0 sats \ 12 replies \ @taxd OP 14 Apr 2023
Given the amount of expertise on Stacker.news, maybe somebody can explain to me why fractional reserve banking is bad and why it cannot occur using Bitcoin.
i) Why cannot Bitcoin banks exist, where people deposit Bitcoin for interest and where the bank lends this Bitcoin to companies for interest?
ii) Depositors then have the risk of a bank run and they cannot get out their Bitcoin until the Bitcoin is back to the bank from the debtors. This may take years but the Bitcoin is not lost unless the debtor defaults.
iii) Why can't this wait-problem be fixed by "deposit-insurance" companies that pays out Bitcoin in case of a bank run and gets the IOU from the bank in return. Naturally these insurance companies take a fee for their services and the insurance may be on the market, similar to CDSs that are tradeable.
I just don't get it. Why can't banks extremely similar to fiat-banks exist in a Bitcoin world? Fractional reserve and everything.
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108 sats \ 7 replies \ @ama 14 Apr 2023
Because they won't be able to lend BTC that they don't have, like they do with fiat, which is what fractional reserve allows.
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0 sats \ 3 replies \ @taxd OP 14 Apr 2023
Banks do not lend fiat they don't have. People deposit fiat, get an IOU, and the fiat is lent out and the bank gets an IOU. Thus two IOUs are created which balance each other. But no pseudo-fiat is created.
Exactly the same thing can and will happen with BTC, since credit is valuable and bought for interest.
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0 sats \ 2 replies \ @ama 14 Apr 2023
Sorry, but no. Banks lend money they don't have and that they create out of thin air precisely by fractional reserve, which cannot happen on PoW blockchains (BTC or LTC) layer 1.
Of course there can be other non institucional form of fraud, like lending other things than BTC or LTC using them as "collateral" that they don't have, like Sam Bankman-Fried and other crooks have done already. And that'll keep happening, of course.
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0 sats \ 1 reply \ @taxd OP 14 Apr 2023
This is a very common misconception which many people have.
I don't care, I make money out of peoples mistakes instead of arguing.
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0 sats \ 0 replies \ @ama 14 Apr 2023
Not arguing, just trying to educate the misinformed hopping to help them better understand the corrupt system the neo-liberalism has brought us, and why Bitcoin is so much relevant than they might think.
As US Space Force's Major Jason Lowery has explained to the US Defense Department, Bitcoin is a weapon of self-defense and not just money. And I'm convince it is so not only for States (mainly for every other one to defend themselves from US predatory abuse), but also for individuals (mainly the working class and the poor, closer and closer as time pases), companies (mainly small ones), and all kind of other organisations.
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0 sats \ 1 reply \ @scottathan 14 Apr 2023
I agree. But it's still likely that some level of fractional reserve will be around since loans will still exist. In all likelihood fractional reserve will take it's place as an occasional tool in the financial system that is only used in a few specific instances.
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0 sats \ 0 replies \ @ama 14 Apr 2023
Yes, of course, it'll for sure happen on DeFi on Bitcoin, but not on BTC layer 1 (and hopefully layers 2).
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0 sats \ 0 replies \ @ek 14 Apr 2023
Yes, and they can't do that since the blockchain is public and can be verified by anyone with a node.
Lightning may be a different story but even there, the channels should be verifiable.
So if you go to a bank and don't check that they actually have your funds somewhere on the blockchain, that's on you.
For example, you can ask them to sign a message.
Also, you should use a 2of2 multisig. Else, they can just tell multiple people about the same funds.
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0 sats \ 3 replies \ @siggy47 14 Apr 2023
There is nothing preventing someone from giving an iou on identified bitcoin at a wallet address. If a third party is willing to accept this iou as payment for a future transaction, a fractional reserve system could begin naturally. This is how fractional reserve trading began with gold deposits.
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0 sats \ 2 replies \ @l0k18 14 Apr 2023
But it isn't bitcoin and there is no convenience reason why you need a certificate for an item that is itself a kind of certificate and just as easy to handle. It's not going to be bitcoin, if the marketing is honest, and the supply will be rubbery and nobody will hodl them.
There just isn't reason for financialisation with a fixed supply regime. You can park your surplus in coins for later investments, people can make contracts where they pay you coins and then you promise to pay them a share of the profits. That doesn't require funny numbers either, it's a separate kind of contract.
A credit market in bitcoin is not the same as fractional reserve banking, but it achieves the same thing without the central lever that is used to create boom/bust cycles and consolidate centralisation.
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0 sats \ 1 reply \ @siggy47 14 Apr 2023
I see your point. Still, I can imagine a scenario where there would be an incentive for using an iou versus actual bitcoin. For example, in the future transaction fees may become significant.
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0 sats \ 0 replies \ @l0k18 14 Apr 2023
By that time whole bitcoins will be moving around the lightning network in one go. So, yeah, still no change in the friction going forward. If the economics of running nodes remains similar against the living costs with an increase in block size then there's that solution too. It is possible that advances in the protocol will drastically reduce the on-chain data size per user as has already happened several times with new transaction formats and segwit and so on.
When all LN nodes support AMP fully larger payments will become easier and more routine on LN.
I doubt that BIP 42 will ever be rescinded. Certainly, from my cold dead hands!
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10 sats \ 4 replies \ @ek 14 Apr 2023
lmao. People being so confident and then failing hilariously if challenged.
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8 sats \ 3 replies \ @9ener1c 14 Apr 2023
LOL. That's awesome. Good on that guy for both getting it, and admitting that he figured it out in public.
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0 sats \ 2 replies \ @ek 14 Apr 2023
Yes, I agree.
However, it's hard to grasp where these people get all their confidence from
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10 sats \ 1 reply \ @scottathan 14 Apr 2023
Duning Kruger Effect, something we all suffer from at some point. It's when you know enough about a subject to reach false conclusions you're confident about with reasonable arguments, but you don't know enough to understand why those arguments break down.
Most people's objections to Bitcoin are because of this. I actually dismissed Bitcoin as worthless back in 2018 bc I knew enough to argue against it but not enough to truly understand. Solution is just education and respectful discussion.
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0 sats \ 0 replies \ @ek 14 Apr 2023
Oh, right. Totally forgot about that effect, haha
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