Re: [Ripple-protocol] Interest as pseudo-currency (Re: FAQ pre-existing debt - procedure not atomic)

[Ryan F. <rf...@gm...>]

On 10/14/06, Jiri Baum <ji...@ba...> wrote:
> > My reason for not wanting to integrate passing interest charges back
> > to the payer boils down to being able to answer simply the user's
> > question "what do I have to pay my friend so I don't owe her any more
> > ?"  To me, the answer "you owe her $100 at 6%, and she owes you $100
> > at 3%, so to fairly wipe the slate clean you have to precisely reverse
> > those transactions as intermediaries in other people's payments" isn't
> > a very simple one -- and that's about as simple as it could ever
> > possibly be.
>
> > Maybe you have answers to these questions that I haven't thought of?
>
> The trick is that the above description is missing the *dates* at which the
> loans took place. Let's add a couple of dates to it: the 6% loan is 4 months
> old and the 3% loan is 3 months old (and in each case $100 was the amount
> originally borrowed).
>
> At that point, my answer is: "as of today, you owe her $102.02 and she owes
> you $100.75, so to wipe the slate clean you need to pay her $1.27".
>
> In fact, the program would normally display the debts as "$102.02 at 6%" and
> "$100.75 at 3%", to indicate balance including interest, so the answer would
> be obvious.

You're not considering the fact that much of this interest is likely
being charged to defray costs incurred further up a payment chain.
I'll give an example:  Suppose there's a payment chain Alice -> Bob ->
Carol -> Dan, for a $50 payment, with all balances initially zero.
Bob charges Alice 1% interest, Carol charges Bob 2%, and Dan charges
Carol 3%.  The whole complication with interest arises because Carol,
as an intermediary, is hit with a 3% interest charge, *which recurs
continually over time* on her $50 balance as a side-effect of this
payment.  Perfect fairness dictates that she be able to pass that back
to Bob, who caused her to incur this charge, in addition to charging
the regular 2% to defray her perceived risk of his default.  Bob,
likewise, would pass the 3% as well as the 2% on $50 back to Alice,
and also charge her the regular 1%.

It's easy to calculate the balances at any point in the future, so we
can know what payment is required to zero those balances.  However, if
Bob pays off Carol before Carol pays off Dan, Carol still being
charged interest by Dan for a transaction that she neither initiated
nor substantially benefitted from.  She should still be able to charge
interest to Bob, and Bob to Alice, until her debt with Dan is cleared.
 However, Bob can never know for certain Carol's balance with Dan...

In fact, if the true principle of fairness is that the situation for
intermediaries should remain as close as possible to that before the
transaction took place, then Carol should be able to continue charging
the 3% in perpetuity, since if the transaction hadn't taken place and
her balance was zero, and she gave $50 value to Dan in exchange for a
Ripple bookkeepping entry in her favour, she would be entitled to
charge him interest on that entry.  So, her charging interest (albeit
not necessarily at the same rate she would charge Dan) to Bob makes up
for that.  Sort of...  Of course, Carol *could* stop charging Bob
whenever she wanted to.  But then Bob would be collecting interest
from Alice on Carol's behalf, and pocketing it himself.  Anyways, this
makes up for Bob needing to know Carol's balance with Dan.

So my point is that just because a balance gets zeroed, doesn't mean
interest charges can stop.  (In fact, it's entirely possible to have a
negative balance, but still be collecting interest.)

In my opinion, interest-rate imbalances along the payment chain are
much more cleanly (although not always as fairly) handled using
transaction fees, which propagate naturally back to the payer.  I
think most users would prefer a great increase in simplicity and
intuitiveness to a small (and most often likely very small) increase
in fairness.

Ryan