Financial Cryptography

On The Resolution of Disputes

Trust is a funny thing. It's hard to pinpoint. One can say easily that one trusts someone, but less easily why.

Trust could be considered to be an expectation that some predicted event will come to pass.

Put that way, we can then break down the use of trust into something more objective.

If you have an expectation, you can compare it to other expectations that have since happened. If you rely on this event, you can also determine what your potential costs, benefits and losses are on this event.

There - we said all that without saying who! And, in fact, trust is not about who, it's about events. When I say, "I trust my wife," what I mean is that I have high expectations for her to do and act in a certain way in any given event. I just haven't bothered to list those events.

(Of course, I never say "I trust my wife." Perhaps that's what she didn't marry me.)

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Events and expectations. Take the DGC industry. There is this digital gold. It's supposed to have value. You can buy stuff with it, but it costs money.

How do I trust that? How do I trust any person in the DGC world?

Well, it's actually quite easy to get or acquire trust. You do it by starting small, and building up.

You buy something small. This works, because your loss in the bad event is small, so you don't care so much. Or, to put it another way, even if you lost out on, say, $10 worth of digital gold, you had a little fun and experience to go with it.

This is why so many people's first experience of digital gold is a 1g event. Someone sends them a gram, it's about the same price as a movie ticket, and it has similar entertainment value.

Very broadly speaking, of course. Any loss is offset by the fun of it, and any success confirms the story and starts the building of trust.

Of such small events, bigger expectations are built.

When you next get into the big league and buy, say, $100 worth of gold, that exciting twinge of fear teases. Maybe you'll get the gold. Maybe it will all evaporate the moment you do get the gold, and you will wake up wondering about the white rabbit?

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But it all works, and it gets bigger and bigger, and you learn about the exchange providers and how to tell the good from the bad.

You build up trust. In the expectation that, when you send your paycheck entire to some dude with a strange name, you'll get a full bag of gold in return.

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Then there is the gold itself. It's digital. How did that get to be trusted?

Well, everyone else believes it trusted. That's a good start.

But, everyone knows about scams. That's not such a good start!

And, in fact, at least two Issuers of gold currency have collapsed - OSGold and Standard Reserve. Both in dire and financially ruinous conditions for some. And, to see some of the actions of some of the current pack of Issuers, it's not so clear that one can safely say they aren't the next to be written up in our list of infamous fraudsters.

So, how does our newbie tell the pyrite from the gold? And, why can't it be easy like telling a good exchange provider from a bad?

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Issuance is different to exchange. Let's look at the events, again, and form our expectations.

In Exchange, you send me national currency, and I send you gold. Either you get the gold, or you don't. That means you can tell fairly quickly whether it happened.

It's fast. It's also limited in value, to the precise amount.

Let's look at the downside - I as the Exchange provider decide to run with your national. I will do this if you send me so much money that it exceeds all the future profits that I can earn.

This is a given - there is no point in me working my butt off for the rest of my days if I will earn less money than I could by taking my one chance at your pot [1].

In the business of Exchange, the provider sees a lot of moderate amounts flow through, in and out, very quickly, and she takes a small cut from each [2]. In general, the cut will grow over time, as her revenue, and will be worth much more than any one amount that is being bought and sold.

Not so with the Issuer. By definition, all the metal that is behind an issue is in the hands of the Issuer already. Every little bit that comes in is way less than the amount already under management.

So the equation is reversed. Every Issuer that is out there faces the fact that if he could steal the whole lot, he could earn more money than he could if he stayed in the business of issuance.

Every day, every moment, Issuers are faced with this equation. Cut and run is highly lucrative.

How do we then reverse this? How do we turn this devil's temptation into a sustainable long term business serving us angels?

Well, one way is to promote good governance. We talk about things like 5PM, which is a way to take the power out of hands of the Issuer, and to share it with other trusted parties [3]. Briefly, we examine the location of the bars, what serial numbers they claim, who has verified that they exist, and who can sign them out.

We repeat the process for the digital side [4].

Lately, we've also started to discuss reputation in a less objective fashion. Honour, I've called it [5]. Can we assess the honour of an Issuer and his propensity to do more than just set up a copycat of 5PM? Because that's what happened in one of the failures, 5PM was copied and convincingly presented. People bought it.

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Issuance is a different product to Exchange. It has the unusual characteristic that when we hand over our cash, we don't get immediate satisfaction of our trust requirements.

Unlike buying a car, flying in a plane, or trading the digital gold itself, with Issuance, we are dependant on a trust equation that extends out into the indeterminate future.

Like banks, Issuance requires long term reputation. Like pensions, we need to know that the institution will stay, and will stay safe. Like schools, we need to know more than just whether the child is safe today. Like the army, we don't care what silly parade ground drill they are rehearsing today, we just want to know that we can call on them in 5 years time, when the barbarians are at the gate.

Businesses like these are ripe for government regulation, but that's just because the government is the last man standing when everything else has collapsed. Surely the government knows how to do this, people say? And, when the government shows it doesn't know, people don't say anything, because the issues are too complex [6].

