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From: Eric Voskuil <eric@voskuil.org>
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Date: Mon, 1 Jul 2019 11:52:57 -0700
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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
Precedence: list

It=E2=80=99s an exceedingly poor example. First, value is subjective. It mat=
ters not what other people may consider, only those who act. Given that peop=
le trade them (ICO tokens), they have value to those people. Second, the sce=
nario would not function given that the value, as with money, is based on th=
e ability to trade perpetually.

I said that I would make no further comment given the belief that no new ide=
as were surfacing. However, after giving it some more thought on my own, I b=
elieve I have found the one case in which a person could value such encumber=
ed coins.

In the case of tracking an asset that becomes worthless at a specific time, o=
ne could value a record of ownership, and the ability to trade ownership of t=
he asset during the period. Consider colored coin type tracking of a theater=
 ticket for a specific show, where the ticket is worthless by the end of the=
 show.

Now consider the value attributable to renting coin (e.g. to the tick issuer=
) in order to track the ticket. First, there is no net value in renting coin=
 to pay confirmation (mining) fees on transfers. The cost of a fee is driven=
 by competition and remains the same whether the coin used for payment is en=
cumbered or not. In other words, even with value in tracking there is no *co=
st advantage* to renting of such coins for use as money.

But tracking an asset in this manner has required not only a fee for each tr=
ade, but also the burning of coin. By allowing the lender to recover the coi=
n when the asset expires, this part of the cost of on-chain tracking can be t=
ime-shared (rented), and without depreciation of the coin.

In this case the lender is achieving both a time-locked hoard/speculation an=
d a pre-paid rental return. The return to the lender would be the rental pri=
ce minus the opportunity cost of not investing (ie, in production) this coin=
 otherwise during that period. This is of course based on the economic princ=
iple that both hoarding and speculation are expected to produce no predictab=
le return. As such the cost of the rental would be driven (by competition) t=
oward the cost of capital (e.g. annualized 10% of the coin price) for the sa=
me period.=20

Depending on the term, rental will be cheaper than the outright cost of burn=
ing the same minimum amount of coin (i.e. dust+1, assuming policy compliance=
) as required for tracking. As soon as the rental cost exceeds the minimum t=
racking burn, rental becomes more expensive than just purchasing the coin. S=
o, for example, at 10% market return on capital (rental cost), purchasing th=
e coin is cheaper than rental at any tracking term beyond 7.2 years.

As discussed previously, there can be no monetary value of such encumbered c=
oins. And as shown above, the non-monetary (tracking) scenario is limited to=
 fixed-term tracking. This use of Bitcoin would of course reduce the average=
 cost of non-monetary blockchain storage. I=E2=80=99m not sure that is a use=
 people want to facilitate with a protocol change, but that=E2=80=99s for th=
e community to decide.

