From: <eric@voskuil.org>
To: "'ZmnSCPxj'" <ZmnSCPxj@protonmail.com>
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Date: Tue, 17 May 2022 20:06:29 -0700
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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 evening ZmnSCPxj,

Sorry for the long delay...

> Good morning e,
>=20
> > Good evening ZmnSCPxj,
> >
> > For the sake of simplicity, I'll use the terms lender (Landlord), =
borrower
> > (Lessor), interest (X), principal (Y), period (N) and maturity =
(height after N).
> >
> > The lender in your scenario "provides use" of the principal, and is =
paid
> > interest in exchange. This is of course the nature of lending, as a =
period
> > 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 =
for the
> > period allows the borrower to produce goods, sell them, and return =
the
> > "profit" as interest to the lender. Use implies that the borrower is =
spending
> > the principle - trading it with others. Eventually any number of =
others end up
> > holding the principle. At maturity, the coin is returned to the =
lender (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 =
for the
> > borrowed principal.
>=20
> 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 =
fidelity
> 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 =
transferred,
> instead, a different use of the locked funds is invented.
>=20
> As a better analogy: I am borrowing a piece of gold, smelting it down =
to 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 =
piece
> (with the exact same atoms constituting it), plus an interest from my =
business,
> which gained customers because of the shiny gold advertisement =
claiming "I
> am totally not a bot!!".
>=20
> That you use the same piece of gold for money does not preclude me =
using
> 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 =
entirely.

Ok, so you are suggesting the renting of someone else's proof of "burn" =
(opportunity cost) to prove your necessary expense - the financial =
equivalent of your own burn. Reading through the thread, it looks like =
you are suggesting this as a way the cost of the burn might be diluted =
across multiple uses, based on the obscuration of the identity. And =
therefore identity (or at least global uniqueness) enters the equation. =
Sounds like a reasonable concern 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 of some behavior). Proof of burn/work, such as Hash Cash (and =
Bitcoin), is merely 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.

I can see how you come to refer to selling the PoB as "lending" it, =
because the covenant on the underlying coin is time constrained. But =
nothing is actually lent here. The "advertisement" created by the =
covenant (and its presumed 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 terminology nit, the use of "fidelity bond" and =
the subsequent description of "renting" (the fidelity bond) both led me =
down another path (Tamas' proposal for risk free lending under covenant, =
which we discussed here years ago).

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

Best,
e

> Regards,
> ZmnSCPxj