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From: Tamas Blummer <tamas.blummer@gmail.com>
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Cc: Bitcoin Protocol Discussion <bitcoin-dev@lists.linuxfoundation.org>
Subject: Re: [bitcoin-dev] Generalized covenants with taproot enable
 riskless or risky lending,
 prevent credit inflation through fractional reserve
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Hi Eric,

Thank you for your questions as they show what concepts need further =
explanation, so you understand the potential of this proposal and how it =
is helpful to the ecosystem.

Riskless zero bond is in fact the most basic concept of financial =
engineering. Yes, there are engineers of finance, those who create and =
price financial derivatives (e.g. options, swaps) and structure products =
such as e.g. ABS, CDO etc.
I used to be one of them.

A zero bond formalizes the observation that 1 unit of currency in the =
future has different value than 1 unit available now. It is called =
riskless if it is certain to receive the payment in the future.
If we put this difference of vaue in relation to the amount then we get =
the =E2=80=9Crisk freee rate of return=E2=80=9D, that you heard of.

E.g if one is willing to exchange 1 BTC unconditionally available now =
for 1.1 BTC certainly available in a year but not earlier, then the =
implied =E2=80=9Crisk free rate of return=E2=80=9D is apparently 10% pa. =
for Bitcoins.

The transaction I construct in the first example achives exactly this, =
because:

Bob forgoes his ability to use his unconditionally available coins by =
giving them to Alice with a covenant that ensures that Bob will receive =
them back later.
Bob does this because Alice pays for this in advance.

Alice can further transfer the coins encumbered by the covenant, but =
they will unconditionally return to Bob in the future.

The utility of these encumbered coins is that they prove that the loan =
is fully covered by reserves.

How valuable this utility is will be decided by the market and that =
value will be interest received by those who temporarily give up =
control. I am guess the value will be low but positive.

Lending does not mandate fractional or full reserves. These are choices =
the market or regulators enforce. Full reserve banking is not a fiction =
but is how things worked before introduction of gold receipts. A bank =
could only lend gold coins it possesed. Perils of fractional reserve =
were felt repeatedly by the Bitcoin ecnomy e.g. in the collaps of MtGox.

The idea to return to full reserve banking is not unique to gold bugs or =
Bitcoin but recently a popular vote was initiated in Switzerland to =
force Swiss banks to full reserves with respect to lending. This popular =
vote achived  24% support [1] which is quite remarkable if considered =
that the topic is not trivial as also our exchange shows.

I published today a writing in medium, that explains the concept of =
fractional vs. full reserve banking in conjunction with this proposal. =
Please read: =
https://medium.com/@tamas.blummer/full-reserve-banking-with-bitcoin-462b21=
ae9479 =
<https://medium.com/@tamas.blummer/full-reserve-banking-with-bitcoin-462b2=
1ae9479>

I would welcome feedback on the generalized covenant construct or its =
implementation, as I think it can open up much more uses than the few =
examples I gave.

