Topic: Is there any change that protect crypto from fractional reserve style stuff? (Read 425 times)

I have to say it doesn't make sense to run away from fiat and banks just to reach to crypto and use coinbase. They just get all of your money, make money from it, then give you what you owe without even having to pay you anything. At the very least, all those banks that we hate, has to give you some savings account interest rate in order to loan that back to someone else, so if they are getting 5% a year, you are getting 3% a year, and that 2% is their profit.

Comparing that to coinbase, they give you nothing, you hold your money there and in return you end up with absolutely nothing while they are making so much money with your crypto. Doesn't make sense, keeping it on your own wallet is the way to go for sure.

Yeah, completely meaningless. With centralized exchanges such as Coinbase, your deposit is swept to a central wallet, which is swept and split up several more times, and quickly becomes lost in a system deliberately designed to obfuscate things to any outsiders. No one outside of Coinbase actually knows how much bitcoin Coinbase are holding, and can only go on whatever Coinbase say. And even if Coinbase were completely open about their holdings, such knowledge is useless without knowledge of how much bitcoin they have attributed to all the various accounts, to compare the two and see if they are indeed operating fractional reserve. And again, the only people who can provide such information are the exchange themselves, and they are hardly going to be forthcoming with information which will incriminate themselves in such a way.

On a protocol level, there is little to nothing that we can do to prevent third parties or, particularly, banks from lending out the money you have voluntarily given them. Once you have transferred your coins to the bank's address, you have lost control over them, which means from now you have to trust the bank that it will return your bitcoins the moment you ask. The only "power" you probably will have is the ability to track the movement of funds from the bank's address to which you sent your money, but it hardly can be considered a real power. However, bitcoin banking and the ability of banks to run their business on fractional reserve will be highly limited by the same conditions as in the case of a free banking system, a system of competing private banks with no central bank to bail them out.

Even before the Fed removed the reserve limit altogether, banks would frequently hold less than the minimum reserve ratio, and simply borrow from each other or borrow from the Fed to meet the requirements. Essentially, as long as the bank was willing to pay a fee (the interest on the borrowing), they could hold any amount in reserve they wished, and create and loan out any amount they wished. The fractional reserve requirement is a way for the Fed to influence liquidity and interest rates, and not a way for the Fed to place a limit on how much new money a bank is able to create and loan out.

It's not really clear how this would work with bitcoin. If everyone started trusting centralized third parties to hold their bitcoin, then these third parties will only be limited by the volume of withdrawals or transactions they have to process each day, which will always be a tiny fractional of the total amount being held. If they start conducting off-chain settlements with each other similar to how fiat banks do business with each other (for example, Coinbase and Binance keeping a running total of how much they owe each other without ever actually transacting any coins), then it just becomes farcical.

Yes, but it is limited, at least according to my understanding.

A reserve ratio of 10% would multiply the money supply by a factor of 9. A reserve ratio of 1% would multiply the money supply by a factor of 99. With a fixed base money like Bitcoin, there will be inflation when the reserve ratio drops and deflation when it rises.

This source of inflation is limited because a lower reserve ratio increases a bank's risks of failure. A bank wants to stay in business, so it is motivated to keep its reserve ratio at a sustainable level, thus limiting it contribution to inflation due to FRB.

On the other hand, there are many factors that reduce these incentives, which is why we continue to see banks fail today. A government wanting to increase the money supply could potentially insure banks so that they could reduce their reserve ratio to dangerous levels.

Also, keep in mind that the multiplier is not completely determined by the reserve ratio. In the U.S., the minimum required reserve ratio is effectively 0 now, but the multiplier as measured by M1, M2, M3 ... vs. base money does not reflect that. Furthermore, if you assume that the portion of the bitcoin supply held by banks will much lower than that of fiat, the mutiplier will be even lower simply because there will be fewer bitcoins available for banks to loan.

Does fracional reserve banking alone, enought to cause with 100% certainty, price inflation?