We have a unique sector going on here. We have - collectively - shown how to build a long term trust equation that stands on its own feet. It delivers cost benefits beyond that of any competing arrangement. It finds new solutions quicker than the conventional world. It shows flexibility. It shows strength. It grows and it evolves.

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Into this fray comes one more business activity, the activity known as dispute resolution.

The problem of settling disputes has been a vexing one. Many users are far-flung, talk in different languages, and even think under different laws. Issuers are in strange places with names that are found in holiday brouchures. Exchange providers likewise.

Out of this, several strategies have arisen. One Issuer insists publically on only court orders for all disputes Another strategy is sabre-rattling. A further strategy is to craft the user base to be ... less dispute-ridden.

And, we also have ADR. Alternative Dispute Resolution means a technique for resolving disputes by not using the courts, but instead, using a well known private party to intermediate. He's called a mediator or an arbitrator.

First promoted in the early days of e-gold, perhaps most visibly in a series of conferences called Lex Cybernatoria, it has long been known that if we as a group can Exchange and Issue, why cannot we also Resolve?

It has long been expected that ADR will arise in some form or other, but all of the powerful players are of course conflicted. Only independant players can resolve disputes. Of course.

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The American Arbitration Association is listed in at least one Issuer's user agreement, but we have no reports of it being tested in a user dispute. Notwithstanding its conceptual form, it is apparant that the substance of ADR has distinct and challenging characteristics.

Like Issuance, we are, as users of the service of ADR, dependent on events in the future. Unlike Issuance, we do not so much analyse and enter into this field with eyes open; it's a characteristic of disputes that if one knew what we were doing, we wouldn't have done that!

Also, unlike Issuance, even if we wanted to analyse it, how could we do it? We can't for example run a little event. There's no such thing as a trial dispute, for example. And, other people's disputes do not mean so much to us - especially in today's world of bluster and never admitting doubt or wrongness.

If we were to draw a matrix of these characteristics:

Building Trust	Trial Events	Cannot Try Out
Quick	Exchange	[7]
Future	Issuance	Dispute Resolution

So, up-front analysis is not really a characteristic of dispute resolution. We thus can dispose of a lot of rhetoric easily.

How then can we trust a provider of ADR? The close we look at the event, the more daunting it becomes:

The parties to a dispute have already faced losses - that's a characteristic of disputes. They are also looking at further potential losses due to costs. Perhaps one of them is looking at a potential gain, in the event that she "wins" the dispute.

It's not fast. We didn't want to be here. And we are at great risk. Yet, here we are. Looking at a future event of some great risk.

We need a lot of trust in this process. And no events to draw upon.

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When we look to a provider of dispute resolution, we need to know, with great confidence, that it is trusted, because without making the normal conscious and planned choices, we are suddenly dependent on the judgement of the provider. Indeed, the provider of dispute resolving services has a daunting task establishing this level of trust. The only thing left to analyse is secondary information: the past, the people, the actions, the politics, the results of actions.

All these data points are indirect, so as many as possible are needed to analyse. Every part of the past will be brought to bear, because that's all there is to go on.

Every action, every posture. Here's a trial list:

* considered, reasoning writings, not hyperbole
* impartiality
* longevity and transparency
* respect to all
* a sense of honour (that meets and even exceeds that demanded of the Issuers)
* straight forward answers to difficult questions
* polite useful answers to easy questions
* acceptance of criticism, acceptance of weakness
* open structures, open procedures
* gravity and seriousness, not tomfoolery

Which I scratched out in a moment. Other lists could also be written, no doubt.

Which leaves us in a dilemma - the list of the above is almost impossibly hard to meet. Does that mean we should lower our standards to find a provider of ADR?

I believe not. ADR is nothing without an extremely high level of trust. If it is, then, so like nothing, then we are better off not having it.

We as users may actually be a lot better off by cutting our losses. We are often better off limiting up front than relying and risking on the uncertain future gamble.

If we found ourselves in dispute resolution, and it was bad dispute resolution, then we would be better off avoiding it; removed of the crutch of a false promise, we would then at least be enabled to develop more reliable ways of commerce, in exchange for the losses suffered.

iang

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[1] So, don't ever send payments to an EP in excess of her normal takings. Stay under her biggest amounts, and you have a good chance of being safe.

[2] Exchange providers are often referred to in the feminine, as a merchant, Matilda, whereas Issuers are generally in the masculine, Ivan. It's a convention that helps those in the English language.

[3] 5PM is Five Parties Model, which places the actual control of something valuable in the hands of several parties. Space does not permit full description today...

[4] Which makes for ten parties. Sorry about that.

[5] Ivan the Honourable makes his first appearance at http://www.iang.org/rants/ivan_the_honourable.html

[6] Mises asked the question, why is it that we think that government knows the answers? He never got a satisfactory answer before he died, so it behoves us to keep asking for him.

[7] If you are wondering what goes in this corner, it may be security - it's quick, but you cannot test it. A paradox, but one irrelevant to today's topic.

Posted by iang at October 12, 2003 01:32 PM | TrackBack