Tamas Blummer

[1] Vollgeld Initiative: =
https://www.bfs.admin.ch/bfs/de/home/statistiken/politik/abstimmungen/jahr=
-2018/2018-06-10/vollgeld-initiative.html =
<https://www.bfs.admin.ch/bfs/de/home/statistiken/politik/abstimmungen/jah=
r-2018/2018-06-10/vollgeld-initiative.html>
> On Jun 28, 2019, at 19:25, Eric Voskuil <eric@voskuil.org> wrote:
>=20
> Hi Tamas,
>=20
> There are a number of economic assumptions contained herein. While I =
understand you would like to focus on implementation, the worst bugs are =
requirements bugs. IMO these should be addressed first. I=E2=80=99ve =
addressed some possible issues inline.
>=20
>> On Jun 28, 2019, at 01:27, Tamas Blummer via bitcoin-dev =
<bitcoin-dev@lists.linuxfoundation.org =
<mailto:bitcoin-dev@lists.linuxfoundation.org>> wrote:
>>=20
>> I start with a formalisation of loans as common in finance:
>>=20
>> A zero bond is a contract between two parties Alice and Bob whereby =
Alice receives an amount less than P and has to pay back P at a later =
time point called maturity.
>> The difference between the amount received and P is the interest =
implied by the contract. E.g. receiving 1 Bitcoin (<P) and agree to pay =
back 1.1 (=3DP) in a year is the same as getting a loan with 10% p.a. =
interest.
>>=20
>> The inherent risk in the contract is that Alice may not honor the =
agreement or be bankrupt by then.
>>=20
>> If we could programmatically guarantee that Alice honors the contract =
then we would be able to create a riskless zero bond, the fundation of =
financial engineering.
>=20
> I=E2=80=99m not aware of the basis of this statement. While people use =
the term =E2=80=9Crisk free rate of return=E2=80=9D there has never =
actually been such a thing. It=E2=80=99s not clear to me how a unicorn =
has been the foundation of =E2=80=9Cfinancial engineering=E2=80=9D, but =
I=E2=80=99m not also clear and what is intended by =E2=80=9Cengineering=E2=
=80=9D in this sense. Generally engineering is the implementation of =
higher level concepts. It is those concepts that constitute requirements =
here.
>=20
> At a minimum, interest cannot be guaranteed by this proposal, which =
implies that at best it guarantees, setting aside changes in purchasing =
power, a return of principle minus economic interest on that principle =
(ie opportunity cost). Given that purchasing power changes over time, =
risk increases with the term of the loan. As such this is not riskless - =
both volatility and opportunity cost remain as risks.
>=20
>> A systemic problem with loans is that the lender might operate on =
fractional reserve, that is lending more than his capital.
>=20
> This is not a systemic problem, this is the very nature of lending. =
Fractional reserve is simply a state banking term used to describe the =
fact that people invest (lend) a fraction of their savings and hoard the =
rest. It matters not that banks or individuals do this, credit expansion =
is inherent in economy. Without it there is no investment and therefore =
no production whatsoever.
>=20
>> Unchecked inflation of money supply through fractional reserve is =
creating a mess in the world we live in. Bitcoin could overcome this =
mess implementing this proposal!
>=20
> You seem to be conflating state banking with the effects of investing. =
Taxpayer support for bank investment creates both a moral hazard (and =
the resulting misallocation of capital to state-favored projects, =
creating the famed economic =E2=80=9Cbusiness cycle=E2=80=9D) and is a =
manifestation of persistent monetary inflation (ie seigniorage is a =
source taxation. Investment implies credit expansion, and the level of =
this expansion is controlled by time preference alone.
>=20
>> I stop here with finance speak as the purpose of this mail is not to =
dive into finance, but to show how loans with full reserve check could =
be implemented in Bitcoin.
>>=20
>> 1. Receiving the loan is a payment from Bob to Alice, but we need a =
restriction how Alice can use the funds, so Bob can get them back =
unconditionally at maturity, so lending is riskless to him.
>> 2. Bob wants to receive interest, since he gives up his control of =
the coins until maturity, he can not use them elsewhere until then. That =
interest could be paid in advance, this can be solved with Bitcoin as =
is.
>=20
> Interest cannot be paid in advance. This implies nothing more than a =
smaller amount of principle.
>=20
>> How do we allow Alice to use the coins, that is: split/merge and =
transfer them to others, but still ensure Bob can claim them back at =
maturity?
>>=20
>> We ensure that Alice can only send the coins to outputs that inherit =
a taproot path of validation (using http://bitcoin.sipa.be/miniscript/): =
'and(time(100),pk(C))' where C is Bob=E2=80=99s key and 100 is maturity
>>=20
>> This requires a generalization of the Bitcoin Covenants Idea[1] such =
that it nicely fits with taproot as follows:
>>=20
>> 1. A covenant in the form of '_ covenant C=E2=80=99 on output means =
that it can be spent to an output that maches the covenant pattern with =
placeholder _  and the output(s) will be assigned 'covenant C'.
>> 2. A covenant that mandates an output script with alternate =
validation paths can also assign alternate covernants to be inherited by =
the output(s) depending on which path was used to spend the input eg. =
'covenant or(c covenant C, d covernant D)=E2=80=99
>> 3. The resulting covenant of outputs should be reduced following =
boolean algebra, e.g. or(b,or(b,a)) to or(b, a)
>> 4. express transitivity with 'covenant transitive=E2=80=99 which =
means the output will have the same covenant as the input
>> 5. allow to omit covenant on the output with 'covenant drop'
>>=20
>> The covenant Bob would assign to the loan output sent to Alice is: =
'covenant or(and(time(100),pk(Bob)) covenant drop, _ covenant =
transitive)' which means:
>> - Alice can send to an output script where she is free to chose the =
embedded script at the placeholder _ and that output will again have the =
same covenant as the input.
>> - After maturity Bob can claim any coin that is transitively rooted =
in the loan (more on this later) and the covenant will no longer be =
assigned to his new output(s).
>>=20
>> Assuming Alice wants to send some of the borrowed coins to Charlie:
>>=20
>> for shorter notation lets use b=3D'and(time(100),pk(Bob)) covenant =
