Topic: Bitcoin, debt as deep as the banks couldn't have imagined. (Read 5957 times)

Like any prohibition of victimless behavior, it would kill a lot of people and create huge problems such as corruption, monopolies, incarceration and all the associated problems.  This is very basic psychology.  Interest rates would go up, but people will not stop lending or borrowing.  Everyone suffers, even the few who get rich with their overpriced black market services.  I was hoping we could move past this kind of idiocy soon. 


 

Options are the answer of course.

I think the definition of a "currency" would broaden significantly if this were to happen.

Doubt it. Instead of people saying "you owe me money for this loan," they would say "you owe me money for this job."People would still have issues to complain about.


Investment capital is at most an unsecured loan (nothing is put up against the loan, like a car or a house, so if it fails, you get nothing).  In this case it would depend on how broadly you define "loan." If unsecured loans with no guarantees of repayments are ok, venture capital will still be ok. However, since credit cards are also unsecured loans...



Only in so much as it will severely stifle and slow down economic and scientific development. People will keep dying because new medicines, and new technologies for water filtration, food, housing, and communication will take longer to get invented, built, and delivered. If I come up with a new water filtration system, and can sell it for a 20% profit, my options are:
Take out a multi million dollar loan to set up a factory to produce them by the thousands, then pay off the loan over five to ten years, keep a few $100k profit for myself, and use that money on some other invention, OR
Not having access to loans, make the filters in mygarage one at a time, save up the %20 profits for many years, and maybe afer many many years be able to afford  a factory to make them, but by then either someone else will have invented a better filter, or the customer base would have died off due to bad water.

Bottom line is, loans are a good thing. Irresponsible people who take out loans they can't afford, and who take on loans without even taking the time to understand finances, is the bad thing.

I wonder what would happen to the world if borrowing currency became illegal. Not just no interest on loans, but no loans on currency to begin with.

That is, you only have what people give you, or you create yourself (through labor) -

Would it improve human relationships?

Would it destroy the idea of raising capital?

Would it kill millions of people?

So, this: http://goo.gl/4XmYU

This is the formula to calculate monthly payments in a deflationary currency loan

PMT = ((1-d)^t*P*(d+i))/((d-1)*(-1+(1+i)^(-n)*(1-d)^n))

d = deflation %
n = number of pay periods
t = period for which payment is calculated (t=1 at first payment, t=n for last payment)
i = loan interest
P = principal amount borrowed

Using this formula, each successive payment will be less numerically, but the same in value, so a $600/month payment now will still be the equivalent of $600/month in a few years, making loan repayments easier to manage. At the same time, the lender gets the return on value from both, the deflation interest, and the loan interest.

Apologies. I re-read what I wrote -- I wasn't trying to veer the thread off-topic and mis-interpreted your post. I assumed you were trying to suggest that, were Bitcoin to steadily increase in price, lenders would begin offering loans at negative interest.

The risk of default is a whole separate topic.  It doesn't matter if Bitcoin is inflationary, deflationary, or perfectly managed to never have inflation or deflation.

The examples above illustrated an extremely low risk loan (home loan interest rates).

Risk simply raises interest rate independently of inflation/deflation.
If the bank wanted a 5% return, with 3% inflation, and estimated loss rate of 10% then the bank would charge 5% + 3% + 10% = 18%. The "real" (economic term for adjusted for inflation) cost to borrower is 15%.
The "real" return (adjusted for default losses) for lender would be 5%.

In a 4% deflationary environment the bank would charge 5% - 4% + 10% = 11%.
The "real" (economic term for adjusted for inflation) cost to borrower is still 15%.
The "real" return (adjusted for default losses) for lender would be still 5%.


Well spreading risk around doesn't lower risk.  The topic was about the effects of loaning in deflationary environment.  Default risk is a different topic.

Why would anyone lend to someone at a negative interest rate given there are still scammers (which, by one established lender's count, accounts for ~10% of all loan requests [ETA: that's all defaulters, not just scammers]) and when they could just hold onto it?

What would really help decrease BTC interest rates is if there were enough BTC users to do loans locally where it's practical to have contracts enforced. Edit: Alternately, having many GLBSE users, where someone could just post transfer ownership of shares as security for the loan, would go a long way toward lowering interest rates.

This.

Today interest rates take into account inflation.

When you get a home loan at say 6% the bank has an inflation expectation, lets say it is 3%.  What the bank is saying is they want a 3% RETURN (actually less once you factor in risk of default but lets assume no risk of default to keep it simple).

