Toward A Private Digital Economy

In April 2004, Wavyhill and Andre Goldman published a landmark achievement in the movement towards anonymous digital cash entitled, "Toward A Private Digital Economy: Trusted Transactions in an Anonymous World". The video presentation from DEF CON 12 can be seen here. It is significant in that it is one of the few written pieces that anticipates the forced closure of digital-issuing mints by the authorities. What is explored is the establishment of a trusted central mint that operates anonymously and therefore can remain operational in the face of direct governmental threats and assaults. From the abstract:

"Currently available financial privacy tools have drawbacks arising from centralized ownership and control, and the limitations of presenting specific services. A better approach would be to construct a fully distributed environment for economic activity which mimics the way cash is used in the physical world but is private, anonymous, trusted, and indestructible. A key to this variety is the element of locale, which we will explain in some detail."

"We will introduce a 'Farmer's Market' model of anonymous commerce and expand it into a detailed functional description. We will explore business models viable in this environment and ways to connect them to the transparent banking world."

"An anonymous economy must resolve issues of trust and reputation to be practical. We show how properties of number can be used to derive an 'algebra of trust' and exploited to reduce risk in anonymous transactions. Once reduced to a number, trust, like any other asset, can be quantified, evaluated, commoditized and even used as a currency. Algorithms that distribute data storage can distribute risk and trust once they are reduced to data. These things may overcome some of the barriers to the wide adoption of a private digital economy."

Building on the Digital Monetary Trust due largely to J. Orlin Grabbe, the authors further anticipate that in order to have a reliable trusted issuing mint that is both anonymous and not geographically locatable, it is necessary to provide a mechanism for distributed trust and auditing provisions that do not compromise the anonymity or location of the issuing entity. This function is accomplished through a series of third-parties known as a guild of bondsmen, escrow agents, and fair witnesses. The bondsmen have access to an auditing process that does not put the assets at risk of seizure while still providing enough assurances to the financial integrity of the currency issuance. From the article:

Bondsman - This is a special case of insurance but one that merits special treatment. An insurer sells safety. A bondsman sells trust, the most precious commodity in the anonymous world. He sells it in the form of a promise to pay for losses incurred by a third party due to the non-performance of his client. The client posts a bond, assets worth some fraction of the amount at risk, depending on the bondsman's perception of that risk. There will be a non-returnable fee for the service. Where does the bondsman get his stock in trade? Some of it comes from his track record. In this business, reputation is literally as good as gold. Risk and trust are two sides of the same coin. He can distribute his risk (and gain trust) by posting secondary bonds with other bondsmen. The promise of 10 people to cover an obligation conveys more trust than the promise of any one person, hence the value of co-signers to a loan, trust is additive. Others have used the term “web of trust”. We introduce a related concept, the “web of bonds”. A guild of bondsmen backing each other generates more trust than the sum of the parts, because trust is associative. A bondsman's profit margin must be relatively large, in proportion to his risk. In section V we show how that proportion can be formally derived.

Escrow Agent - Escrow is another form of trust management, assets deposited with a neutral trusted third party to be delivered under contractually specified conditions. Like Bondsman, it is a service well-suited to the anonymous world because it can be transacted electronically. Like Bondsman, it is another way to rent trust, which may be acquired in the same ways. Escrow Agent doesn't pay as well as bondsman, because there is almost no risk.

Fair Witness - The professional witness sells truth, as a trusted reporter of fact. Unlike Heinlein's Fair Witness, an eidetic memory and hypnotically trained powers of observation are not required. Though a contract can be digitally signed in a non-repudiable way, the recording of it in a trusted neutral place has value. Likewise testimony about associated conditions and events not recorded in any contract (Johnny Carboncabin sent 12 threatening and intimidating messages to Clarke Kent after Clarke's whistle-blowing expose' was published). The Witness may verify Dark Side events, objects, conditions (Wolfie's Toy won today's trifecta, that 1909S VDB penny is in mint condition). There may be conditions on disclosure or limits on scope and audience. The witness may take the role of auditor: “I attest that on this date, 'The Anonymaker' proxy's logs were kept for no more than four hours. I reviewed their code and it was so configured. I probed their server and it was running the code I reviewed”. There is also the role of Notary: “I attest that the same individual signed both of these documents, though I can't disclose the content of the documents or the identity of the individual.”. Another valuable Witness service is putting a time stamp on identities, coins, messages, contracts, and so on. The Fair witnesses fee should be in proportion to the reputation of the Witness, and the amount or issue in contest.

For further reading:
"The Digital Monetary Trust Part 1: Introduction", J. Orlin Grabbe, November 15, 1999
"The Digital Monetary Trust Part 2: The Anonymous Account System", J. Orlin Grabbe, November 22, 1999
"A Brief Guide to Digital Cash Articles on My Webpage", J. Orlin Grabbe, February 28, 1998