drop=E2=80=99 for the script that gives Bob control after maturity.
>>=20
>> Alice can not send to pk(Charlie), but she can send to or(b, =
pk(Charlie) covenant transitive)
>> Sending to pk(Charlie) would be sending cash, sending to or(b, =
pk(Charlie) covenant transitive) is a promissory note issued by Alice to =
Charlie, here is why:
>>=20
>> If Charlie accepts an or(b, pk(Charlie) covenant transitive) output =
then he trusts, that Alice will offer a regular payment in exchange for =
it before maturity, since that output is worthless to Charlie after =
maturity as Bob can just take it.
>>=20
>> It seems at the first sight that there is no value in these outputs =
for Charlie, since he still has to ensure Alice replaces them before =
maturity.
>>=20
>> The value of these outputs to Charlie is the proof that he has =
exclusive control of the coins until maturity.
>=20
> At a minimum, money that predictably depreciates (to zero in this =
case) must be discounted accordingly. How much is money worth today that =
is worth zero tomorrow? This can be observed with both inflation and =
demurrage money. This also implies that each encumbered coin is not =
fungible with any other of a distinct discount schedule.
>=20
> What is the economic consequence of lending discounted money? Lower =
interest rates. How much lower? The rate of depreciation. This can also =
be observed with inflation and demurrage, but observation isn=E2=80=99t =
required. This is a necessary outcome.
>=20
> So when one lends 1 demurrage coin for a term one cannot earn interest =
on 1 coin, one is earning interest on a fraction of a coin. That =
fraction creates credit expansion and reduces return in direct =
proportion to the risk that has been offset. In other words, the risk =
cost has been converted to opportunity cost. The discounted fraction =
earns no interest.
>=20
> So credit expansion and risk remain, in the same proportions as =
without such a system. However lack of fungibility introduces an =
additional overhead cost.
>=20
> e
>=20
>> Alice can not issue promissory notes in excess of own capital or =
capital that she was able to borrow. No coin inflation or fractional =
reserve here, which also reduces the credit risk Charlie takes.
>>=20
>> Due to the transitive covenant Charlie could pass on the coins to an =
other temporary owner until maturity when Bob would re-collect them =
unconditionally.
>>=20
>> Should Charlie no longer be comfortable with Alice=E2=80=99s promise =
or need final coins (cash) immediatelly, then he could turn to Dan and =
do a re-purchase (repo) agreement with him.
>>=20
>> Charlie would receive final coins from Dan in exchange for the =
temporarily controled coins and Charlie's promise to replace them with =
final coins before maturity.
>> Dan would thereby charge high interest through a discount since as he =
has to bear the credit risk of Charlie. This is not a riskless but a =
plain zero bond.
>>=20
>> Why would Dan want to take temporary control of the coins at all? =
Again, to ensure Charlie is not doing yet another repo with Frank on the =
same coins, the sum of Charlie's repo deals are not in excess of his =
claims against others.
>> This again avoids lending in excess of coin supply and reduces the =
credit risk Dan takes.
>>=20
>> Here are the sketches for the transacions for above alternate =
actions:
>>=20
>> lets use shortcut c for 'or(and(time(100),pk(Bob)) covenant drop, _ =
covenant transitive)=E2=80=99
>>=20
>> the transactions offer a fee of 0.0001
>>=20
>> Bob gives a riskless credit to Alice:
>>=20
>> Input            Output
>> 1 pk(Bob)        1 or(b,pk(Alice) covenant c)
>> 0.1 pk(Alice)        0.9999 pk(Bob)
>>=20
>> Alice could send a 0.5 promissory note to Charlie:
>>=20
>> Input                    Output
>> 1 or(pk(Alice) covenant c)        0.5 or(b,pk(Charlie) covenant c)
>> 1 pk(Alice)                0.5 or(b,pk(Alice) covenant c)
>>                   0.9999 pk(Alice)
>>=20
>> Alice could make good of the note before maturity, pay some interest =
and get back temporary control of the coins with:
>> Input                        Output
>> 0.5 or(b,pk(Charlie) covenant c)        0.5 or(b,pk(Alice) covenant =
c)
>> 0.5101 pk(Alice)                0.51 pk(Charlie)
>>=20
>> alternatively Charlie borrows from Dan at high interest:
>>=20
>> Input                        Output
>> 0.5 or(b,pk(Charlie) covenant c)        0.5 or(b,pk(Dan) covenant c)
>> 0.3001 pk(Dan)                0.3 pk(Charlie)
>>=20
>> and Charlie re-purchases the temporary coins before maturity, making =
good of the repo with Dan:
>>=20
>> Input                            Output
>> 0.5 or(b,pk(Dan) covenant c)            0.5 or(b,pk(Charlie) covenant =
c)
>> 0.5001 pk(Charlie)                    0.5 pk(Dan)
>>=20
>> We need to define further transaction level validations for =
transactions spending inputs with covenants as follows:
>>=20
>> 1. If there are inputs without covenant before the input with =
covenant than inputs without covenant must be spent exactly with outputs =
preceeding the outputs with covenants.
>> 2. A transaction can have inputs with different covenants, their =
allocation to outputs should follow input order.
>> 3. For output(s) that share input(s) with covenant, the sum of =
covenant outputs must exactly add up to the input(s). This allows =
merging and splitting them.
>>=20
>> Bob would re-collect his coins at maturity unconditionally. Who =
followed through promises or defaulted down the transitive chain is =
irrelevant to him.
>> Remark: we might also need a covenant attribute defining the minimum =
size of output, so Bob is not forced to collect dust, which would be =
expensive or even impossible. I am not yet happy with this solution, =
looking for better.
>>=20
>> I am very excited about the possibilities this proposal would unlock =
and ask you verify usefulness of this scheme and join working out the =
details and how covenants would be integrated with taproot.
>>=20
>> Tamas Blummer
>>=20
>> [1] Malte Moser, Ittay Eyal, and Emin Gun Sirer. Bitcoin Covenants. =
URL: http://fc16.ifca.ai/bitcoin/papers/MES16.pdf
>> _______________________________________________
>> bitcoin-dev mailing list
>> bitcoin-dev@lists.linuxfoundation.org =
<mailto:bitcoin-dev@lists.linuxfoundation.org>
>> https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev =
<https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev>

