On the Principles of Financial Transactions Secured by Witnesses

Value (and storing it)

An object has value if people are willing to part with something, or to expend some effort, in order to acquire it. Those who are thirsty, will pay for water. Such people need water. People go to lengths to acquire gold, too. But no one needs gold like they need water (mental syndromes aside). One desires gold because it is valuable. That closes the loop: gold has value because people will give a lot for it and they do so because it is valuable.

(Our) money is debt

Suppose you want to build a house and lend from the bank. It provides half a million euros in new notes that bear your name on the backside (not really, but it helps to understand how it works). Moreover, there is this magical machine that changes a note with an arbitrary name on it for one that bears yours. Using your brand new notes you pay ten construction workers who build your house. Your money spreads through society and it is your job to bring it back to the bank (it wrote down how much you owe). So you get a job and make money. Each month you set aside some notes. In general these will not be your notes, but using the magical machine you change them into notes with your name on it and bring them back to the bank. The bank burns these notes and updates your debt administration. Thirty years pass — you have to live, too — before you’ve returned the very last note.

The value of money

People do things for money. Why? Because they can have other people do things for that money. Money has, just like gold or Bitcoins, a value. But there are differences.

Information

The Latin verb ‘informare’ can be translated with ‘giving shape’. ‘Information’ might be understood as ‘a thought that has acquired a shape’. One should understand that as a physical shape, like a clay tablet or a letter. ‘Information storage medium’ is a tautology because the physical carrying is already implied in ‘information’. ‘Thought storage medium’ would be better.

Money as information

A bank note obviously is information. In the paragraph before last I argued that the thought that is carried in this case, has to do with debt. The note with your name on it that is in circulation expresses ‘I should pay this loan’.

Reliable money

By far the biggest part of the money in circulation doesn’t have a physical form like notes or coins. Many authors speak of ‘scriptural money’ or ‘virtual money’. The latter form especially suggests an almost meta-physical quality. But even virtual money is a thought expressed in a physical form. But what form, exactly?

Bitcoins’ promise

Satoshi Nakomoto famously writes in the first paragraph of his famous paper (Bitcoin: a Peer-to-Peer Electronic Cash System) that electronic payments are not completely irreversible. That is a friendly way of saying that cheating is possible. This leads to high transaction costs. It also makes companies should not trust their clients, on principle. His next paragraph introduces his solution:

Witnesses

We marry in the presence of witnesses. This is because marriage is an act in front of a community of people, however much married life is a private affair. The witnesses listen in name of the entire community to the yes-I-do — a speech act if there ever was one!

The bank, revisited

We can think of the bank as the reliable witness of a financial transaction. A witness in name of the community of people.

Could we construct WitCoin using Blockchain?

A transaction with a witness sounds like a ‘smart contract’. Ethereum’s Solidity is, without doubt, suitable to program such a contract. WitCoin can then be based on Blockchain.

Conclusion

Nakomoto correctly notes that the grain of trust on internet is too big and especially that trust is too expensive. Micropayments are just impossible with transaction costs of twenty to thirty cent! In the meantime, today’s intensive cooperation and communication of the internet really needs micropayments of fractions of a cent.

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Joop Ringelberg

Joop Ringelberg

The pleasure of finding things out.