Here you go.
Others have also made this connection.
https://www.reddit.com/r/Bitcoin/comments/56ehi1/fractional_reserve_on_lightning_network/But if the LN is deployed, it will almost certainly be based on a small number of big hubs.
These big hubs could mutiply the money in circulation in the same way that banks multiply the amount of dollar bills.
Namely, they would start issuing bitcoin IOUs and lend them to people, backed by a fractional reserve of bitcoins.
That is, the hub has 1000 actual BTC, but issues IOUs worth 5000 BTC.
The hubs would extend the LN protocol to let clients use those IOUs for payments (much as people today use checks and bank wires as equivalent alternatives to cash).
Clients would even be able to redeem the IOUs for real BTC; the hubs would be betting that only a small fraction of the clients would redeem at the same time.
https://lists.linuxfoundation.org/pipermail/lightning-dev/2015-December/000400.htmlIf we could lower the capital requirement, we'd lower the barrier for
people wishing to run a Lightning Network node.
Here are some thoughts:
- The trust-based system you're proposing looks like a
fractional-reserve banking system.
- Such fractional-reserve hubs will provide lower transaction fees
(because of lower capital requirements) — so the idea is worth pursuing.
http://www.wallstreettechnologist.com/2016/10/03/lightning-network-will-it-save-bitcoin-or-break-it/for instance, if you are a large hub, with lots of capital but with many many connections to individual users and businesses, this means that everyone would want to route payments through you because less hops means less fees. If you had to open up channels by putting matching amounts of your money in with every other user, then this would be a limiting factor. (as you would have to have 100% reserve amounts for all your channels) and inefficient as a whole as the network would require 2 dollars locked up in order to send every 1 dollar.
Instead you only open up channels where the depositor puts in funds. The hub then credits their account balance with that amount. When they are paid money by other parties, the hub just increases the balance by that amount, they don’t actually move the money through a LN channel. This can be done as long as the payee is also another client of the same hub. When a client wants to withdraw, only then do they open up a withdraw LN channel to the client which they can pull money back out. This way the hub only locks up their own funds only when clients withdraw, which most of the time, will be minimal as long as people continue to use the same hub.
When a hub grows large enough, it will start opening bidirectional channels to other large hubs. If they trust each other enough, then they start crediting each other in IOUs instead of real payment channels.
You can end up with a fractional banking system existing as long as hubs trust each other to make good on their promises to pay each other back, and no crisis of confidence happens that causes a bank run.
FYI:
If you open a bank , everyone knows you are doing a fractional, BTC was created to get away from those shenanigans, and defaults that occurs
because of the way fractional reserves operate. At some point their will be a bank run, it is never an if , but a when.
Latest example of fractional reserves in Crypto was Cryptsy and you see how well that worked out.
FYI2:
http://www.zerohedge.com/news/2015-11-23/fractional-reserve-banking-pure-fraud-part-iThis is a commentary which should never have needed to be written.
What is euphemistically called “fractional-reserve banking” is obvious fraud, and obvious crime.
By its very definition, it transforms the banking sector of an economy into a leveraged Ponzi-scheme, and as with all Ponzi-schemes, there is no possible “happy ending” here.
Fractional-reserve banking evolved literally based upon the temptation of all bankers to perpetrate fraud.
Empirically it has always been observed, down through the centuries, that under normal circumstances, only a tiny percentage of depositors will come to claim their cash/wealth at any one time.
Thus the temptation is for bankers to “lend” more funds than they actually possess, i.e. they are “lending” what does not even exist: “fractional-reserve banking” – the ultimate euphemism of banking and fraud.
It goes without saying that anyone or any entity which endeavours to “lend” something which does not exist is perpetrating fraud.
But before examining this inherent fraud more closely, it is important to back-up, and look at the Law.
Note that even when banks “lend” the money which they actually do hold on deposit (as trustees for the depositors) that this is already wholly/totally illegal.
It is the crime known as“conversion”.
Criminal conversion:
A person who knowingly or intentionally exerts unauthorized control over property of another person commits criminal conversion.
When your bank lends-out money you deposited, which it claims to be “holding” for you as trustee, does it seek your prior authorization before lending-out your property and thus putting it at risk? Of course not. The banks get around the naked criminality of their lending operations through general authorization. In the small-print of any/all bank deposit contracts is a clause whereby the depositor “authorizes” the bank to lend-out their property to Third Parties.
