant-caps: normal; font-weight: normal; letter-spaci=
ng: normal; text-align: start; text-indent: 0px; text-transform: none; white=
-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px; float: no=
ne; display: inline !important;" class=3D"">I=E2=80=99m not aware of the bas=
is of this statement. While people use the term =E2=80=9Crisk free rate of r=
eturn=E2=80=9D there has never actually been such a thing. It=E2=80=99s not c=
lear to me how a unicorn has been the foundation of =E2=80=9Cfinancial engin=
eering=E2=80=9D, but I=E2=80=99m not also clear and what is intended by =E2=80=
=9Cengineering=E2=80=9D in this sense. Generally engineering is the implemen=
tation of higher level concepts. It is those concepts that constitute requir=
ements here.</span><br style=3D"font-family: Helvetica; font-size: 12px; fon=
t-style: normal; font-variant-caps: normal; font-weight: normal; letter-spac=
ing: normal; text-align: start; text-indent: 0px; text-transform: none; whit=
e-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D=
""><br style=3D"font-family: Helvetica; font-size: 12px; font-style: normal;=
 font-variant-caps: normal; font-weight: normal; letter-spacing: normal; tex=
t-align: start; text-indent: 0px; text-transform: none; white-space: normal;=
 word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><span style=3D=
"font-family: Helvetica; font-size: 12px; font-style: normal; font-variant-c=
aps: normal; font-weight: normal; letter-spacing: normal; text-align: start;=
 text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0=
px; -webkit-text-stroke-width: 0px; float: none; display: inline !important;=
" class=3D"">At a minimum, interest cannot be guaranteed by this proposal, w=
hich implies that at best it guarantees, setting aside changes in purchasing=
 power, a return of principle minus economic interest on that principle (ie o=
pportunity cost). Given that purchasing power changes over time, risk increa=
ses with the term of the loan. As such this is not riskless - both volatilit=
y and opportunity cost remain as risks.</span><br style=3D"font-family: Helv=
etica; font-size: 12px; font-style: normal; font-variant-caps: normal; font-=
weight: normal; letter-spacing: normal; text-align: start; text-indent: 0px;=
 text-transform: none; white-space: normal; word-spacing: 0px; -webkit-text-=
stroke-width: 0px;" class=3D""><br style=3D"font-family: Helvetica; font-siz=
e: 12px; font-style: normal; font-variant-caps: normal; font-weight: normal;=
 letter-spacing: normal; text-align: start; text-indent: 0px; text-transform=
: none; white-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0=
px;" class=3D""><blockquote type=3D"cite" style=3D"font-family: Helvetica; f=
ont-size: 12px; font-style: normal; font-variant-caps: normal; font-weight: n=
ormal; letter-spacing: normal; orphans: auto; text-align: start; text-indent=
: 0px; text-transform: none; white-space: normal; widows: auto; word-spacing=
: 0px; -webkit-text-size-adjust: auto; -webkit-text-stroke-width: 0px;" clas=
s=3D"">A systemic problem with loans is that the lender might operate on fra=
ctional reserve, that is lending more than his capital.<br class=3D""></bloc=
kquote><br style=3D"font-family: Helvetica; font-size: 12px; font-style: nor=
mal; font-variant-caps: normal; font-weight: normal; letter-spacing: normal;=
 text-align: start; text-indent: 0px; text-transform: none; white-space: nor=
mal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><span st=
yle=3D"font-family: Helvetica; font-size: 12px; font-style: normal; font-var=
iant-caps: normal; font-weight: normal; letter-spacing: normal; text-align: s=
tart; text-indent: 0px; text-transform: none; white-space: normal; word-spac=
ing: 0px; -webkit-text-stroke-width: 0px; float: none; display: inline !impo=
rtant;" class=3D"">This is not a systemic problem, this is the very nature o=
f lending. Fractional reserve is simply a state banking term used to describ=
e the fact that people invest (lend) a fraction of their savings and hoard t=
he rest. It matters not that banks or individuals do this, credit expansion i=
s inherent in economy. Without it there is no investment and therefore no pr=
oduction whatsoever.</span><br style=3D"font-family: Helvetica; font-size: 1=