So the bank says we are willing to lend at 3% + inflation expectation.  While your nominal interest rate is 6% your paying with inflated dollars (which are worth progressively 3% less each year).  So your carrying cost is a 3%.

Imagine a stabilized Bitcoin where deflation expectation is 3%.  Assumming the same risk above vhe bank would lend you money at 0%.  While your NOMINAL inflation rate is 0% your cost hasn't changed.  Since you are paying the bank back in deflated dollars (worth progressively more each year) you carrying cost is still 3%.

Likewise imagine a future Bitcoin where deflation expectation is 7%.  The bank would lend you money at a NEGATIVE interest rate (yes the amount repaid would be less than amount borrowed).  In the scenario above it would be -4% interest.  It still won't matter as the buying power of Bitcoin will rise by 7% per year your carrying cost is 3%.

Deflation is going to stabilize once bitcoin matures. The nominal interest rate will adjust to take deflation into account.

You are under no obligation to permanently park the money in the vault, and are free to withdraw it at any time (i.e. to a bank), but then the vault would have little to no stored fiat value and gain no critical mass (it would probably still have a relatively high money velocity). This is why a shared trust system is critical, otherwise you may remain a bailment service indefinitely. Not really a big deal per se, but you'd rather unpeg sooner than later I'd think. In any case, you are either trusting me (the participating trusted federated exchange servers), the blockchain, another financial service provider, or your bank. You still have to choose. You have to trust somebody, somewhere, eventually.

You want something akin to GoldMoney where they hold an unallocated amount of gold, in the aggregate, within a secured vault and then permit you to trade token quantities between GoldMoney approved accounts. The gold doesn't move much due to it's physical intrinsic nature (taking possession is logistically more difficult), so the trust level must be extremely high, in addition to the fact, they are very centralized. Nevertheless, you can withdraw physical gold specie if you want (for a substantial fee).

I do understand the implications, but they really don't have to represent a long-term relationship or obligation. Also, your money doesn't necessarily make a one-way trip into the vault (although that is preferable, by avoiding intermediary logistics). For example, vault-to-paypal, vault-to-paxum, vault-to-dwolla, vault-to-cheque, vault-to-bankwire, etc.

Notwithstanding, if you sold/traded the BCT back to the exchange pool (as opposed to somebody in the network), which effectively redeems your fiat, it would be removed from circulation by being put back in the primary account (the initial pre-mined origin block) to be recirculated at a future date, thus maintaining the 1:1 ratio as represented by total vaulted fiat reserve. The BCT coins would then be temporarily retired as it were.

As mentioned in the other topic, Mt Gox or PayPal or Dwolla are fundamentally different in that they are ONLY transaction facilitators between two other unrelated parties. They don't issue or keep the money, they only let two other people exchange it, holding USD/BTC briefly, and after the transaction is done, have no more obligations to those two people.

From what I understand, and correct me if I'm wrong, your idea would result in an entity that itself creates the BTC, holds it until a buyer comes along, sells it directly to the buyer for USD, and then maintains a long term obligation to that buyer by promising to repurchase their BTC with the same USD they sold for. Am I correct? And can you see the difference? I have to trust Mt Gox, PayPal, and Dwolla for a day or two at most. I have to trust your issuer for as long as I hold your money.

We all created digital bitcoins out of thin air haven't we? What happens to bitcoin when all of the bitcoins are mined? What will secure the network then? I would assume that to be via the processing power dedicated to the transaction fees. Bailment services aren't worthless (the do require a certain amount of trust however). They've been done for 100's of years (without computers for the most part). I just want a hybrid open source federated trust fiat/bitcoin exchange system. Then everybody can verify where their money is (both reserve fiat and token BCT coins).

There is a fixed pre-mined limited supply of BCT (deflationary). If the fiat (which is inflationary by government design) in reserve becomes greater than the BCT coins in circulation the BCT value actually goes up not down. They, are for the most part, inversely related, but then you knew that already.

None of this is technically much different than Mt Gox. or PayPal or Dwolla per se.

The difference is that gold is already worth something. A closer analogy would be you setting up a vault and filling it with worthless mud bricks, which you then try to sell off for a total of $21million, by promising to hold on to the money people give you, should they want it back, in exchange for those bricks. Considering you'll be the central mud brick issuing authority, it would be no different from trying to establish fiat currency. Even if you can prove that you are not inflating your mud brick supply, the issues remaining are how will you prevent counterfeiting (who will do the hash mining for you?), and who will buy the these worthless mud bricks from you in the first place, especially since you'll be the ultimate "early adopter." Personally, if someone created something for nothing, and tried to pawn it off on other people for $21m, my first instinct would be to call them a scammer.