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<html><head><meta http-equiv=3D"Content-Type" content=3D"text/html =
charset=3Dutf-8"></head><body style=3D"word-wrap: break-word; =
-webkit-nbsp-mode: space; -webkit-line-break: after-white-space;" =
class=3D""><div class=3D"">Hi Eric,</div><div class=3D""><br =
class=3D""></div><div class=3D"">Thank you for your questions as they =
show what concepts need further explanation, so you understand the =
potential of this proposal and how it is helpful to the =
ecosystem.</div><div class=3D""><br class=3D""></div><div =
class=3D"">Riskless zero bond is in fact the most basic concept of =
financial engineering. Yes, there are engineers of finance, those who =
create and price financial derivatives (e.g. options, swaps) and =
structure products such as e.g. ABS, CDO etc.</div><div class=3D"">I =
used to be one of them.</div><div class=3D""><br class=3D""></div><div =
class=3D"">A zero bond formalizes the observation that 1 unit of =
currency in the future has different value than 1 unit available now. It =
is called riskless if it is certain to receive the payment in the =
future.</div><div class=3D"">If we put this difference of vaue in =
relation to the amount then we get the =E2=80=9Crisk freee rate of =
return=E2=80=9D, that you heard of.</div><div class=3D""><br =
class=3D""></div><div class=3D"">E.g if one is willing to exchange 1 BTC =
unconditionally available now for 1.1 BTC certainly available in a year =
but not earlier, then the implied =E2=80=9Crisk free rate of return=E2=80=9D=
 is apparently 10% pa. for Bitcoins.</div><div class=3D""><br =
class=3D""></div><div class=3D"">The transaction I construct in the =
first example achives exactly this, because:</div><div class=3D""><br =
class=3D""></div><div class=3D"">Bob forgoes his ability to use his =
unconditionally available coins by giving them to Alice with a covenant =
that ensures that Bob will receive them back later.</div><div =
class=3D"">Bob does this because Alice pays for this in =
advance.&nbsp;</div><div class=3D""><br class=3D""></div><div =
class=3D"">Alice can further transfer the coins encumbered by the =
covenant, but they will unconditionally return to Bob in the =
future.&nbsp;</div><div class=3D""><br class=3D""></div><div =
class=3D"">The utility of these encumbered coins is that they prove that =
the loan is fully covered by reserves.</div><div class=3D""><br =
class=3D""></div><div class=3D"">How valuable this utility is will be =
decided by the market and that value will be interest received by those =
who temporarily give up control. I am guess the value will be low but =
positive.</div><div class=3D""><br class=3D""></div><div =
class=3D"">Lending does not mandate fractional or full reserves. These =
are choices the market or regulators enforce. Full reserve banking is =
not a fiction but is how things worked before introduction of gold =
receipts. A bank could only lend gold coins it possesed. Perils of =
fractional reserve were felt repeatedly by the Bitcoin ecnomy e.g. in =
the collaps of MtGox.</div><div class=3D""><br class=3D""></div><div =
class=3D"">The idea to return to full reserve banking is not unique to =
gold bugs or Bitcoin but recently a popular vote was initiated in =
Switzerland to force Swiss banks to full reserves with respect to =
lending. This popular vote achived &nbsp;24% support [1] which is quite =
remarkable if considered that the topic is not trivial as also our =
exchange shows.</div><div class=3D""><br class=3D""></div><div =
class=3D"">I published today a writing in medium, that explains the =
concept of fractional vs. full reserve banking in conjunction with this =
proposal. Please read:&nbsp;<a =
href=3D"https://medium.com/@tamas.blummer/full-reserve-banking-with-bitcoi=
n-462b21ae9479" =
class=3D"">https://medium.com/@tamas.blummer/full-reserve-banking-with-bit=
coin-462b21ae9479</a></div><div class=3D""><br class=3D""></div><div =
class=3D"">I would welcome feedback on the generalized covenant =
construct or its implementation, as I think it can open up much more =
uses than the few examples I gave.</div><div class=3D""><br =
class=3D""></div><div class=3D"">Tamas Blummer</div><div class=3D""><br =
class=3D""></div><div class=3D"">[1] Vollgeld Initiative:&nbsp;<a =
href=3D"https://www.bfs.admin.ch/bfs/de/home/statistiken/politik/abstimmun=
gen/jahr-2018/2018-06-10/vollgeld-initiative.html" =
class=3D"">https://www.bfs.admin.ch/bfs/de/home/statistiken/politik/abstim=
mungen/jahr-2018/2018-06-10/vollgeld-initiative.html</a></div><br =
class=3D""><div><blockquote type=3D"cite" class=3D""><div class=3D"">On =
Jun 28, 2019, at 19:25, Eric Voskuil &lt;<a =
href=3D"mailto:eric@voskuil.org" class=3D"">eric@voskuil.org</a>&gt; =
wrote:</div><br class=3D"Apple-interchange-newline"><div class=3D""><span =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px; float: none; =
display: inline !important;" class=3D"">Hi Tamas,</span><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br=
