Topic: Can BItcoin scale by operating like banks do, with cash and check money? (Read 620 times)

Going forward, Bitcoin will need to use the Lightning Network for small transactions such as these.

Realistically, people are not looking to scam for such small amount, so double-spend is not really an issue compared to large transactions which can take longer and require security.

Your average restaurant or grocery store isn't going to get double-spend very often and even so look at people who use counterfeit money or whatnot... it is the same thing.

People can use the lightning network to open a one time only fee channel from their personal wallet to their exchange (bank). Then funds can be sent to their exchange (bank) as needed and sent to other exchanges with minimal fees. It could work so well! Most people are already using exchanges anyway.

I do wonder if a reduction in fees would cause a reduction in mining with the reduced profits from mining and would that reduce the security of the network?

Most people already use exchanges. Creating a system where coins can move from one exchange to another without creating a blockchain transaction and having those fees only makes things better.

By not having the banks method it'll just lead to more centralization as a result of a larger blockchain as I said.

it has a possibility, but you can already save, invest and use bitcoin for transactions, we don't need a bank just to store our bitcoin or invest it, and that's one of the advantages of having bitcoin.having bitcoin scale be operating like banks, is not a good idea.

Sounds like too regulated to me. It's not good idea considering the fact that bitcoin is decentralised is in nature. I'm sure bitcoin will work just fine as it is now. Implementing traditional banks rule will really make it hard to be decentralised. Just imagine bitmixer won't be useful anymore because we use it for anonymous transaction but with this method everything will be open up.

Ideally yes, but Bitcoin can't scale and still be the decentralized system that it is now. As I said before, likely the temporary solution will be to increase the block size and have it become more centralized that way. People already use ewallets to a large extent and also the electrum wallet which uses a centralized database.

Even that will have its limits and then the banks will come about anyway. The worst of both methods.

I don't think that it is a good idea because the basic core principle of Bitcoin is to keep third parties away from your transaction for faster transaction time and lesser cost. If we are allowing someone to control or manage our bitcoins then what's the point of using Bitcoin? It's whole different concept from traditional financial methods and thus it is recommended to keep and use in that way to avoid the manipulation in fundamentals.

*bump*

With all the threads trying to promote the Bitcoin Cash (BCC) pump and dump altcoin it's time to continue to think about a proper scaling solution. This is an efficiency method that allows transactions to occur outside the blockchain. Don't go along with the miners wanting to inflate the block size making it too difficult for the average person to run a node.

If the lightning network is so great then we can start over and make a cryptocoin that doesn't need to store a significant amount of information on a blockchain. Really lighning is just a method of sending coins to the same person multiple times as many times as you want without clogging up the blockchain with the transactions. It has its uses and it's great but it cannot replace the whole network.

The Bitcoin banks method needs to start happening now. It will happen eventually anyway since everyone says that Bitcoin will scale forever. We can wait until the block size has been hard forked to 10MB maximum size, then that will run out of capacity and the banks will come around anyway. It'll be the worst of both worlds where almost nobody will be able to run the bitcoin client on their own computer and we'll have the bitcoin banks.

If your intention behind this solution would be to alleviate on-chain transactions, take a look at Lightning Network. It's a very similar idea, but with a trustless protocol instead of counterparty risk and with a network of regular users instead of federated exchanges. The way you describe it is unfortunately utterly beside the point of cryptocurrencies, although that probably wouldn't stop the mass market from using it, if convenient enough.

All they need to do is trust one another, up to the amount that they set. Once exchange A owes exchange B 100 BTC due to exchange transactions from exchange A to exchange B then B stops accepting incoming money from exchange A until exchange B receives an actual Bitcoin transaction of 100 BTC.

How could this work? You want to move BTCs from somewhere to another place without paying fees, without make a transaction, but it's impossible.

There could be an exchange network operating this way, but at some point they will need to send transactions among themselves... To make this work one person (or a team) must control a big network of sites, centralizing all of them in one's hands. Anyway it will never avoid the necessity to make many transactions, overloading Blockchain.

They're already allowed to. It's up to the users of Bitcoin to decide to use such a system or not. It's only recently that scaling and fees became an issue so there was previously no need for this.

   Which requires them to loan out money at interest, which makes them fractional reserve.

   It's really driven by greed. People want interest on their money, so they're willing to accept a fractional reserve system. Historically in the US, and pretty much everywhere else as well, The fractional reserve system got so big that inflation was needed to keep it going. So the gold backed currencies that backed the money had to drop the gold standard so that the system could continue without bank failures. Now with Bitcoin the inflation of Bitcoin itself (which is the equivalant of the cash that backs bank money) cannot occur, or can it?
   Ethereum hard forked because people were mad about their bad decisions that let them fall for a trap. These people wanted their money back so they hard forked Ethereum to give it back. What if Bitcoin exchanges fail and people lose money and everyone is mad and they demand that a hard fork of Bitcoin be made to bail out their deposits in failed interest bearing exchange accounts? Bitcoin can fork in the same way.
   You say that you're against this idea but if you say that exchanges should pay interest then you're paving the way for it.

No it would only affect that exchange, and any money that was sent to that exchange but not yet balanced due to an inter exchange Bitcoin transaction. The imbalance should only be a couple percent at most at any given time, so the effect on other exchanges would be minimal, and how much of an imbalance an exchange allows at any given time is entirely up to them.

