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From: Tamas Blummer <tamas.blummer@gmail.com>
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Subject: Re: [bitcoin-dev] Generalized covenants with taproot enable
 riskless or risky lending,
 prevent credit inflation through fractional reserve
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Good morning ZmnSCPxj,

thank you very much for sharing your BCAN idea and thought process in =
detail.

I add some thoughs that very likely occured to you, but not formulated =
explicitelly:

1. The unique feature of such advertisement network is that it has no =
owner, just like the Bitcoin network.
If it had an owner, that owner could simply bill for use, but would also =
be forced to restrict access or apply some sort of censorship.
This is why usage costs is imposed through opportunity cost and not =
billed.

2. Since opportunity cost of one Bitcoin for a short time period is =
magnitudes less than its face value, one would need significant
Bitcoin amounts to impose meaningful costs so they have the chance to be =
included into BCANs purposedly limited bandwidth.
Those who would want to place an ad will often not have sufficient =
amount of Bitcoin holdings which lets them borrow UTXOs.

3. If borrowed Bitcoin is certain to be returned (as in your =
construction) then this offers riskless interest for HODLer.

4. Bitcoin=E2=80=99s most popular use is storing wealth whereby this use =
currently completely relies on the assumption that =E2=80=9Cthe number =
goes up=E2=80=9D.
A service that delivers interest on HODLed coins without exposing the =
HODLer to credit risk of the borrower is a huge game changer.

5.This scheme allows HODLer a concious decision whom or what project =
they fund.

For above reasons I think that this is a crucial design pattern to build =
censorship resistant networks which also give rise to riskless interest =
on Bitcoin.

My finance examples where abstract and less interesting for this =
audience but the BCAN should ring the bell for many.

As you said BCAN is possible with current Bitcoin, therefore we should =
no longer discuss it under the covenant topic.
The idea of debt covenant will likely resurface as soon as this design =
pattern proves to be useful in practice and one is looking for
a more flexible solution. I am confident we will get there, but not as =
fast as I initially thought.