 style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px; float: none; display: inline =
!important;" class=3D"">There are a number of economic assumptions =
contained herein. While I understand you would like to focus on =
implementation, the worst bugs are requirements bugs. IMO these should =
be addressed first. I=E2=80=99ve addressed some possible issues =
inline.</span><br style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><blockquote=
 type=3D"cite" style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; orphans: auto; text-align: start; text-indent: =
0px; text-transform: none; white-space: normal; widows: auto; =
word-spacing: 0px; -webkit-text-size-adjust: auto; =
-webkit-text-stroke-width: 0px;" class=3D"">On Jun 28, 2019, at 01:27, =
Tamas Blummer via bitcoin-dev &lt;<a =
href=3D"mailto:bitcoin-dev@lists.linuxfoundation.org" =
class=3D"">bitcoin-dev@lists.linuxfoundation.org</a>&gt; wrote:<br =
class=3D""><br class=3D"">I start with a formalisation of loans as =
common in finance:<br class=3D""><br class=3D"">A zero bond is a =
contract between two parties Alice and Bob whereby Alice receives an =
amount less than P and has to pay back P at a later time point called =
maturity.<br class=3D"">The difference between the amount received and P =
is the interest implied by the contract. E.g. receiving 1 Bitcoin =
(&lt;P) and agree to pay back 1.1 (=3DP) in a year is the same as =
getting a loan with 10% p.a. interest.<br class=3D""><br class=3D"">The =
inherent risk in the contract is that Alice may not honor the agreement =
or be bankrupt by then.<br class=3D""><br class=3D"">If we could =
programmatically guarantee that Alice honors the contract then we would =
be able to create a riskless zero bond, the fundation of financial =
engineering.<br class=3D""></blockquote><br style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><span =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px; float: none; =
display: inline !important;" class=3D"">I=E2=80=99m not aware of the =
basis of this statement. While people use the term =E2=80=9Crisk free =
rate of return=E2=80=9D there has never actually been such a thing. =
It=E2=80=99s not clear to me how a unicorn has been the foundation of =
=E2=80=9Cfinancial engineering=E2=80=9D, but I=E2=80=99m not also clear =
and what is intended by =E2=80=9Cengineering=E2=80=9D in this sense. =
Generally engineering is the implementation of higher level concepts. It =
is those concepts that constitute requirements here.</span><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br=
 style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px; float: none; display: inline =
!important;" class=3D"">At a minimum, interest cannot be guaranteed by =
this proposal, which implies that at best it guarantees, setting aside =
changes in purchasing power, a return of principle minus economic =
interest on that principle (ie opportunity cost). Given that purchasing =
power changes over time, risk increases with the term of the loan. As =
such this is not riskless - both volatility and opportunity cost remain =
as risks.</span><br style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><blockquote=
 type=3D"cite" style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; orphans: auto; text-align: start; text-indent: =
0px; text-transform: none; white-space: normal; widows: auto; =
word-spacing: 0px; -webkit-text-size-adjust: auto; =
-webkit-text-stroke-width: 0px;" class=3D"">A systemic problem with =
loans is that the lender might operate on fractional reserve, that is =
lending more than his capital.<br class=3D""></blockquote><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px; float: none; display: inline =
!important;" class=3D"">This is not a systemic problem, this is the very =
nature of lending. Fractional reserve is simply a state banking term =
used to describe the fact that people invest (lend) a fraction of their =
savings and hoard the rest. It matters not that banks or individuals do =
this, credit expansion is inherent in economy. Without it there is no =
investment and therefore no production whatsoever.</span><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br=
 style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><blockquote type=3D"cite" style=3D"font-family: Helvetica; =
font-size: 12px; font-style: normal; font-variant-caps: normal; =
font-weight: normal; letter-spacing: normal; orphans: auto; text-align: =
start; text-indent: 0px; text-transform: none; white-space: normal; =
widows: auto; word-spacing: 0px; -webkit-text-size-adjust: auto; =
-webkit-text-stroke-width: 0px;" class=3D"">Unchecked inflation of money =
supply through fractional reserve is creating a mess in the world we =
live in. Bitcoin could overcome this mess implementing this proposal!<br =
class=3D""></blockquote><br style=3D"font-family: Helvetica; font-size: =
12px; font-style: normal; font-variant-caps: normal; font-weight: =
normal; letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px;" class=3D""><span style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px; float: none; display: =