Oh, another issue is that when bitcoin gets issued and exchanged for fiat, you have one person holding bitcoin, and one holding fiat, both free to spend their money however they want. In your case, the fiat backing your mud bricks is tied up in the vault, required to back the bricks should anyone want to exchange it back, and being used to support the brick's value. Should the fiat in your vault start to severely inflate, the drop in value will translate to the bricks as well.

The BCT coins are always backed by a proof of work just as they are in the bitcoin network. You need this to prohibit (or at least make very difficult) the >51% double spending situation of the coin between BCT account holders. It is still needed so that the security of the network is maintained. You want to trust several individuals to manage the same pool of BCT coin when executing a BCT issuance. An example would be that any 90 of 100 account comptrollers would release a BCT coin into circulation whilst simultaneously auditing/verifying the vault has the equivalent fiat in reserve.

It's the fiat reserve that needs a similar paper trail blockchain functionality because they are the primary issuers of the pre-mined BCT coins, and you don't want them putting BCT into circulation without an equivalent fiat dollar stored in the vault. It's an issuance issue that would probably be handled by the Open Transactions server/client software. It's a hybrid smart property contract arrangement. To wit, all of the exchangers and BCT holders have a stake in both the issuance of the asset BCTs and the intra-account trading of the circulating BCT.

I've seen the Open Transactions video and that's why I find this idea plausible in the first place. I truly believe we need a federated trust interfacing system (automated auditing) between exchangers and also BCT-to-BCT interactions. There needs to be more fiat/BCT integration with the outside world. You would just prefer a large pool of fiat to deposit and withdraw from when the float happens.

The floating merely means that there are more fiat dollars in the vault than BCT coins to back them. You just convert to the foreign exchange format we use today and abandon the 1:1 redemption bailment methodology. Most of the fiat will likely remain in the vault. This is done completely in the open, and the event will be known and agreed upon by all of the participants. I truly believe that a deflationary currency is preferable because in real life all things are finite and in scarce supply. Physical reality should be emulated.

It's merely more preferable to absorb the rise and fall of fiat reserves from a large pool than a small one. It's sheer size (critical mass analogy) merely acts as a supply/demand shock absorber.

I believe so. I haven't done it myself, but in a video FellowTraveler shows how one creates digital cash. It's issued independently of the federated servers, so you shouldn't even need to keep it all running yourself - we just have to trust that you have the physical cash. The whole thing is based on smart contracts.

What I'm not clear about is how the floating phase works. Are the coins then backed by proof of work, a commodity/currency, or some combination?

That was what I was hoping to achieve. Basically it's a hybrid between the decentralization of bitcoin and the facilitation of the Open Transaction account capability to effectuate a mass exodus from government fiat to a pseudo-anonymous alt-currency (bitcoin or equivalent). You need 2 systems: a bitcoin currency and a open source exchange service cryptographically tied together in a loosely federated trust network.

The idea is to maintain a 1:1 purchase parity with your digital currency until such time as it matches your fiat reserve by some relatively large quantity (i.e. 21 billion dollars of BTC equivalence, or some such large amount), then you float. This should make the market less volatile as the influx or outgo of USD by any one participant, at any one point in time, should cause less volatility. The price averages out quickly.

The question is how to prove your private fiat reserve is not being arbitrarily manipulated by the author/originator of the account? Can you make your account accessible by multiple traders so that they can guarantee the introduction of fiat in reserve is both auditable and grows in exact proportion to the digital coin you introduce into circulation?

To wit, can I create a smart contract that permits the release into circulation of exactly one, and only one, equivalent certificate of redemption (digital token coin) for every fiat dollar in reserve in an automated fashion and independent of the account holder?

Religions against borrowing money?  I will add that to my list of reasons why I should become a lender.

Bitcoin is about taking the monetary power away from governments influenced by tyrannical despots, oligarchs, philosopher kings, or ignorant mobs.  I do not see it as a vehicle to remove profit motive or to destroy lending institutions.  In fact I see the future of bitcoin use not by humans but by bots, automated machines, and AI for an intermediate between fiat currencies and quick and cheap electronic way to allocate resources based on a machine's digital ecological value.

That actually sounds like a great way to handle interest payments in a deflationary currency.

Of course, it'll probably take a while before it needs to be implemented, considering the current volatility.