Regards,

Tamas Blummer

> On Jul 9, 2019, at 12:31, ZmnSCPxj via bitcoin-dev =
<bitcoin-dev@lists.linuxfoundation.org> wrote:
>=20
> Good morning all,
>=20
> I will attempt to restart my thinking from initial principles =
regarding my proposed "Bitcoin Classified Ads Network".
>=20
> Nodes behave this way:
>=20
> * Nodes in this network gossip advertisements.
> * These advertisements refer to a UTXO that must be unspent at the =
chain tip considered by each node, else they would be rejected.
> * The referred UTXO must contain a commitment to the text of the =
advertisement, else the advertisement is rejected.
> * Nodes have a maximum limit on the total size of all advertisements =
they retain and propagate to new nodes, or gossip to their peers.
>  This is a deliberate design decision.
> * If nodes exceed the above limit, they will sort advertisements =
according to a value-rate, the value of the UTXO divided by the storage =
size of the advertisement, and prune advertisements with low value-rate =
until they are within the limit again.
> * Once the backing UTXO is spent, the advertisement is removed by =
nodes that follow that chaintip.
> * As the name ***Classified Ads*** suggests, each advertisement also =
indicates a "class" in which they belong to.
>=20
> Then, from the above, we derive how a seller might behave.
>=20
> * Sellers will attempt to put the minimum possible value into a UTXO =
committing to an advertisement, to reduce the opportunity cost of using =
the value elsewhere.
> * Thus the rent of the advertisement in this case is paid to =
joinmarket makers and LN forwarding nodes, as the value used in a UTXO =
backing an advertisement is not useable in joinmarket/LN.
> * Sellers remain in full control of their advertising UTXO, and can =
spend it at any time.
> * Sellers may spend part of the UTXO and put the remaining funds into =
a change address that is a new advertising UTXO, and re-transmit the =
advertisement, this time pointing to the new change UTXO.
> * However, if the remaining change becomes too low, then its =
value-rate may drop below the lowest value-rate that BCAN nodes will =
retain in their (deliberately limited) storage, thus also deleting their =
advertisement from the BCAN.
> * Presumably, the reason for advertising at all, is that the seller =
considers the cost of advertising to be less than the expected gain of =
actually selling their product.
> * Thus, even if the seller has the ability to spend the UTXO at any =
time, they run the risk of spending too much and thus removing their =
advertisement from the BCAN, and losing the expected gain of having the =
advertisement exist on the BCAN.
> * A utility-maximizing seller would therefore not spend a =
minimal-value UTXO backing the advertisement until it has gained the =
advantage of actually selling the product, even if it has the option to =
do so: it is a forced move.
> * The cost of keeping the minimal-value UTXO unspent is the =
opportunity cost in that the value may have been used in joinmarket or =
LN instead.
> * The minimum value will largely be dependent on how much the BCAN is =
used; more sellers advertising over BCAN will increase the minimum =
value.
> * If the minimum value that is viable to keep its advertisement alive =
goes higher, then the opportunity cost of the seller using the same =
value elsewhere might exceed the expected gain from selling the product.
>  However, this is expected of *any* advertising scheme: if the gains =
from selling is too small to justify the advertisement price, =
advertising does not happen; this is expected utility-maximizing =
behavior.
> * If competitors of the seller exist and the BCAN node storage is =
already filled, competitors can increase the minimum value of a UTXO =
that can keep an advertisement alive on BCAN by simply adding more of =
their advertisements to BCAN.
> * Thus we expect that, once the BCAN node storage is at or near the =
maximum value, the minimum value of a UTXO that can back an =
advertisement will approach the expected gain from selling the product.
>=20
> Thus the system of simply committing UTXOs to particular advertisement =
texts seems sufficient to extract value from a seller wishing to =
advertise.
> The purpose of this extraction of value is to ensure that spam does =
not overload the BCAN.
>=20
> Let us now consider some kind of specialization, where a HODLer =
specializes in owning UTXOs, while an advertiser specializes in trading =
products that need advertising of some kind.
>=20
> * We assume that the specialization means that the HODLer cannot =
feasibly make and sell products on its own, while the advertiser cannot =
own and control UTXOs of the minimum value needed to keep their =
advertisement alive on the BCAN.
> * We assume that the specialization means that the advertiser can make =
and sell products for cheaper than the HODLer can, while the HODLer can =
own and control (and secure) UTXOs of the minimum value needed for =
advertisements to be kept alive, for cheaper than the advertiser can.
>=20
> Then:
>=20
> * A HODLer may offer to provide a UTXO locked by a 2-of-2 with a =
commitment to an advertisement of the advertiser's choosing, in exchange =
for rent of the value, plus an unbreakable promise to return the rented =
UTXO value back to the HODLer (represented by a `nLockTime` pre-signed =
transaction that returns the 2-of-2 back to the HODLer control).
> * The HODLer is effectively lending the UTXO out to the advertiser, =
for the time frame agreed upon by the advertiser.
> * The rent at which the HODLer lends out the UTXO must be between the =
opportunity cost of instead securely utilizing the UTXO in LN or =
joinmarket, and the expected gain the advertiser expects from having its =
product advertised.
>  * The HODLer is assumed to have the ability to secure the UTXO and =
retain all data it needs to recover the UTXO; this is part of the =
assumption that the HODLer specializes in such.
>  * The advertiser is assumed to have positive gains from creating, =
advertising, and selling its product; this is part of the assumption =
that the advertiser specializes in such.
> * The HODLer and advertiser can agree to refund part of the rent, if =
the advertiser signs a transaction that immediately returns control of =
the value to the HODLer, before the agreed `nLockTime`.
> * The above constructions can be done in current Bitcoin.
> * However, the same constructions could be done with a covenant as =
proposed by Tamas, possibly with reduced communication/coordination =
costs between the advertiser and HODLer.
>=20
> Now, there remains the question as to whether users will actually =
patronize the BCAN instead of existing advertising systems.
>=20
> * We assume that privacy is valuable to users.
> * We assume that users of BCAN will run BCAN nodes.
>  This leaks them as users of BCAN, a small loss of privacy.
>=20
> Then:
>=20
> * Users can look for advertisements of specific classes by simply =
querying their own BCAN node.
>  This does not leak privacy ata all as long as the communication =
channel of the user with their own BCAN node is private.
>  * Compare this to alternatives, which involve some entity observing =
the behavior of users and thus invading their privacy.
> * Advertisers that misclassify their advertisements will be unable to =
reach their target audience.
> * Utility-maximizing advertisers will correctly indicate the class of =
their advertisements, as otherwise they would be paying the advertising =
cost without gaining the benefit of the advertisement.
>=20
>=20
> Regards,
> ZmnSCPxj
> _______________________________________________
> bitcoin-dev mailing list
> bitcoin-dev@lists.linuxfoundation.org
> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev


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