inline !important;" class=3D"">You seem to be conflating state banking =
with the effects of investing. Taxpayer support for bank investment =
creates both a moral hazard (and the resulting misallocation of capital =
to state-favored projects, creating the famed economic =E2=80=9Cbusiness =
cycle=E2=80=9D) and is a manifestation of persistent monetary inflation =
(ie seigniorage is a source taxation. Investment implies credit =
expansion, and the level of this expansion is controlled by time =
preference alone.</span><br style=3D"font-family: Helvetica; font-size: =
12px; font-style: normal; font-variant-caps: normal; font-weight: =
normal; letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><blockquote=
 type=3D"cite" style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; orphans: auto; text-align: start; text-indent: =
0px; text-transform: none; white-space: normal; widows: auto; =
word-spacing: 0px; -webkit-text-size-adjust: auto; =
-webkit-text-stroke-width: 0px;" class=3D"">I stop here with finance =
speak as the purpose of this mail is not to dive into finance, but to =
show how loans with full reserve check could be implemented in =
Bitcoin.<br class=3D""><br class=3D"">1. Receiving the loan is a payment =
from Bob to Alice, but we need a restriction how Alice can use the =
funds, so Bob can get them back unconditionally at maturity, so lending =
is riskless to him.<br class=3D"">2. Bob wants to receive interest, =
since he gives up his control of the coins until maturity, he can not =
use them elsewhere until then. That interest could be paid in advance, =
this can be solved with Bitcoin as is.<br class=3D""></blockquote><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px; float: none; display: inline =
!important;" class=3D"">Interest cannot be paid in advance. This implies =
nothing more than a smaller amount of principle.</span><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br=
 style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><blockquote type=3D"cite" style=3D"font-family: Helvetica; =
font-size: 12px; font-style: normal; font-variant-caps: normal; =
font-weight: normal; letter-spacing: normal; orphans: auto; text-align: =
start; text-indent: 0px; text-transform: none; white-space: normal; =
widows: auto; word-spacing: 0px; -webkit-text-size-adjust: auto; =
-webkit-text-stroke-width: 0px;" class=3D"">How do we allow Alice to use =
the coins, that is: split/merge and transfer them to others, but still =
ensure Bob can claim them back at maturity?<br class=3D""><br =
class=3D"">We ensure that Alice can only send the coins to outputs that =
inherit a taproot path of validation (using <a =
href=3D"http://bitcoin.sipa.be/miniscript/" =
class=3D"">http://bitcoin.sipa.be/miniscript/</a>): =
'and(time(100),pk(C))' where C is Bob=E2=80=99s key and 100 is =
maturity<br class=3D""><br class=3D"">This requires a generalization of =
the Bitcoin Covenants Idea[1] such that it nicely fits with taproot as =
follows:<br class=3D""><br class=3D"">1. A covenant in the form of '_ =
covenant C=E2=80=99 on output means that it can be spent to an output =
that maches the covenant pattern with placeholder _ &nbsp;and the =
output(s) will be assigned 'covenant C'.<br class=3D"">2. A covenant =
that mandates an output script with alternate validation paths can also =
assign alternate covernants to be inherited by the output(s) depending =
on which path was used to spend the input eg. 'covenant or(c covenant C, =
d covernant D)=E2=80=99<br class=3D"">3. The resulting covenant of =
outputs should be reduced following boolean algebra, e.g. or(b,or(b,a)) =
to or(b, a)<br class=3D"">4. express transitivity with 'covenant =
transitive=E2=80=99 which means the output will have the same covenant =
as the input<br class=3D"">5. allow to omit covenant on the output with =
'covenant drop'<br class=3D""><br class=3D"">The covenant Bob would =
assign to the loan output sent to Alice is: 'covenant =
or(and(time(100),pk(Bob)) covenant drop, _ covenant transitive)' which =
means:<br class=3D"">- Alice can send to an output script where she is =
free to chose the embedded script at the placeholder _ and that output =
will again have the same covenant as the input.<br class=3D"">- After =
maturity Bob can claim any coin that is transitively rooted in the loan =
(more on this later) and the covenant will no longer be assigned to his =
new output(s).<br class=3D""><br class=3D"">Assuming Alice wants to send =
some of the borrowed coins to Charlie:<br class=3D""><br class=3D"">for =
shorter notation lets use b=3D'and(time(100),pk(Bob)) covenant drop=E2=80=99=
 for the script that gives Bob control after maturity.<br class=3D""><br =
class=3D"">Alice can not send to pk(Charlie), but she can send to or(b, =
pk(Charlie) covenant transitive)<br class=3D"">Sending to pk(Charlie) =
would be sending cash, sending to or(b, pk(Charlie) covenant transitive) =
is a promissory note issued by Alice to Charlie, here is why:<br =