Because if yes, just printing X coins per Y minutes and halving this reward after Z year/months (or premining and distributing like NXT), is not enought to make sure price inflation not happen with 100% certainty like it happens with the state.

Which brings us back full circle to the point I made in my first reply in this thread here:

As long as a significant proportion of users are happy to let third parties store their private keys and therefore have complete control over their coins, then there will always be the possibility that the third party is practicing fractional reserve banking, regardless of whatever kinds of checks, balances, or controls you put in place. The only way to prevent is for everyone to hold their own keys and their own coins.

This would also not work (assuming other people still leave their money at exchanges), this because fractional reserve bank sort of create new money of thin air, inflating the currency, and so mess with even those without money at banks or exchanges.

Not a great idea in theory, and completely useless in practice.

In reality, very few people actually withdraw their coins from exchanges on this day, and so any exchange operating a fractional reserve system can still easily cover the withdrawals. Even if everyone did withdraw their coins, publicizing a day in advance that you are going to withdraw your coins gives the exchange plenty of time to buy or borrow more bitcoin temporarily to cover those withdrawals, and then go right back to their fractional reserve practices the very next day. And even although some exchanges suspend withdrawals or go in to temporary "maintenance" mode during this time, people completely ignore the fact that doing so is pretty much proof they are running a fractional reserve system, and continue to use those exchanges anyway.

Rather than promoting a single day when people should withdraw their coins from exchanges, we should instead promote the idea that you should never have coins on exchanges unless they are actively being traded. Deposit, trade, withdraw, over as short a time period as possible.

This can only happen in a centralized system like Cex. This is why we have Proof Of Key Day Celebration. A day where everyone withdraws their money from centralized exchanges to their private wallets to test how liquid are those exchanges, to ensure they haven't fleece customers fund or divert it for another purpose. Some Cex do plan schedule maintenance and even halt withdrawals of asset during these period, it means something is wrong with depositors fund.

Sure, but they can simply count on the fact that only a small number of people ever actually request to withdraw real bitcoin, and an incredibly small number would ever request to do it at any one time. Hell, even if they just implemented a delay of 1 hour for withdrawals it would give them plenty of time to buy more bitcoin elsewhere and transfer it in to their own accounts to cover the withdrawals and continue running their fractional reserve system with very little reserves.

I would imagine you would have a very hard time convincing people to move away from bitcoin (or any other coin) and to a forked version which is exactly the same except you lose a portion of your holdings over time.

They are giving I Owe You papers not numbers, this "I Owe You" paper MUST be paid if requested, the thing is that by losing money they because of demurrage, they lose the power of give people their "I Owe You" .
If you put 10kg of gold at someone hand and he give a 10kg gold IOU, if you go there with this paper and they give you back this 10KG IOU, they WILL give to give 10KG gold back to you.

Also, you wouldn't do it with already existing coins, and if wanted to be done with already existing coin you could do some fork of a existing coin you want to implement this feature at.

Definitely, that's why I said it can only be possible if Bitcoin is valued on itself like by purchasing power or work hours which would make it more stable than when it is purely determined by speculation.
Fractional reserve is definitely not possible in the current structure of the Bitcoin ecosystem and might not actually be possible in the coming years as it's still a very maturing system.

It does not even perfectly work with fiat if you consider situations of inflation and hyper devaluation, it's just the current most efficient system.

I don't think that we can use the same thing with Bitcoins. Fractional reserve banking might be hard if we are just considering bitcoins, since at the end of the day we have to understand the fact that, bitcoins as a whole are volatile and lending through 3rd parties can cause initial owners to have probelms since they might have to sell instantly because of market fluctuations. How do they decide to do that then ?

Stock market, exchanges nothing predicted any pandemic, but we are living one and everything went very down which does mean that, even if the exchanges hold billions of dollars it would be nearly impossible to achieve stability due to the volatile nature.

Fractional reserve banking might only work for fiat. With Bitcoins it might be a disaster in making.