2px; font-style: normal; font-variant-caps: normal; font-weight: normal; let=
ter-spacing: normal; text-align: start; text-indent: 0px; text-transform: no=
ne; white-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;"=
 class=3D""><br style=3D"font-family: Helvetica; font-size: 12px; font-style=
: normal; font-variant-caps: normal; font-weight: normal; letter-spacing: no=
rmal; text-align: start; text-indent: 0px; text-transform: none; white-space=
: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><bl=
ockquote type=3D"cite" style=3D"font-family: Helvetica; font-size: 12px; fon=
t-style: normal; font-variant-caps: normal; font-weight: normal; letter-spac=
ing: normal; orphans: auto; text-align: start; text-indent: 0px; text-transf=
orm: none; white-space: normal; widows: auto; word-spacing: 0px; -webkit-tex=
t-size-adjust: auto; -webkit-text-stroke-width: 0px;" class=3D"">Unchecked i=
nflation of money supply through fractional reserve is creating a mess in th=
e world we live in. Bitcoin could overcome this mess implementing this propo=
sal!<br class=3D""></blockquote><br style=3D"font-family: Helvetica; font-si=
ze: 12px; font-style: normal; font-variant-caps: normal; font-weight: normal=
; letter-spacing: normal; text-align: start; text-indent: 0px; text-transfor=
m: none; white-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0=
px;" class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; font=
-style: normal; font-variant-caps: normal; font-weight: normal; letter-spaci=
ng: normal; text-align: start; text-indent: 0px; text-transform: none; white=
-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px; float: no=
ne; display: inline !important;" class=3D"">You seem to be conflating state b=
anking with the effects of investing. Taxpayer support for bank investment c=
reates both a moral hazard (and the resulting misallocation of capital to st=
ate-favored projects, creating the famed economic =E2=80=9Cbusiness cycle=E2=
=80=9D) and is a manifestation of persistent monetary inflation (ie seignior=
age is a source taxation. Investment implies credit expansion, and the level=
 of this expansion is controlled by time preference alone.</span><br style=3D=
"font-family: Helvetica; font-size: 12px; font-style: normal; font-variant-c=
aps: normal; font-weight: normal; letter-spacing: normal; text-align: start;=
 text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0=
px; -webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: He=
lvetica; font-size: 12px; font-style: normal; font-variant-caps: normal; fon=
t-weight: normal; letter-spacing: normal; text-align: start; text-indent: 0p=
x; text-transform: none; white-space: normal; word-spacing: 0px; -webkit-tex=
t-stroke-width: 0px;" class=3D""><blockquote type=3D"cite" style=3D"font-fam=
ily: Helvetica; font-size: 12px; font-style: normal; font-variant-caps: norm=
al; font-weight: normal; letter-spacing: normal; orphans: auto; text-align: s=
tart; text-indent: 0px; text-transform: none; white-space: normal; widows: a=
uto; word-spacing: 0px; -webkit-text-size-adjust: auto; -webkit-text-stroke-=
width: 0px;" class=3D"">I stop here with finance speak as the purpose of thi=
s mail is not to dive into finance, but to show how loans with full reserve c=
heck could be implemented in Bitcoin.<br class=3D""><br class=3D"">1. Receiv=
ing the loan is a payment from Bob to Alice, but we need a restriction how A=
lice can use the funds, so Bob can get them back unconditionally at maturity=
, so lending is riskless to him.<br class=3D"">2. Bob wants to receive inter=
est, since he gives up his control of the coins until maturity, he can not u=
se them elsewhere until then. That interest could be paid in advance, this c=
an be solved with Bitcoin as is.<br class=3D""></blockquote><br style=3D"fon=
t-family: Helvetica; font-size: 12px; font-style: normal; font-variant-caps:=
 normal; font-weight: normal; letter-spacing: normal; text-align: start; tex=
t-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;=
 -webkit-text-stroke-width: 0px;" class=3D""><span style=3D"font-family: Hel=
vetica; font-size: 12px; font-style: normal; font-variant-caps: normal; font=
-weight: normal; letter-spacing: normal; text-align: start; text-indent: 0px=
; text-transform: none; white-space: normal; word-spacing: 0px; -webkit-text=
