[e-cvs] cvs commit: e/doc/talks/pisa/paper index.html
markm@eros.cs.jhu.edu
markm@eros.cs.jhu.edu
Fri, 28 Dec 2001 10:06:49 -0500
markm 01/12/28 10:06:49
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turn.</font></p>
<p><font color="#000000">For example, Figure 4 shows the six possible board
states of a simple negotiation and exchange game. Let's say Alice is playing
- the left side of the board and Bob the right. The initial board state
- is the one shown on the far left, in which neither of the pieces is on
- the board. The gold bar, representing money, is off the board on the left,
- which portrays its possession by Alice at this time. For concreteness,
- let's say the knight represents stock. Bob might offer a certain amount
- of stock to Alice by placing it on the right square of the board. This
- takes us to the board state that's up and right from the initial state.
- Alice might not respond soon enough, in which case Bob may withdraw his
- offer by taking back the knight, bringing us back to the initial state.
- That's why the first transition arrow is shown as bidirectional.</font></p>
+ the left side of the board and Bob the right. In the initial board state,
+ A, neither of the pieces is on the board. The gold bar, representing money,
+ is off the board on the left, which portrays its possession by Alice at
+ this time. For concreteness, let's say the knight represents stock. Bob
+ might offer a certain amount of stock to Alice by placing it on the right
+ square of the board, taking us to board state B. Alice might not respond
+ soon enough, in which case Bob may withdraw his offer by taking back the
+ knight, bringing us back to state A. That's why the first transition arrow
+ is shown as bidirectional.</font></p>
<p><font color="#000000">Or Alice may respond to Bob's offer with a certain
- amount of money, by placing it on the left square of the board. This takes
- us to the upper right board state. At this point, either party may still
- decide they're unsatisfied, withdraw their piece, and reenter the loop
- of bidirectional arrows. Or, in the upper right board state, Bob may pick
- up the money offered by Alice. Bob has accepted Alice's offer. This is
- the irreversible commitment step shown by the bold unidirectional arrow,
- and takes us to the board state down one. From here, the only possible
- move is for Alice to pick up Bob's knight.</font></p>
+ amount of money, by placing it on the left square of the board, taking
+ us to state D. At this point, either party may still decide they're unsatisfied,
+ withdraw their piece, and reenter the loop of bidirectional arrows (at
+ B or C). Or, in the upper right board state, Bob may pick up the money
+ offered by Alice. Bob has accepted Alice's offer. This is the irreversible
+ commitment step shown by the bold unidirectional arrow, and takes us to
+ state E. From here, the only possible move is for Alice to pick up Bob's
+ knight, leaving the game in terminal state F.</font></p>
<p>How is this contract self enforcing? What prevents cheating? Who needs
to trust whom with what? To answer these questions, we must start by explaining
what is happening on whose computer. We assume that each player trusts
their own computer (a dangerous assumption, but we cannot proceed without
- it). We also assume that player A cannot not trust player B's computer
- any more or less than they trust player B. Under these assumptions, we
+ it). We also assume that player X cannot not trust player Y's computer
+ any more or less than they trust player Y. Under these assumptions, we
can treat a computer and its proprietor as a single unit for purposes
of analysis.</p>
<p><font color="#000000"><img src="images/5-duties.gif" width="297" height="299" align="right">The
@@ -504,7 +503,7 @@
Smart Contracts explained so far, the vending machine and the exchange
game, cannot turn assets into capital. To do so requires contracts that
unfold over time, like a mortgage. To explain how such unfolding creates
- ever more abstract forms of property, a good clear example is the <i>covered
+ ever more abstract forms of property, a simple clear example is the <i>covered
call option</i>. (Such instruments are kindergarden finance for many,
so excuse us while we belabor the obvious. Re-explaining the familiar
is often necessary when translating into a different medium.)</font></p>
@@ -515,39 +514,41 @@
before the deadline. The option is a <i>covered</i> call option when Alice's
counterparty, Bob, escrows up front the stock Alice may decide to purchase.</font></p>
<p>We may visualize this as the game shown in Figure 6. In the initial board
- state, shown in the top left, the stock is already on the board. While
- in this state, neither Alice nor Bob may pick up the stock. Another "player"
- in the game, so to speak, is the game clock. Should the deadline expire
- while in this initial state, the clock causes a transition to a state
- from which Bob can now pick up his stock and go home.</p>
+ state A, the stock is already on the board. While in this state, neither
+ Alice nor Bob may pick up the stock. An new element in the game is the
+ game clock, attached to a transition arrow, that only permits this transition
+ after its deadline has expired. Should the deadline expire while the game
+ is still in state A, Bob could then pick up his stock and go home, leaving
+ the game in terminal state B.</p>
<p>Or, before the deadline expires, Alice may decide to <i>exercise</i>
the option. She may place a gold piece on the left square. Unlike in the
previous game, in this game the acceptable amounts are predetermined by
- the rules. The left square only accepts a certain amount of money. If
- Alice places this amount of money on the board, this is the irrevocable
- commitment step shown as the bold unidirectional arrow. After this move,
- the only remaining legal moves are for Alice to pick up the stock, and
- for Bob to pick up the money.</p>
- <p>What is so different about this contract? During the time between when
- the game starts (when Alice gets access to her chair) and the time when
- the game transitions to a new board state (either by expiration of the
- deadline or by exercise of the option), Alice a something valuable. During
- this interval, Alice has the option to buy this stock. This is a very
- different kind of value to have than the stock or money themselves. The
- value of this new right <i>derives</i> from the value of the stock and
- the money, but whereas they are very simple literal kinds of rights, this
- new right is somehow more abstract. In Wall Street terminology, the new
- right is a <i>derivative</i> of the more literal <i>underlying</i> rights.
- In de Soto's terminology, if the literal instruments are physical <i>assets</i>,
+ the rules. The left square only accepts the amount of money agreed on
+ when the game was constructed. If Alice places this amount of money on
+ the board, this is the irrevocable commitment step shown as the bold unidirectional
+ arrow, taking us to state C. After this move, the only remaining legal
+ moves are for Alice to pick up the stock, and for Bob to pick up the money.</p>
+ <p>What is so different about this contract? During the interval of time
+ from the start of the game transitions until the game leaves state A (whether
+ by expiration or exercise) Alice a something valuable. During this interval,
+ Alice has the option to buy this stock for a given. This is a very different
+ kind of value than having the stock or money themselves. The value of
+ this new right <i>derives</i> from the value of the stock and the money,
+ but whereas they are very simple literal kinds of rights, this new right
+ is somehow more abstract. In Wall Street terminology, the new right is
+ a <i>derivative</i> of the more literal <i>underlying</i> rights. In de
+ Soto's terminology, if the literal instruments are physical <i>assets</i>,
then abstract rights derived by contracts about these instruments are
- <i>capital</i>. </p>
+ a step towards being <i>capital</i>. </p>
<p>But there's something missing from this picture. Through the system so
far depicted, Alice can trade those rights managed by issuers -- money
and stock. The contract host, despite its complete ignorance that it has
done so, has created a new valuable right, owned by Alice. But in the
picture so far, Alice has no ability to trade this new right. This needs
to be repaired, in order for these new rights to truly be capital, and
- in order for yet more abstract forms of capital to be derived from them.</p>
+ in order for yet more abstract forms of capital to be derived from them.
+ Capital is both itself abstract, and widely tradeable, enabling further
+ abstraction. </p>
<h3><img src="images/7-layering.gif" width="308" height="304" align="right">Networks
of Games</h3>
<p>What we need, quite simply, is an issuer of this new right Alice holds