Category Archives: Cryptography

Philip Maymin, Markets are Efficient if and Only if P = NP.

I prove that if markets are efficient, meaning current prices fully reflect all information available in past prices, then P = NP, meaning every computational problem whose solution can be verified in polynomial time can also be solved in polynomial time. I also prove the converse by showing how we can “program” the market to solve NP-complete problems. Since P probably does not equal NP, markets are probably not efficient. Specifically, markets become increasingly inefficient as the time series lengthens or becomes more frequent. An illustration by way of partitioning the excess returns to momentum strategies based on data availability confirms this prediction.

But if P = NP then that’s it for most of modern cryptography, especially public/private key encryption. We’ll have to send giant one-time pads to each other before we can have secure communications.

So it turns out (if this paper is correct) that the choice is not (national) security or privacy. It’s market efficiency or (data) security and privacy.

Then again, it’s hardly news that markets fail. Look outside your window.

Edward Castronova, the leading economist of online gaming, writes that “Experience with game currencies makes me skeptical about Bitcoin“.

Game currencies are good currencies. What are the features of those currencies?

• You get money only by doing things that can be interpreted as “productive work.” No freebies or handouts, and nothing abstract. You don’t solve puzzles to get coin, you run FedEx quests. 
• Mild inflation. As in the real world, mild inflation makes people happiest. Small enough to be unnoticeable in the short run, yet gives people a sense over time that their wealth and power is rising (even if it isn’t). 
• It assumed that the currency will be hacked and exploited. A strong central authority is in place to seize illicit funds and roll back damage.

Bitcoins don’t have these features.

One thing, though: the last point is probably not consistent with strong anonymity. If you think that’s a valuable part of your coin model, you usually have to pay a price on the repudiation front.