Topic: Interest and Bitcoin - Impossible? - page 6. (Read 6579 times)

Perhaps I've framed the question wrong...

If there is interest, it will create more "claims" on bitcoins than there are bitcoins that exist. This is deterministically true and the simple math is above to illustrate it.

So, we have two things:

1) Bitcoins (created through mining)
2) Claims on bitcoins (created through usury)

The two are NOT the same.

So, at some point in the (distant?) future, we will have a situation where there are 21 million bitcoins, and claims against 210 million bitcoins.

That is, when people suddenly start calling in claims on bitcoins, the debt system begins to rapidly unwind, as in a "run on the 'system'". That system MUST be outside of the bitcoin system though because it's not a part of the protocol, i.e. that's trivially true.

THE QUESTION REFRAMED FROM THE ABOVE:

Is this problematic that there will be more claims on bitcoins than there will be bitcoins in existence?

My gut reaction is that usury, with respect to bitcoin, it nothing more than counterfeiting fake bitcoins and convincing people that they are real, which we know is false, i.e. a claim on a thing is not the thing. The implication then is that usury will create inflation for a currency that is inherently deflationary (if nobody objects to framing the terminology like that).

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Not quite. In my original post I thought I was pretty clear that I wanted to frame the question in  'frictionless universe'. The question isn't about practicality, it's theoretical.

I understand the velocity of money and how that affects systems, but I think you might have missed the point above where I glossed over the velocity and assumed a near infinite velocity (zero friction).


Since the system is deterministic, it's only a matter of time before claims on bitcoins eclipse the number of bitcoins in existence. Any talk about the velocity of money is just arguing about "when" the claims eclipse the real thing. I am not worried about "when". I'm interested in the implications of that eclipse.

Right now we have central banks printing fiat money out of thin air, and it seems to me that usury is not significantly different. I'm merely framing that issue in terms of how usury is compatible with bitcoin as bitcoin has a hard limit on the amount that can exist.


Another way to look at it is how JP Morgan, Goldman Sachs, and now the Fed have been shorting silver and gold - paper silver & gold. By manufacturing imaginary silver & gold, they've managed to manipulate the market and crash the prices.

In terms of bitcoin, the imaginary bitcoins (claims on bitcoins) created through usury seem to lead to the same problem.

I just don't see how usury is compatible with bitcoin unless we want to go down that same road that we see with other fiat currencies and paper silver/gold.

That isn't going to happen on a large scale, because you'd be throwing money away due to defaults.

I disagree with him, but an idiot? Really? He put a lot of thought, overall good thought into it and just arrives at the wrong conclusion. You do make a good point, but no need to be a jerk. If you want to be rude, go find a member of the Federal Reserve Board  .

OP is wrong and does not understand the movement of money. A loan of 21 million bitcoins or more seems like it would be impossible to pay back, but then you have to remember that bitcoins circulate. After paying a portion of the loan, the bitcoins circle back through the economy and another portion of the loan can be payed.

I think this interest thing is always a bit of a red herring.

The problem we have today is more succinctly described as socialism for the rich, and capitalism (without real capital) for the masses.

Interest the way it is often described in posts like this doesn't really exist. If anyone tells you money magically multiplies in your savings account, they are lying. They are hiding the real mechanics how things work: where value is created and where it’s sucked up. Today inflation alone outruns most grannys' savings accounts anyway.

If we have soft money (like credits or promises for future services), then we don’t need interest, because money supply can always be expanded on-the-fly by people on the spot. There is no counterparty risk. This is how it works in most LETSs (local exchange and trading systems). There’d at most be reputation loss.

If we have a hard currency (i.e. debt-free, think gold and silver or bitcoins), and I lend someone money, I carry the risk that they won’t pay back. So I charge interest. This way I can hedge against the risk of other debtors going bankrupt. Also without interest I wouldn't have any incentive to lend anyone any money in the first place.

Again, *I* carry the risk. If the debtor goes bankrupt, there’s basically nothing I can do.

The debtor is mostly a business. This means I’d basically have a share of that business. They need to produce the interest that I charge. This is also called dividends. So interest would always be backed by dividends. Interest and dividends are essentially the same.

The business can also make a loss. So I’d have negative earnings, negative interest in that month.

Yes, interest could also be negative. So you see, in an honest and not corrupted economy, everything is a transparent zero sum game. No magically multiplying money. The problem today is that banks do not have to take on such losses. They get the benefits of their investments without the risk. That’s why we have socialism for the rich.

Compound interest: another fallacy that’s often purported. If I have a share of a company, and I get dividends, and I reinvest them into the same share, what happens? The price of the share rises. Eventually it will be overvalued, and the price of the share will drop again: I will have made loss. Again, everything is correct, a zero sum game.