-stroke-width: 0px; float: none; display: inline !important;" class=3D"">Int=
erest cannot be paid in advance. This implies nothing more than a smaller am=
ount of principle.</span><br style=3D"font-family: Helvetica; font-size: 12p=
x; font-style: normal; font-variant-caps: normal; font-weight: normal; lette=
r-spacing: normal; text-align: start; text-indent: 0px; text-transform: none=
; white-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" c=
lass=3D""><br style=3D"font-family: Helvetica; font-size: 12px; font-style: n=
ormal; font-variant-caps: normal; font-weight: normal; letter-spacing: norma=
l; text-align: start; text-indent: 0px; text-transform: none; white-space: n=
ormal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><block=
quote type=3D"cite" style=3D"font-family: Helvetica; font-size: 12px; font-s=
tyle: normal; font-variant-caps: normal; font-weight: normal; letter-spacing=
: normal; orphans: auto; text-align: start; text-indent: 0px; text-transform=
: none; white-space: normal; widows: auto; word-spacing: 0px; -webkit-text-s=
ize-adjust: auto; -webkit-text-stroke-width: 0px;" class=3D"">How do we allo=
w Alice to use the coins, that is: split/merge and transfer them to others, b=
ut still ensure Bob can claim them back at maturity?<br class=3D""><br class=
=3D"">We ensure that Alice can only send the coins to outputs that inherit a=
 taproot path of validation (using <a href=3D"http://bitcoin.sipa.be/miniscr=
ipt/" class=3D"">http://bitcoin.sipa.be/miniscript/</a>): 'and(time(100),pk(=
C))' where C is Bob=E2=80=99s key and 100 is maturity<br class=3D""><br clas=
s=3D"">This requires a generalization of the Bitcoin Covenants Idea[1] such t=
hat it nicely fits with taproot as follows:<br class=3D""><br class=3D"">1. A=
 covenant in the form of '_ covenant C=E2=80=99 on output means that it can b=
e spent to an output that maches the covenant pattern with placeholder _ &nb=
sp;and the output(s) will be assigned 'covenant C'.<br class=3D"">2. A coven=
ant that mandates an output script with alternate validation paths can also a=
ssign alternate covernants to be inherited by the output(s) depending on whi=
ch path was used to spend the input eg. 'covenant or(c covenant C, d coverna=
nt D)=E2=80=99<br class=3D"">3. The resulting covenant of outputs should be r=
educed following boolean algebra, e.g. or(b,or(b,a)) to or(b, a)<br class=3D=
"">4. express transitivity with 'covenant transitive=E2=80=99 which means th=
e output will have the same covenant as the input<br class=3D"">5. allow to o=
mit covenant on the output with 'covenant drop'<br class=3D""><br class=3D""=
>The covenant Bob would assign to the loan output sent to Alice is: 'covenan=
t or(and(time(100),pk(Bob)) covenant drop, _ covenant transitive)' which mea=
ns:<br class=3D"">- Alice can send to an output script where she is free to c=
hose the embedded script at the placeholder _ and that output will again hav=
e the same covenant as the input.<br class=3D"">- After maturity Bob can cla=
im any coin that is transitively rooted in the loan (more on this later) and=
 the covenant will no longer be assigned to his new output(s).<br class=3D""=
><br class=3D"">Assuming Alice wants to send some of the borrowed coins to C=
harlie:<br class=3D""><br class=3D"">for shorter notation lets use b=3D'and(=
time(100),pk(Bob)) covenant drop=E2=80=99 for the script that gives Bob cont=
rol after maturity.<br class=3D""><br class=3D"">Alice can not send to pk(Ch=
arlie), but she can send to or(b, pk(Charlie) covenant transitive)<br class=3D=
"">Sending to pk(Charlie) would be sending cash, sending to or(b, pk(Charlie=
) covenant transitive) is a promissory note issued by Alice to Charlie, here=
 is why:<br class=3D""><br class=3D"">If Charlie accepts an or(b, pk(Charlie=
) covenant transitive) output then he trusts, that Alice will offer a regula=
r payment in exchange for it before maturity, since that output is worthless=
 to Charlie after maturity as Bob can just take it.<br class=3D""><br class=3D=
"">It seems at the first sight that there is no value in these outputs for C=
harlie, since he still has to ensure Alice replaces them before maturity.<br=
 class=3D""><br class=3D"">The value of these outputs to Charlie is the proo=
