Date: Wed, 18 May 2022 06:29:23 +0000
To: eric@voskuil.org
From: ZmnSCPxj <ZmnSCPxj@protonmail.com>
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Cc: 'Bitcoin Protocol Discussion' <bitcoin-dev@lists.linuxfoundation.org>
Subject: Re: [bitcoin-dev] BIP proposal: Timelocked address fidelity bond
	for BIP39 seeds
Precedence: list


Good morning e,

> Good evening ZmnSCPxj,
>
> Sorry for the long delay...

Thank you very much for responding.

>
> > Good morning e,
> >
> > > Good evening ZmnSCPxj,
> > >
> > > For the sake of simplicity, I'll use the terms lender (Landlord), bor=
rower
> > > (Lessor), interest (X), principal (Y), period (N) and maturity (heigh=
t after N).
> > >
> > > The lender in your scenario "provides use" of the principal, and is p=
aid
> > > interest in exchange. This is of course the nature of lending, as a p=
eriod
> > > without one's capital incurs an opportunity cost that must be offset =
(by
> > > interest).
> > >
> > > The borrower's "use" of the principal is what is being overlooked. To
> > > generate income from capital one must produce something and sell it.
> > > Production requires both capital and time. Borrowing the principle fo=
r the
> > > period allows the borrower to produce goods, sell them, and return th=
e
> > > "profit" as interest to the lender. Use implies that the borrower is =
spending
> > > the principle - trading it with others. Eventually any number of othe=
rs end up
> > > holding the principle. At maturity, the coin is returned to the lende=
r (by
> > > covenant). At that point, all people the borrower traded with are bag=
 holders.
> > > Knowledge of this scam results in an imputed net present zero value f=
or the
> > > borrowed principal.
> >
> > But in this scheme, the principal is not being used as money, but as a =
billboard
> > for an advertisement.
> >
> > Thus, the bitcoins are not being used as money due to the use of the fi=
delity
> > bond to back a "you can totally trust me I am not a bot!!" assertion.
> > This is not the same as your scenario --- the funds are never transferr=
ed,
> > instead, a different use of the locked funds is invented.
> >
> > As a better analogy: I am borrowing a piece of gold, smelting it down t=
o make
> > a nice shiny advertisement "I am totally not a bot!!", then at the end =
of the
> > lease period, re-smelting it back and returning to you the same gold pi=
ece
> > (with the exact same atoms constituting it), plus an interest from my b=
usiness,
> > which gained customers because of the shiny gold advertisement claiming=
 "I
> > am totally not a bot!!".
> >
> > That you use the same piece of gold for money does not preclude me usin=
g
> > the gold for something else of economic value, like making a nice shiny
> > advertisement, so I think your analysis fails there.
> > Otherwise, your analysis is on point, but analyses something else entir=
ely.
>
>
> Ok, so you are suggesting the renting of someone else's proof of "burn" (=
opportunity cost) to prove your necessary expense - the financial equivalen=
t of your own burn. Reading through the thread, it looks like you are sugge=
sting this as a way the cost of the burn might be diluted across multiple u=
ses, based on the obscuration of the identity. And therefore identity (or a=
t least global uniqueness) enters the equation. Sounds like a reasonable co=
ncern to me.
>
> It appears that the term "fidelity bond" is generally accepted, though I =
find this an unnecessarily misleading analogy. A bond is a loan (capital at=
 risk), and a fidelity bond is also capital at risk (to provide assurance o=
f some behavior). Proof of burn/work, such as Hash Cash (and Bitcoin), is m=
erely demonstration of a prior expense. But in those cases, the expense is =
provably associated. As you have pointed out, if the burn is not associated=
 with the specific use, it can be reused, diluting the demonstrated expense=
 to an unprovable degree.

Indeed, that is why defiads used the term "advertisement" and not "fidelity=
 bond".
One could say that defiads was a much-too-ambitious precursor of this propo=
sed scheme.

> I can see how you come to refer to selling the PoB as "lending" it, becau=
se the covenant on the underlying coin is time constrained. But nothing is =
actually lent here. The "advertisement" created by the covenant (and its pr=
esumed exclusivity) is sold. This is also entirely consistent with the idea=
 that a loan implies capital at risk. While this is nothing more than a ter=
minology nit, the use of "fidelity bond" and the subsequent description of =
"renting" (the fidelity bond) both led me down another path (Tamas' proposa=
l for risk free lending under covenant, which we discussed here years ago).

Yes, that is why Tamas switched to defiads, as I had convinced him that it =
would be similar enough without actually being a covenant scam like you des=
cribed.

> In any case, I tend to agree with your other posts on the subject. For th=
e burn to be provably non-dilutable it must be a cost provably associated t=
o the scenario which relies upon the cost. This provides the global uniquen=
ess constraint (under cryptographic assumptions of difficulty).

Indeed.
I suspect the only reason it is not *yet* a problem with existing JoinMarke=
t and Teleport is simply that no convenient software currently exists which=
 allows the same bond to be used by both, thus making it safe in practice b=
ut not in theory.
But the theory implies that if somebody does make such software, effectivel=
y both systems will become joined as effectively only a single identity exi=
sts in both systems.
This may not be a problem either since the intent is that Teleport will obs=
olete JoinMarket someday, but if other applications start using the same sc=
heme without requiring a commitment to a specific application, this may als=
o effectively render Teleport less useful as well.

Regards,
ZmnSCPxj