There was a phase of free banking in the US when things worked like that. Banking as a service mediating between lenders and debtors. If I get more and more debtors than savers, I can lower the rates for debtors and rise the rates I pay out to savers. If I get more and more savers, then I must lower the rates I pay them out. If savers compound, I must lower the rates as well. That way I’d always keep balances in check if my bank wants to stay alive.

Turns out the problem wasn't usury in this era: many banks went bankrupt. People demanded more stability, and the FED was introduced. The rest is history. Since then, the FED dictates interest rates: it’s a command economy that dictates growth without substance, mindless consumption and runaway inflation.

We now have the worst of both worlds (soft and hard currency): Money backed by nothing, it is debt (or promises, we’re held as collateral for public debt), but they charge interest on it nevertheless.

About deflation, I already wrote elsewhere:

This terminology comes from the "central bank" thinking.

Bitcoin is not "deflationary", because it is not an enforced monopoly money. It is just an asset. It follows supply and demand. So you could ask even today, why should I lend someone my dollars, if I can buy bitcoins instead? Simply because bitcoins exist, you would therefore want to charge high interest even on dollar loans. Or would you? No, because, as we see, the value of Bitcoin fluctuates; it is therefore not deflationary. And even in an economy that is dominated by the Bitcoin currency, it will have to compete with other assets that may promise higher return. So the average interest rate in an economy that is not dominated by a central bank would have nothing to do with the mainly used currency. It will rather be the median of any assets out there.

My 5 cents - it is all a matter of how fast bitcoin is growing. If growing. When growth is fast and strong - yeah, it is better to just keep your coins and do not risk lending them. The default probability is never zero like in OP's frictionless world. But when bitcoin adoption platoes it may still make sense to lend bitcoins to someone who know a shortcut in the economy and can make money grow faster than they do so naturally.

Why not?

Not exactly, but let's say after Bitcoin is more mainstream you can pay for a $100,000 house in USD or BTC and the bank will finance either way. You could borrow (assuming $100/BTC for simplicity sake) $100,000 or BTC100 to pay for the house. Now if the bank was to charge 7% on the loan (using more normal rates) either way, the bank would make much more on the BTC loan than on the USD loan because of the inflation on the USD and deflation on the BTC side.

If USD inflation was 3% (it's probably higher but let's pretend the CPI is not BS), and BTC deflation 3%, the bank would have to charge 6% higher on the USD loan to make as much on it as they would on the BTC loan. This is because when the USD loan is paid back after the term, say 10 years, it would only be worth $73,742 (today's dollars, ignoring interest) whereas the BTC loan ignoring interest would be worth $134,391 (today's dollars, ignoring interest). That's a difference of $62,000.

Therefore, the bank could charge 7% interest on USD and 1% on BTC. 3% of the USD interest would cover inflation and 4% would be profit. On the BTC loan, there isn't any inflation to deal with and the bank can get some of that 4% profit from deflation, and just charge 1% interest.

Now this wouldn't work quite the same in an economy where BTC is the main currency, but you get the point. Hopefully I didn't make this too convoluted.

The most likely results of this scenario is that some of your loans end in default. There is no contradiction in contractual claims for repayment in BTC to exceed actual BTC; it just means that some of those claims may not be fulfilled. However, even that isn't actually inevitable; whenever you receive a payment, you're sending that BTC back out again as another loan. Thus, it becomes available to make another payment. As long as we're assuming ideal conditions, there is no limit on how much people can owe you, provided the rate of reinvestment is at least equal to the rate of repayment.

There are other problems with your assumptions. The first is that the supply of people willing to take out loans at 10% interest (or any interest) is not inexhaustible. The more money you inject in to the economy, the less demand there is relative to the supply, and the less interest people are willing to pay. The second problem is that your own needs and wants are not insignificant (and the wants become more significant, in relative terms, as the interest decreases). Money which you spend on your own needs and wants becomes available to others to repay their loans.

No one loans money like BTC or dollars at negative interest because you would always have been better off just holding he money.

Example I loan 1000 BTCs at -5% interest and get back 950 coins, deflation of 10% means the 950 coins have a value equivalent to 1045 of my original coins, so yes I'm richer then when I started yes.  But if I had just pocketed my 1000 coins I'd have 1000 nominal coins and a 1100 value measured in original coins.  Thus I'm richer-er by just not making that loan.

This is why demurrage works, you can't just sit on coins and retain value because theirs a nominal coin loss irrespective of inflation or deflation.  Now the same scenario with 5% demurrage, you loan 1000 coins at 0%, and get back 1000, if you had held the coins you would have 950 so the loan is worth more and is worth more regardless of inflation or deflation and you can actually charge negative interest up to the level of demurrage and still come out even, though in practice this is not expected.