f that he has exclusive control of the coins until maturity.<br class=3D""><=
/blockquote><br style=3D"font-family: Helvetica; font-size: 12px; font-style=
: normal; font-variant-caps: normal; font-weight: normal; letter-spacing: no=
rmal; text-align: start; text-indent: 0px; text-transform: none; white-space=
: normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><sp=
an style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; fon=
t-variant-caps: normal; font-weight: normal; letter-spacing: normal; text-al=
ign: start; text-indent: 0px; text-transform: none; white-space: normal; wor=
d-spacing: 0px; -webkit-text-stroke-width: 0px; float: none; display: inline=
 !important;" class=3D"">At a minimum, money that predictably depreciates (t=
o zero in this case) must be discounted accordingly. How much is money worth=
 today that is worth zero tomorrow? This can be observed with both inflation=
 and demurrage money. This also implies that each encumbered coin is not fun=
gible with any other of a distinct discount schedule.</span><br style=3D"fon=
t-family: Helvetica; font-size: 12px; font-style: normal; font-variant-caps:=
 normal; font-weight: normal; letter-spacing: normal; text-align: start; tex=
t-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;=
 -webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: Helve=
tica; font-size: 12px; font-style: normal; font-variant-caps: normal; font-w=
eight: normal; letter-spacing: normal; text-align: start; text-indent: 0px; t=
ext-transform: none; white-space: normal; word-spacing: 0px; -webkit-text-st=
roke-width: 0px;" class=3D""><span style=3D"font-family: Helvetica; font-siz=
e: 12px; font-style: normal; font-variant-caps: normal; font-weight: normal;=
 letter-spacing: normal; text-align: start; text-indent: 0px; text-transform=
: none; white-space: normal; word-spacing: 0px; -webkit-text-stroke-width: 0=
px; float: none; display: inline !important;" class=3D"">What is the economi=
c consequence of lending discounted money? Lower interest rates. How much lo=
wer? The rate of depreciation. This can also be observed with inflation and d=
emurrage, but observation isn=E2=80=99t required. This is a necessary outcom=
e.</span><br style=3D"font-family: Helvetica; font-size: 12px; font-style: n=
ormal; font-variant-caps: normal; font-weight: normal; letter-spacing: norma=
l; text-align: start; text-indent: 0px; text-transform: none; white-space: n=
ormal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br st=
yle=3D"font-family: Helvetica; font-size: 12px; font-style: normal; font-var=
iant-caps: normal; font-weight: normal; letter-spacing: normal; text-align: s=
tart; text-indent: 0px; text-transform: none; white-space: normal; word-spac=
ing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><span style=3D"font-fa=
mily: Helvetica; font-size: 12px; font-style: normal; font-variant-caps: nor=
mal; font-weight: normal; letter-spacing: normal; text-align: start; text-in=
dent: 0px; text-transform: none; white-space: normal; word-spacing: 0px; -we=
bkit-text-stroke-width: 0px; float: none; display: inline !important;" class=
=3D"">So when one lends 1 demurrage coin for a term one cannot earn interest=
 on 1 coin, one is earning interest on a fraction of a coin. That fraction c=
reates credit expansion and reduces return in direct proportion to the risk t=
hat has been offset. In other words, the risk cost has been converted to opp=
ortunity cost. The discounted fraction earns no interest.</span><br style=3D=
"font-family: Helvetica; font-size: 12px; font-style: normal; font-variant-c=
aps: normal; font-weight: normal; letter-spacing: normal; text-align: start;=
 text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0=
px; -webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: He=
lvetica; font-size: 12px; font-style: normal; font-variant-caps: normal; fon=
t-weight: normal; letter-spacing: normal; text-align: start; text-indent: 0p=
x; text-transform: none; white-space: normal; word-spacing: 0px; -webkit-tex=
t-stroke-width: 0px;" class=3D""><span style=3D"font-family: Helvetica; font=
-size: 12px; font-style: normal; font-variant-caps: normal; font-weight: nor=
mal; letter-spacing: normal; text-align: start; text-indent: 0px; text-trans=