class=3D""><br class=3D"">If Charlie accepts an or(b, pk(Charlie) =
covenant transitive) output then he trusts, that Alice will offer a =
regular payment in exchange for it before maturity, since that output is =
worthless to Charlie after maturity as Bob can just take it.<br =
class=3D""><br class=3D"">It seems at the first sight that there is no =
value in these outputs for Charlie, since he still has to ensure Alice =
replaces them before maturity.<br class=3D""><br class=3D"">The value of =
these outputs to Charlie is the proof that he has exclusive control of =
the coins until maturity.<br class=3D""></blockquote><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px; float: none; display: inline =
!important;" class=3D"">At a minimum, money that predictably depreciates =
(to zero in this case) must be discounted accordingly. How much is money =
worth today that is worth zero tomorrow? This can be observed with both =
inflation and demurrage money. This also implies that each encumbered =
coin is not fungible with any other of a distinct discount =
schedule.</span><br style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><span =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px; float: none; =
display: inline !important;" class=3D"">What is the economic consequence =
of lending discounted money? Lower interest rates. How much lower? The =
rate of depreciation. This can also be observed with inflation and =
demurrage, but observation isn=E2=80=99t required. This is a necessary =
outcome.</span><br style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px;" class=3D""><br style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><span =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px; float: none; =
display: inline !important;" class=3D"">So when one lends 1 demurrage =
coin for a term one cannot earn interest on 1 coin, one is earning =
interest on a fraction of a coin. That fraction creates credit expansion =
and reduces return in direct proportion to the risk that has been =
offset. In other words, the risk cost has been converted to opportunity =
cost. The discounted fraction earns no interest.</span><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br=
 style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px; float: none; display: inline =
!important;" class=3D"">So credit expansion and risk remain, in the same =
proportions as without such a system. However lack of fungibility =
introduces an additional overhead cost.</span><br style=3D"font-family: =
Helvetica; font-size: 12px; font-style: normal; font-variant-caps: =
normal; font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><span style=3D"font-family: Helvetica; font-size: 12px; =
font-style: normal; font-variant-caps: normal; font-weight: normal; =
letter-spacing: normal; text-align: start; text-indent: 0px; =
text-transform: none; white-space: normal; word-spacing: 0px; =
-webkit-text-stroke-width: 0px; float: none; display: inline =
!important;" class=3D"">e</span><br style=3D"font-family: Helvetica; =
font-size: 12px; font-style: normal; font-variant-caps: normal; =
font-weight: normal; letter-spacing: normal; text-align: start; =
text-indent: 0px; text-transform: none; white-space: normal; =
word-spacing: 0px; -webkit-text-stroke-width: 0px;" class=3D""><br =
style=3D"font-family: Helvetica; font-size: 12px; font-style: normal; =
font-variant-caps: normal; font-weight: normal; letter-spacing: normal; =
text-align: start; text-indent: 0px; text-transform: none; white-space: =
normal; word-spacing: 0px; -webkit-text-stroke-width: 0px;" =
class=3D""><blockquote type=3D"cite" style=3D"font-family: Helvetica; =
font-size: 12px; font-style: normal; font-variant-caps: normal; =
font-weight: normal; letter-spacing: normal; orphans: auto; text-align: =
start; text-indent: 0px; text-transform: none; white-space: normal; =
widows: auto; word-spacing: 0px; -webkit-text-size-adjust: auto; =
-webkit-text-stroke-width: 0px;" class=3D"">Alice can not issue =
promissory notes in excess of own capital or capital that she was able =
to borrow. No coin inflation or fractional reserve here, which also =
reduces the credit risk Charlie takes.<br class=3D""><br class=3D"">Due =
to the transitive covenant Charlie could pass on the coins to an other =
temporary owner until maturity when Bob would re-collect them =
unconditionally.<br class=3D""><br class=3D"">Should Charlie no longer =
be comfortable with Alice=E2=80=99s promise or need final coins (cash) =
immediatelly, then he could turn to Dan and do a re-purchase (repo) =
agreement with him.<br class=3D""><br class=3D"">Charlie would receive =
final coins from Dan in exchange for the temporarily controled coins and =
Charlie's promise to replace them with final coins before maturity.<br =
class=3D"">Dan would thereby charge high interest through a discount =
since as he has to bear the credit risk of Charlie. This is not a =
riskless but a plain zero bond.<br class=3D""><br class=3D"">Why would =
Dan want to take temporary control of the coins at all? Again, to ensure =