The reason why I somewhat think that this is a good ideas is that it is completely voluntary. You don't have to be a part of it. You can still keep your coins in your own wallet, just like you can keep cash at home and not put it in the bank until you need it in there to write a check to somebody.
I understand that there are a lot of negatives, but it mostly relates to people's greed and the result of lots of greedy people using a voluntary system like this.

Right now 3-4 transactions per second is what the network can handle. Maybe that can be boosted up to 30 - 40 transactions per second but at that point the average person will not be able to run a full node. It may take 20GB of RAM or an expensive 2TB SSD. So eventually some kind of centralization must occur for Bitcoin to continue to grow. My idea is one method that gives people the freedom to participate in a lange Bitcoin network while keeping a full node wallet at home at the same time for their savings.

See the real danger here isn't the fractional reserve Bitcoin exchanges which would be voluntary to use, it's the result of the failure of that system that would cause lots of people to want to hard fork Bitcoin to bail themselves out.

Can you imagine the damage if exchanges were linked in this way and when one of them are compromised/hacked? The

hacker will not only steal from one exchange, but rather from all exchanges that are linked. A lot of people use Bitcoin,

because they want to prevent another economic collapse, due to fractional reserve banking practices. 

I think you are missing the whole decentralization concept here.

1. Exchanges working as banks to carry out bogus bitcoin transactions and then level it out with a real bitcoin transaction in case of an imbalance. I don't get the purpose of it. It would create too much centralization. First of all, it is not at all recommended to store a good amount of bitcoins in exchanges, you never know when one gets hacked or shut down. Secondly, bogus transactions would take away the whole transparency aspect. Then why blockchain is there? Bogus transactions and blockchain technology, don't know how that gonna work.

2. Who would be the federal reserve of bitcoins? One centralized entity distributing bitcoin to exchanges. Would users be stupid enough to part with their bitcoins and hand it over to a single organization. Never.

Bitcoin is decentralized and applying a centralized banking structure/model/concept/ideas to it wouldn't work.

If you allow banks to conduct transactions off the blockchain you've just removed a fundamental feature of bitcoin, which is public verifiability of transactions AND you've opened up the opportunity for banks to inflate the money supply (the same as occurs with fractional lending).

Exchanges already operate as banks in the capacity that Bitcoin allows them to.

The only thing exchanges don't offer that they should is interest on balances held within wallets. Every exchange should pay interest to compensate us for the risk we take in not owning our private keys. The only two Exchanges/Online Wallets that I know of that do offer interest are YoBit and FreeBitco.in.

In the future I believe exchanges will start offering interest for balances held, it'll just require exchanges realizing how quickly they can attract accounts and balances (from which they can charge transact fees) if they offered such an appropriate benefit.

Many people do not realize, but our typical fractional reserve banks generally don't oprate with cash. The amount of cash that a bank has is a small fraction of the amount of money that a bank has. If you try withdrawing $200,000 in cash, they would probably tell you that you have to wait a little bit, because they have to have more cash delivered from the Federal Reserve branch.

Banks operate on cash backed check or electronic funds. When you get a loan from a bank, they write you a check. The money is created out of nothing on the spot. How much they can create is limited by how much capital or derivitives the back has, which is in turn defined by banking rules. There are inspections or audits to enforce these rules. I think how much money a bank can loan out is around 9 to 1 for regular capital and 40 to 1 for derivitives. This money has value because it is backed by cash that comes from the Federal Reserve, which came from the United States Treasury if I'm not mistaken. You can see how little cash there is by looking at the money supply figures, M0, M1, and M2. Only M0 is actual cash that backs all that virtual bank money.

Cash itself was backed by gold or silver at one time but that's a different but similar story.

When you write a check and deposit it in another bank, the first bank reduces the money in your account, and the other bank increases the amount of money. No cash actually moves. If an imbalance occurs the Federal Reserve takes care of moving the cash to the banks that need more. In fact they have a system set up where they know which banks will need more cash during certain times of the year, such as holidays.

To get to the point:
So my idea is that the exchanges could work like banks. No necessarily the fractional reserve loan aspect of banking, but just the virtual check / electronic money system. BItcoin on a wallet could be like cash. The exchanges would operate like banks do, where sending Bitcoins from one exchange to another wouldn't actually create a transaction. If an imbalance occurs, then the exchanges could do a real Bitcoin transaction to balance their accounts. Or there could be a federal reserve of BItcoin that manages everything, and exchanges would pay a small fee to be a part of the federal reserve Bitcoin exchange network. edit; The federal reserve idea is a possibilty but it's really not necessary. All that is necessary is that exchanges trust each other up to a certain amount of BTC. For instance, exchange A may allow up to 20BTC to be received from another exchange before that exhcange must sent real Bitcoins to exchange A or further incoming transactions will be denied or listed as "on hold for verification" or such. That 20BTC imbalance could consist of hundreds or thousands of small transactions that occur between the exchanges, which would significantly reduce blockchain load.

edit: This system allows for Bitcoin users to keep their savings at home in a full node wallet, while having their small transactions occur in exchanges (or "banks") with minimal fees. Other methods of scaling Bitcoin like making bigger blocks for everyone ends up making it harder and harder for people to run their own Bitcoin nodes, so they end up not just using exchanges, but putting all of their savings in to exchanges. I believe that keeping the blockchain small to give people full control of their savings while having a voluntary Bitcoin banking system is a better solution than the others.