form: none; white-space: normal; word-spacing: 0px; -webkit-text-stroke-widt=
h: 0px; float: none; display: inline !important;" class=3D"">So credit expan=
sion and risk remain, in the same proportions as without such a system. Howe=
ver lack of fungibility introduces an additional overhead cost.</span><br st=
yle=3D"font-family: Helvetica; font-size: 12px; font-style: normal; font-var=
iant-caps: normal; font-weight: normal; letter-spacing: normal; text-align: s=
tart; text-indent: 0px; text-transform: none; white-space: normal; word-spac=
ing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-fami=
ly: Helvetica; font-size: 12px; font-style: normal; font-variant-caps: norma=
l; font-weight: normal; letter-spacing: normal; text-align: start; text-inde=
nt: 0px; text-transform: none; white-space: normal; word-spacing: 0px; -webk=
it-text-stroke-width: 0px;" class=3D""><span style=3D"font-family: Helvetica=
; font-size: 12px; font-style: normal; font-variant-caps: normal; font-weigh=
t: normal; letter-spacing: normal; text-align: start; text-indent: 0px; text=
-transform: none; white-space: normal; word-spacing: 0px; -webkit-text-strok=
e-width: 0px; float: none; display: inline !important;" class=3D"">e</span><=
br style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; fon=
t-variant-caps: normal; font-weight: normal; letter-spacing: normal; text-al=
ign: start; text-indent: 0px; text-transform: none; white-space: normal; wor=
d-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br style=3D"fon=
t-family: Helvetica; font-size: 12px; font-style: normal; font-variant-caps:=
 normal; font-weight: normal; letter-spacing: normal; text-align: start; tex=
t-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;=
 -webkit-text-stroke-width: 0px;" class=3D""><blockquote type=3D"cite" style=
=3D"font-family: Helvetica; font-size: 12px; font-style: normal; font-varian=
t-caps: normal; font-weight: normal; letter-spacing: normal; orphans: auto; t=
ext-align: start; text-indent: 0px; text-transform: none; white-space: norma=
l; widows: auto; word-spacing: 0px; -webkit-text-size-adjust: auto; -webkit-=
text-stroke-width: 0px;" class=3D"">Alice can not issue promissory notes in e=
xcess of own capital or capital that she was able to borrow. No coin inflati=
on or fractional reserve here, which also reduces the credit risk Charlie ta=
kes.<br class=3D""><br class=3D"">Due to the transitive covenant Charlie cou=
ld pass on the coins to an other temporary owner until maturity when Bob wou=
ld re-collect them unconditionally.<br class=3D""><br class=3D"">Should Char=
lie no longer be comfortable with Alice=E2=80=99s promise or need final coin=
s (cash) immediatelly, then he could turn to Dan and do a re-purchase (repo)=
 agreement with him.<br class=3D""><br class=3D"">Charlie would receive fina=
l coins from Dan in exchange for the temporarily controled coins and Charlie=
's promise to replace them with final coins before maturity.<br class=3D"">D=
an would thereby charge high interest through a discount since as he has to b=
ear the credit risk of Charlie. This is not a riskless but a plain zero bond=
.<br class=3D""><br class=3D"">Why would Dan want to take temporary control o=
f the coins at all? Again, to ensure Charlie is not doing yet another repo w=
ith Frank on the same coins, the sum of Charlie's repo deals are not in exce=
ss of his claims against others.<br class=3D"">This again avoids lending in e=
xcess of coin supply and reduces the credit risk Dan takes.<br class=3D""><b=
r class=3D"">Here are the sketches for the transacions for above alternate a=
ctions:<br class=3D""><br class=3D"">lets use shortcut c for 'or(and(time(10=
0),pk(Bob)) covenant drop, _ covenant transitive)=E2=80=99<br class=3D""><br=
 class=3D"">the transactions offer a fee of 0.0001<br class=3D""><br class=3D=
"">Bob gives a riskless credit to Alice:<br class=3D""><br class=3D"">Input &=
nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Output<br c=
lass=3D"">1 pk(Bob) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1 or(b,pk(Alic=
e) covenant c)<br class=3D"">0.1 pk(Alice) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nb=
sp;&nbsp;0.9999 pk(Bob)<br class=3D""><br class=3D"">Alice could send a 0.5 p=
