Human-backed derivative

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Human-backed derivative

Postby Tailsteak » Tue Feb 09, 2016 1:02 am

Okay, I posted this idea on Twitter, and a few tweeps chimed in - I want to know what the people here think.

More importantly, I want someone to point out the terrible consequences I'm not thinking of and talk me out of this terrible, terrible idea.

I am wondering if it's possible to sell - well, we used a few different terms for it on Twitter ("stock in myself", "a personal-backed currency") but the most accurate one seems to be a "human-backed derivative" - of my own net worth.

i.e., I'd set up a system - perhaps here on this forum! - where I post all my assets and debts and projected earnings, and then offer up 1% of it all for people to purchase from me. I'll break it up - let's say ten people each purchase tokens that represent 0.1% of my net worth - and each token can, at any time, be sold to another person or back to myself for 0.1% of whatever my net worth is at that time. I'd have to be completely transparent, of course, about my financial situation... but what the heck, I'm not shy. Maybe I'd post regular screenshots of my bank account, credit card balance, Paypal account, etc, with all the identity-theftable info covered up. We'd also have to be transparent about keeping track of who owns which token - you'd have to post when you trade to another user, so I can keep track of who has what.... otherwise, everything would be on the honour system, and that's just not going to work when actual money's involved.

I don't expect to deal with any significant amount of cash, here - I'm not thinking I'll make any sort of profit - I just want to monkey with this as a sort of financial experiment (hence why it'd only be 1%). Perhaps I'd put a time-limit of a year on this, a stipulation that you have to sell the derivatives back to me after the year is up, regardless of their value.

And, of course, if it doesn't turn out to have terrible consequences, I'd be interested in seeing if I could talk other people into doing the same. Perhaps I'd set up a website specifically for selling and trading derivatives based on oneself.

This is a terrible idea. I know it is (if it weren't, people would already be doing it). Why is it terrible?
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Re: Human-backed derivative

Postby DanielH » Tue Feb 09, 2016 1:42 am

I’m not sure about terrible consequences, but here are some things from basic financial knowledge of derivatives. Any point discussing how they would work is just about the more conventional derivatives; obviously you could make them work however you want (except you probably could not affect the results of my first point very much), but these might be good baselines.

  • I don’t know if this is actually illegal or not, but the legality almost certainly gets more complicated if you want to sell these to a country you don’t live in, and even more complicated if you want to sell them online to the United States because it might count as online gambling. IANAL, etc.
  • Trading them back to you would be called redeeming them, and could be at 0.1% of your net worth at the time. Trading them among each other would usually not necessarily be at 0.1% of your current net worth; in fact, most options trade at a premium (for more than their current redemption value) because the redemption value might go up. This premium would gradually get smaller as the expiration date approached. Because they would trade at a premium, you might actually be able to make money from this, but that would complicate matters and it might not work as well for such a small market.
  • The standard way for such a thing to work if it’s not person-backed would be for it to have an expiry time in a year or so, and if it expired then it would just be worthless. No forced redemption if your net worth goes negative, for example.
  • You would need to be very clear about the accounting with these contracts and how they affected your net worth. Since issuing or redeeming one of these would be a financial transaction with you, if you aren’t careful in your accounting they would change your net worth and that would just be confusing.
  • I think economists have discussed this or similar, but I have no idea what they actually said or where to find it.
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Re: Human-backed derivative

Postby yomikoma » Tue Feb 09, 2016 1:27 pm

If your current worth is X, then I'm buying one of these tokens from you for X/1000. I can give it back for Y/1000 where Y is your new net worth. You actually profit if Y < X since you're basically taking a loan out from me where you're in control of the ending value of the loan, not me. What's your incentive to raise your net worth? Can I sue you for neglecting your shareholders if you don't act to improve your net worth?

When a company does this, they also generate profit that is paid out to all shareholders. But you don't have "profit", only income, so I'm not getting that either.
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Re: Human-backed derivative

Postby DanielH » Tue Feb 09, 2016 2:36 pm

Ideally, the other 99% of his net worth is his incentive. In practice, that probably would not actually work.
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Re: Human-backed derivative

Postby JustinReilly » Tue Feb 09, 2016 2:39 pm

I don't think you'd be able to sue, but I reckon that people who show poor prospects or poor histories of increasing their net worth would see their shares selling at a discount in the market. Likewise, those showing good prospects would sell at a premium.
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Re: Human-backed derivative

Postby yomikoma » Tue Feb 09, 2016 3:55 pm

A likely gambit is that Tailsteak could sell a bunch of these then go on a vacation to Hawaii. He clearly "profits" by enjoying some island rays and learning to surf but his net worth goes down and he can pay us back cheap.
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Re: Human-backed derivative

Postby snowyowl » Thu Feb 11, 2016 6:54 pm

The term I've heard is celebrity bond, since they work best when used by celebrities. David Bowie issued some.

The idea was that, if Bowie's later songs had turned out to be rubbish and didn't earn anything, he'd still make a living from his bonds. Celebrity bonds let you take on a financially risky career like music (or webcomics for that matter) by shouldering that risk onto your investors, who are better placed to cope with risk.
... in bed.
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Re: Human-backed derivative

Postby DanielH » Thu Feb 11, 2016 7:18 pm

That doesn’t really work the same way. It looks like if Bowie had won the lottery, the bonds would not actually increase in value. I could misunderstand, though; I hadn’t heard of this before. Could somebody who understands this better give a comparison?
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Re: Human-backed derivative

Postby Satinavian » Sun Feb 14, 2016 2:47 am

Problems :

- How do we know that you actually posted all of your accounts ? There is no oversight.

- What happens when the time for the redeeming get nearer and you decide to stop working and make a several month expensive holyday instead ?

The first point would need an amount of survaillance that is not fun. The second point would only be solved by an obligation to not willfully decrease your net worth. But as soon as there is such an obligation, as soon as we could sue you to work because we own a part of your productivity, we are in slavery-territory. Debt-slavery to be more precise.


So either it boils down to effectively "we give you some money and you give us back whatever you think is nice " because you have full controll over your net worth or we arrive at some very wrong economic concept that was abolished for good reasons and is probably still illegal. Both are bad options. You might try the first one with good friends based on mutual trust but that is not better or any different from private loans from good friends. Often those work OK, but it can get really nasty if something doesn't work out and then the friendship turns sour.
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Re: Human-backed derivative

Postby Deepbluediver » Wed Feb 17, 2016 1:32 pm

I have not read all the replies- sorry. I've just been super-busy lately.

This sounds kind of like a form of no or low-interest loan. People might get into it for the novelty on a small scale, but why would anyone WANT to own a portion of another person('s net worth) for a limited period of time? Unless you are anticipating a substantial increase in your personal value in the next year or whatever time period you pick, why should I tie my money up in an uncertain investment?
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