Just my thoughts~
P.S. but there are many exchanges which ask the bitcoin owners to lend their coins through them

Yes, that's exactly my point(s). As I pointed out my first reply in this thread here (https://bitcointalksearch.org/topic/m.58496931), two major exchanges have already been caught red handed doing exactly this, and using customers' deposits without their knowledge or consent to invest and try to make themselves more profit. I would wager that many other big exchanges also do similar things, using their large bitcoin holdings to fund loans, investments, expansions, etc., and therefore leaving them not holding 100% of their customers' deposits. Since the only time everyone tries to withdraw their coins from an exchange en masse is when they already know that exchange is having major liquidity problems, by which time it is already too late for the users in question, then most exchanges doing this will get away with doing this just fine right up to that moment it becomes too late.

There really is no reason to leave you coins long term on an exchange or other centralized service, and you very well might find your coins aren't really there when you come to withdraw them.

The difference is that if you end up with all of your fiat with you, then some people would have to car thousands of dollars, some would even have to face with millions of dollars stored somewhere, you can't put that in your wallet in cash. Whereas in crypto we are talking about digital numbers, download a non-custodial wallet on your phone and pay with QR code if you want to and you are done, it is as easy as that to carry crypto.

Yet, we are still seeing billions of dollars deposited into exchanges, what happens if those exchanges started to use your money to do something with it? What if there are 2 billion dollars deposited but 1.5 billion dollars left because exchange lost half a million dollars trying to do something? As long as people do not withdraw all together, they will slowly make that back as profit and will eventually equal the deposited number again.

The whole premise behind fractional reserve is that banks aren't handing out real money or real coins when they approve loans or credit for their customers. They are handing out numbers on a spreadsheet only. This could work in bitcoin just fine if people don't actually withdraw their coins from the platform in to their own wallet, but rather just trust the number the platform shows them is present in their account, as they do with centralized exchanges, web wallets, and so on.

Indeed, forcing the bank or centralized service to sacrifice some of the coins they are holding with every block mined, actively encourages them to hold as little as possible in their reserves, making fractional reserve worse rather than better.

This of course all ignores the fact that you would never get consensus on a proposal to start stealing coins from people's wallets and adding them back in to block rewards.

By having demurrage, X% of all coins go back to be mined each block, and at each block each wallet give back to be mined Y% of X% of all coins (rounded up always) where Y% is based at the percentage of the total coins the wallet have.

Maybe this would make harder for a company or bank to do fractional reserve stuff, because their wallet would have tons of coins and so have a huge percent of the total coins and so their value of Y will be big and they will lose tons of coins over time.

By losing tons of coins over time, they reduce the amount of real coins they have to give back to people. Fractional reserve banking usually works, because the amount of people wanting their money back is usually just a small percentage of the total real money they have, but with this demurrage idea as they continue to lose money this amount of people that want their money back at a given time will become a bigger and bigger percentage of the bank total real money.



This idea has just one problem, you now have demurrage, a thing that, like printing enought money to make sure price inflaiton has 100% chance to happen (the monetary inflation done by the state), is a HELLISH thing.

I like your appreciation about the Tether, basically that currency has been growing in terms of which many trust because they see it as if it were the USD, anyway there is also the BUSD, which is being well seen and is currently being taken into account for many uses in the BSC network and the different NFT games and for the exchange of coins or tokens of the games, if we think that this is a way to protect our money, would it be correct? I know that Tether was highly named by many who was responsible for the bullish trend of BTC in 2017, because there was a whole problem where Bitfinex was involved, but I still have a lot of trust in that stablecoin.

If enough people do things on-chain, then fractional reserve would obviously be eliminated.

Unfortunately it will continue to happen. A lot of projects that centralize things (e.g. Tether) tend to evolve into bank-style fractional reserves as a matter of time.

Make sure that your coins are on-chain at all times and you control the keys to your coin, and you will be good.