If I give you $100, and we mark it on a stick, and then split it and give me the longer one, and then I throw away my half and split a new one that says you owe me $200, how do we resolve it when the halves come together and don't match? I say you made a new half-stick, and you say I did.

Both parties in a contract can have an incentive to lie.

I think in this case one of the recipients has a monopoly on violence and doesn't care how much money you think they owe you.

You have to give both parties incentive to produce the original stick. So if they don’t match then you both lose.

I don’t think all contracts have an obvious both losing state though.

> I don't understand

Think about two situations:

Firstly, if I lend you money, we split sticks, then I throw away my stick and get a new stick that says I lent you more money.

Secondly, if you lend me money, we split sticks, then I throw away my stick and get a new stick that says you lent me less money.

In both cases you're claiming my stick is clearly counterfeit because it doesn't match yours and I'm (falsely, but nobody knows that except the other party) claiming your stick is clearly counterfeit because it doesn't match mine.

What happens next? We're no better off than if we only had a verbal record and were disagreeing. So what is the point in the sticks?

Understand?