Charlie is not doing yet another repo with Frank on the same coins, the =
sum of Charlie's repo deals are not in excess of his claims against =
others.<br class=3D"">This again avoids lending in excess of coin supply =
and reduces the credit risk Dan takes.<br class=3D""><br class=3D"">Here =
are the sketches for the transacions for above alternate actions:<br =
class=3D""><br class=3D"">lets use shortcut c for =
'or(and(time(100),pk(Bob)) covenant drop, _ covenant transitive)=E2=80=99<=
br class=3D""><br class=3D"">the transactions offer a fee of 0.0001<br =
class=3D""><br class=3D"">Bob gives a riskless credit to Alice:<br =
class=3D""><br class=3D"">Input =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Output<b=
r class=3D"">1 pk(Bob) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;1 =
or(b,pk(Alice) covenant c)<br class=3D"">0.1 pk(Alice) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.9999 pk(Bob)<br class=3D""><br=
 class=3D"">Alice could send a 0.5 promissory note to Charlie:<br =
class=3D""><br class=3D"">Input =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Output<br class=3D"">1 =
or(pk(Alice) covenant c) &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 =
or(b,pk(Charlie) covenant c)<br class=3D"">1 pk(Alice) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;0.5 or(b,pk(Alice) covenant c)<br =
class=3D"">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nb=
sp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.9999 pk(Alice)<br =
class=3D""><br class=3D"">Alice could make good of the note before =
maturity, pay some interest and get back temporary control of the coins =
with:<br class=3D"">Input =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Output<br =
class=3D"">0.5 or(b,pk(Charlie) covenant c) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 or(b,pk(Alice) covenant =
c)<br class=3D"">0.5101 pk(Alice) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;0.51 pk(Charlie)<br class=3D""><br =
class=3D"">alternatively Charlie borrows from Dan at high interest:<br =
class=3D""><br class=3D"">Input =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Output<br =
class=3D"">0.5 or(b,pk(Charlie) covenant c) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 or(b,pk(Dan) covenant =
c)<br class=3D"">0.3001 pk(Dan) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;0.3 pk(Charlie)<br class=3D""><br class=3D"">and Charlie =
re-purchases the temporary coins before maturity, making good of the =
repo with Dan:<br class=3D""><br class=3D"">Input =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbs=
p;&nbsp;&nbsp;Output<br class=3D"">0.5 or(b,pk(Dan) covenant c) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 =
or(b,pk(Charlie) covenant c)<br class=3D"">0.5001 pk(Charlie) =
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&n=
bsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.5 pk(Dan)<br class=3D""><br =
class=3D"">We need to define further transaction level validations for =
transactions spending inputs with covenants as follows:<br class=3D""><br =
class=3D"">1. If there are inputs without covenant before the input with =
covenant than inputs without covenant must be spent exactly with outputs =
preceeding the outputs with covenants.<br class=3D"">2. A transaction =
can have inputs with different covenants, their allocation to outputs =
should follow input order.<br class=3D"">3. For output(s) that share =
input(s) with covenant, the sum of covenant outputs must exactly add up =
to the input(s). This allows merging and splitting them.<br class=3D""><br=
 class=3D"">Bob would re-collect his coins at maturity unconditionally. =
Who followed through promises or defaulted down the transitive chain is =
irrelevant to him.<br class=3D"">Remark: we might also need a covenant =
attribute defining the minimum size of output, so Bob is not forced to =
collect dust, which would be expensive or even impossible. I am not yet =
happy with this solution, looking for better.<br class=3D""><br =
class=3D"">I am very excited about the possibilities this proposal would =
unlock and ask you verify usefulness of this scheme and join working out =
the details and how covenants would be integrated with taproot.<br =
class=3D""><br class=3D"">Tamas Blummer<br class=3D""><br class=3D"">[1] =
Malte Moser, Ittay Eyal, and Emin Gun Sirer. Bitcoin Covenants. URL: <a =
href=3D"http://fc16.ifca.ai/bitcoin/papers/MES16.pdf" =
class=3D"">http://fc16.ifca.ai/bitcoin/papers/MES16.pdf</a><br =
class=3D"">_______________________________________________<br =
class=3D"">bitcoin-dev mailing list<br class=3D""><a =
href=3D"mailto:bitcoin-dev@lists.linuxfoundation.org" =
class=3D"">bitcoin-dev@lists.linuxfoundation.org</a><br class=3D""><a =
href=3D"https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev" =
class=3D"">https://lists.linuxfoundation.org/mailman/listinfo/bitcoin-dev<=
/a></blockquote></div></blockquote></div><br class=3D""></body></html>=

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