Best,
Eric

> On Jun 30, 2019, at 13:26, Tamas Blummer <tamas.blummer@gmail.com> wrote:
>=20
> My argument does not need the comparison with ICOs.
>=20
> They were just an example that people pay for the utility of register even=
 though others think the tokens they keep track of are worthless.
>=20
> Tamas Blummer
>=20
>=20
>> On Jun 30, 2019, at 22:13, Eric Voskuil <eric@voskuil.org> wrote:
>>=20
>> ICO tokens can be traded (indefinitely) for other things of value, so the=
 comparison isn=E2=80=99t valid. I think we=E2=80=99ve both made our points c=
learly, so I=E2=80=99ll leave it at that.
>>=20
>> Best,
>> Eric
>>=20
>>> On Jun 30, 2019, at 12:55, Tamas Blummer <tamas.blummer@gmail.com> wrote=
:
>>>=20
>>>=20
>>>> On Jun 30, 2019, at 20:54, Eric Voskuil <eric@voskuil.org> wrote:
>>>>=20
>>>> Could you please explain the meaning and utility of =E2=80=9Cunforgeabl=
e register=E2=80=9D as it pertains to such encumbered coins?
>>>=20
>>> I guess we agree that some way of keeping track of ownership is prerequi=
site for something to aquire value.
>>> We likely also agree that the security of that ownership register has gr=
eat influence to the value.
>>>=20
>>> The question remains if a register as utility in itself gives value to t=
he thing needed to use that register.
>>> I think it does, if people are interested in what it keeps track of, for=
 whatever reason, even for reasons you find bogus.
>>>=20
>>> It was not intentional, but I think I just explained why Ethereum aquire=
d higher market value by being register of ICO tokens.
>>>=20
>>> Now back to the coins encumbered with the debt covenant:
>>> Transactions moving them constitute a register of covered debt and you n=
eed them to update that register.
>>> Should some people find such a register useful then those coins needed t=
o update this register will aquire value.
>>> Does not matter if you think the concept of covered debt is just as bogu=
s as ICOs.
>>>=20
>>> Here some good news: If they aquire value then they offer a way to gener=
ate income for hodler by temporarily giving up control.
>>>=20
>>> Tamas Blummer
>>>=20
>>>>=20
>>>> The meaning in terms of Bitcoin is clear - the =E2=80=9Cowner=E2=80=9D o=
f outputs that represent value (i.e. in the ability to trade them for someth=
ing else) is recorded publicly and, given Bitcoin security assumptions, cann=
ot be faked. What is not clear is the utility of a record of outputs that ca=
nnot be traded for something else. You seem to imply that a record is valuab=
le simply because it=E2=80=99s a record.
>>>>=20
>>>> e
>>>>=20
>>>>> On Jun 30, 2019, at 11:35, Tamas Blummer <tamas.blummer@gmail.com> wro=
te:
>>>>>=20
>>>>>=20
>>>>>> On Jun 30, 2019, at 19:41, Eric Voskuil <eric@voskuil.org> wrote:
>>>>>>=20
>>>>>>=20
>>>>>>> On Jun 30, 2019, at 03:56, Tamas Blummer <tamas.blummer@gmail.com> w=
rote:
>>>>>>>=20
>>>>>>> Hi Eric,
>>>>>>>=20
>>>>>>>> On Jun 29, 2019, at 23:21, Eric Voskuil <eric@voskuil.org> wrote:
>>>>>>>>=20
>>>>>>>> What loan? Alice has paid Bob for something of no possible utility t=
o her, or anyone else.
>>>>>>>=20
>>>>>>> Coins encumbered with the described covenant represent temporary con=
trol of a scarce resource.
>>>>>>>=20
>>>>>>> Can this obtain value? That depends on the availability of final con=
trol and ability to deal with temporary control.
>>>>>>=20
>>>>>> For something to become property (and therefore have marketable value=
) requires that it be both scarce and useful. Bitcoin is useful only to the e=
xtent that it can be traded for something else that is useful. Above you are=
 only dealing with scarcity, ignoring utility.
>>>>>=20
>>>>> There is a deeper utility of Bitcoin than it can be traded for somethi=
ng else. That utility is to use its unforgeable register.
>>>>> We have only one kind of units in this register and by having covenant=
s we would create other kinds that are while encumbered not fungible with th=
e common ones.
>>>>>=20
>>>>> Units are certainly less desirable if encumbered with a debt covenant.=
 You say no one would assign them any value.
>>>>>=20
>>>>> I am not that sure as they still offer the utility of using the unforg=
eable register, in this case a register of debt covered by reserves.
>>>>> You also doubt forcing debt to be covered by reserves is a good idea, I=
 got that, but suppose we do not discuss this here.
>>>>> If there are people who think it is a good idea, then they would find h=
aving an unforgeable register of it useful and therefore units needed to mai=
ntain that register valuable to some extent.
>>>>>=20
>>>>>>=20
>>>>>>> I think you do not show the neccesary respect of the market.
>>>>>>=20
>>>>>> I=E2=80=99m not sure what is meant here by respect, or how much of it=
 is necessary. I am merely explaining the market.
>>>>>=20
>>>>> You are not explaining an existing market but claim that market that i=
s not yet there will follow your arguments.
>>>>>=20
>>>>>>> Your rant reminds me of renowed economists who still argue final con=
trol Bitcoin can not have value, you do the same proclaiming that temporary c=
ontrol of Bitcoin can not have value.
>>>>>>=20
>>>>>> It seems to me you have reversed the meaning of temporary and final. B=
itcoin is useful because of the presumption that there is no finality of con=
trol. One presumes an ability to trade control of it for something else. Thi=
s is temporary control. Final control would be the case in which, at some po=
int, it can no longer be traded, making it worthless at that point. If this i=
s known to be the case it implies that it it worthless at all prior points a=
s well.
>>>>>>=20
>>>>>> These are distinct scenarios. The fact that temporary (in my usage) c=
ontrol implies the possibility of value does not imply that finality of cont=
rol does as well. The fact that (renowned or otherwise) people have made err=
ors does not imply that I am making an error. These are both non-sequiturs.
>>>>>>=20
>>>>>>> I say, that temporary control does not have value until means dealin=
g with it are offered, and that is I work on. Thereafter might obtain value i=
f final control is deemed too expensive or not attainable, we shall see.
>>>>>>=20
>>>>>> The analogy to rental of a consumable good does not apply to the case=
 of a non-consumable good. If it cannot be traded and cannot be consumed it c=
annot obtain marketable value. To this point it matters not whether it exist=
s.
>>>>>=20
>>>>> I meant with control the control of entries in the register which I th=
ink is the deeper utility of Bitcoin. Final control is meant to be the oppos=
ite of temporary which is the time limited control with some expiry.
>>>>>=20
>>>>> Thank you for your thoughts as they help to sharpen my arguments.
>>>>>=20
>>>>> Best,
>>>>>=20
>>>>> Tamas Blummer
>>>>>=20
>>>>>> Best,
>>>>>> Eric
>>>>>>=20
>>>>>>> Tamas Blummer
>=20