I'm not sure that I understand what you're saying.

If, for example, deflation is 1%, then if I loan out BTC to you at -0.5% interest, I am up 0.5% on that loan when you pay me back because I've recouped 0.5% of the 1% deflation. But as you've pointed out, it's still better for me to hold on to the money and gain the deflation rate instead...

Are you agreeing with me in that BTC interest requires another fiat currency to deal with interest? I'm fuzzy there.

I'm reading that now... But need more time. It's a fascinating concept.

No, not negative interest, because the benefits of such a loan would be less beneficial to the creditor than just holding the currency. However, say that the interest rate in dollars is 3.5% and (this would be in the future with hopefully slower deflation) 1% deflation, the BTC interest rate might be 2.5% because of the deflationary advantage to the creditor.

Thanks for the responses.

However, I think we have some misunderstandings.

First, the numbers are irrelevant. Whether the interest rate is 1% or 10% or 1000% is completely irrelevant. The point of the exercise is to illustrate that compounded interest is a mathematically deterministic formula and will overcome the entire system at *some* point, be that 30 years or 300 years.

So let's not focus on the specific numbers. The important thing is that the system is deterministic and exponential in nature.


I think that's an excellent point. The "interest" is merely paid back through deflation. i.e. I borrow 1 BTC today, and tomorrow it has less purchasing power, so I effectively put in more effort to pay back that 1 BTC.

I think you've nailed a very important point there.


Understood, but I still don't see how I'm off the mark if the system deterministically creates more BTC than is possible in reality.

This creates an absurdity, and it needs to be addressed if I'm wrong in assuming that compound interest deterministically overcomes the entire system.


Yes, I know my numbers aren't realistic. The point was to have nice easy round numbers to illustrate the determinism.

Are you suggesting a negative interest rate? e.g. -0.5% when the deflation is 1%, for example only.

Do you have data on those being the most profitable industries?

On the contrary.

Usury is impossible under Freicoin, because only demurrage cancels the liquidity premium of money.  A load under FRC will be zero (before accounting for risk) and the lenders will benefit by not having to pay demurrage for the duration of the loan, hence they achieve by investing what other in standard currency get by mere mattress stuffing.

Meanwhile the borrower will pay demurrage (if he just holds the coins) and need to be acquiring more coins to pay back the loan but the loan will not increase in cost and if they can produce 1 coin worth of salable products from 1 coin of capital goods they will be able to repay the loan (this assumes the borrower immediately converts all the borrowed money into capital goods which in essence passes demurrage on yet again).

Under BTC Usury is inevitable because under deflation the principle of any loan (even one with zero interest) in increasing and putting the borrower deeper into debt.  Only the most obscenely profitable endeavors are worth investing in and these are rarely of much redeeming social value (drugs and gambling) or really create anything (spending BTC to buy more computers to mine more BTC (what a circle-jerk)).

Obviously the borrower gets shafted under BTC, while under FRC the borrower would be better off then in our current Fiat system.

funny thing, I was thinking about this myself too..

Problem, atm, as well, there is no btc credit scoring system, and no tie from such a system to real life debt recovery firms...
If this could be done, you might see "btc visa" etc starting up

Bitcoins loans already exist and therefore BTC interest exists, it's just there's no common rate or method of documenting/settling.

Any asset that can be lent can have an interest rate. The rate will be determined by what lenders/borrowers are willing accept, based on the credit risk of the borrower and the amount of borrowers vs lenders.

Rates will not be low due to the difficulties of establishing the ability and intention of the borrower to repay, given so many people and firms that have been involved in BTC so far have been scammers or financially incompetent.

I disagree, a loan should still charge interest. After all, the creditor could benefit from holding the coins just as much as loaning them, and holding them involves less risk and more flexibility. Interest could be lower though.

First of all, such interest would be completely unafordable. You'll never see anyone take out a $100,000,000 loan (which is the equivalent to BTC1,000,000) at 10% interest for such a long time, it's just a horrible financial decision... and no bank would approve it either. Secondly, interest in fiat currencies at least partially takes account of inflation (unless the fed messes with rates, as it usually does), Bitcoin conversely, should take account of deflation. So I would expect lower interest. This particular loan would just have to default, but interest is not impossible by any means.

I totally understand your thinking, and believe you are a bit off the mark on a few points.

The fiat system has been around for probably most of your life, and has distorted the way you think about money.

Interest can probably exist with BTC, but it would be nowhere near 10% pa  due to the reason that you described.

Losses due to bad investments (ie defaults) would also be a lot higher than in the current system.

Therefore, due to risk of loss and the low return, one would never be willing to lead out ALL of his/her BTC as the risk / return ratio would be too high.

Also as there is no inflation in a totally BTC world, a return of 1% might be the norm.