romissory note to Charlie:<br class=3D""><br class=3D"">Input &nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;=
&nbsp;&nbsp;&nbsp;&nbsp;Output<br class=3D"">1 or(pk(Alice) covenant c) &nbs=
p;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 or(b,pk(Charlie) covenant c)<br cl=
ass=3D"">1 pk(Alice) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&=
nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 or(b,pk(Alice) covenant c)<br class=3D=
"">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&=
nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.9999 pk(Alice)<br class=3D""><br class=3D=
"">Alice could make good of the note before maturity, pay some interest and g=
et back temporary control of the coins with:<br class=3D"">Input &nbsp;&nbsp=
;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nb=
sp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Output<br class=3D"">0.5 o=
r(b,pk(Charlie) covenant c) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 or=
(b,pk(Alice) covenant c)<br class=3D"">0.5101 pk(Alice) &nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.51 p=
k(Charlie)<br class=3D""><br class=3D"">alternatively Charlie borrows from D=
an at high interest:<br class=3D""><br class=3D"">Input &nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;=
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Output<br class=3D"">0.5 or(b,pk(C=
harlie) covenant c) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 or(b,pk(Da=
n) covenant c)<br class=3D"">0.3001 pk(Dan) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.3 pk(Charlie)<br=
 class=3D""><br class=3D"">and Charlie re-purchases the temporary coins befo=
re maturity, making good of the repo with Dan:<br class=3D""><br class=3D"">=
Input &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbs=
p;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;Output<br class=3D"">0.5 or(b,pk(Dan) covenant c) &nbsp;&nbs=
p;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 or(b,pk(Charlie)=
 covenant c)<br class=3D"">0.5001 pk(Charlie) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;=
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbs=
p;&nbsp;0.5 pk(Dan)<br class=3D""><br class=3D"">We need to define further t=
ransaction level validations for transactions spending inputs with covenants=
 as follows:<br class=3D""><br class=3D"">1. If there are inputs without cov=
enant before the input with covenant than inputs without covenant must be sp=
ent exactly with outputs preceeding the outputs with covenants.<br class=3D"=
">2. A transaction can have inputs with different covenants, their allocatio=
n to outputs should follow input order.<br class=3D"">3. For output(s) that s=
hare input(s) with covenant, the sum of covenant outputs must exactly add up=
 to the input(s). This allows merging and splitting them.<br class=3D""><br c=
lass=3D"">Bob would re-collect his coins at maturity unconditionally. Who fo=
llowed through promises or defaulted down the transitive chain is irrelevant=
 to him.<br class=3D"">Remark: we might also need a covenant attribute defin=
ing the minimum size of output, so Bob is not forced to collect dust, which w=
ould be expensive or even impossible. I am not yet happy with this solution,=
 looking for better.<br class=3D""><br class=3D"">I am very excited about th=
e possibilities this proposal would unlock and ask you verify usefulness of t=
his scheme and join working out the details and how covenants would be integ=
rated with taproot.<br class=3D""><br class=3D"">Tamas Blummer<br class=3D""=
><br class=3D"">[1] Malte Moser, Ittay Eyal, and Emin Gun Sirer. Bitcoin Cov=
enants. URL: <a href=3D"http://fc16.ifca.ai/bitcoin/papers/MES16.pdf" class=3D=
"">http://fc16.ifca.ai/bitcoin/papers/MES16.pdf</a><br class=3D"">__________=
_____________________________________<br class=3D"">bitcoin-dev mailing list=
<br class=3D""><a href=3D"mailto:bitcoin-dev@lists.linuxfoundation.org" clas=
s=3D"">bitcoin-dev@lists.linuxfoundation.org</a><br class=3D""><a href=3D"ht=
tps://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev" class=3D"">htt=
ps://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev</a></blockquote>=
</div></blockquote></div><br class=3D""></div></blockquote></div></div></div=
></body></html>=

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