Topic: Why controlling BTC supply is possible (Read 1974 times)

Well I didn't mean blockchain volume is a "problem" but at some point in the future tx will either be off blockchain or the tx volume demand will be so high that either tx fees are incredibly high (bitcoin becomes more of a high value fund transfer network like interbank wire transfers) and/or the requirements to run a node become so high that the network is run by a handful of nodes.

For example 7 billion people aren't going to be able to pay for their morning coffee with bitcoins, at least not as on blockchain transactions.

Another option is multisig where the eWallet has one key and the user has a second key (on say a smartphone) spending coins requires using both keys.  This is more secure than provable reserves as it doesn't require validation and it has the added benefit that the exchange can't get "hacked" or hacked and disappear with all the funds.   However this does mean that all transactions are on blockchain so any benefits of off blockchain transactions are lost (reduced/no fees, instant confirmations, reduced blockchain volume, etc).

This is true but it deals with counterparty risk. There is no counterparty risk if you hold the private key.  This is something I always recommend and the more people that hold their own private keys the less of an effect a FRB system would have on the money supply.  However we are all in this together.  If some users allow their coins (either for the promise of interest or through apathy/ignorance) to be used in a fractional reserve then it affects everyone.

If you use online wallets, you get promises of bitcoins. Use your own wallet, however, and suddenly those are YOUR bitcoins, no questions asked.

Borrowing, lending, and credit doesn't require fractional reserve banking.  Now if you are a banker there is nothing better than lending someone elses money and keeping all (or almost all) the profits but it isn't a requirement.

If I have 1 BTC and I lend it to you that was done without fractional reserve banking.  If someday Bitpay floats a 20,000 BTC, 10 year bond @ 3.5% interest that would be another form of lending that doesn't involve fractional reserve banking.

The problem is that labor, supplies and pay will never accept a debt BTC and if they do, we come back to the same cycle that sparked our today's situation that BTC wants to avoid.
If there is credit between suppliers/business or  employee/employers it will be because employee or suplliers believe in the project. And will be compensated for the risk they take, nothing like what we have today.

In other terms, employee or supplliers might get paid in colored coins instead of BTC, which would be a very interesting application of it.

Deathandtaxes did such a great job of explaining banking.

Just wanna add something to the topic.  Even if BTC replace fiat USD, there will always be need for FRB banking services.  The simple reason is most credit is for business rather than individuals.

Suppose you invented a widget.  You save up a bunch of money by working and create a prototype.  Then you get orders in the form of invoices.  How are you gonna buy the supplies & and pay the labor to produce that order?

People will always need credit.  Money has always existed as credit whenever there was an economy.   Gold came after credit money.  Then later gold proved to to inelastic when economies expanded quickly and demand for money outpaced supply

Woo hoo we understand each other now.

The good news is any such devaulation should be minimal (at least compared to fiat currencies).  Here is why

PurchasingPower = 1/ EffectiveMoneySupply

EffectiveMoneySupply = MonetaryBase * MoneyMultiplier

MoneyMultiplier = (%FundsOnDeposit / %ReserveRequirement) + %FundsOffDeposit

So looking first at the monetary base.  With Bitcoin it is growing fast but eventually will slow down and it is capped at 21M BTC.  So with 12M BTC outstanding we know it can't even double.   That puts a limit on the upper bound of the effective money supply.
Lets compare this to the federal reserve. http://research.stlouisfed.org/fred2/series/BASE/

1985:  $182B
2014:  $3,984B

So the federal reserve alone has expanded just the monetary base by >2000% in just 30 years.

The second component is harder to quantity.  A lot will depend on how popular bitcoin "banks" are.  What is the demand for bitcoin debt?  How much of a reserve will these banks hold.   In the fiat world the reserve is 10% and roughly 100% of funds are on deposit.  Cash not on deposit is a small portion.  So the max money multiplier is 10x.  In reality bank tend to be more conservative the money multiplier currently is ~3x.  You can see this in the M2 (relative to the monetary base)
http://research.stlouisfed.org/fred2/series/M2

The fed no longer tracks the M3 some estimates put it at 50% higher than the M2 making the money multiplier more like 5x.

I believe that Bitcoin banks will never be able to sustain a money multiplier of 5x.  First not everyone will have their funds on deposit "personal wallet = fiat cash" and a greater portion of the supply will be held outside fractional reserves.  Things like demanding provable reserves for exchanges (who shouldn't be banking) will verify there is no multiplier on those funds.   How much of the money supply will eventually be fractional deposits?  I have no idea but if I had to guess I would say probably less than 20%.  Bitcoin "banks" aren't going to be able to support a 10% reserve.  With no FDIC and central bank, bank runs will be a real threat.  Remember a bank run can kill an otherwise healthy bank.  Even rumor could be enough to start a bank run.  The only protection banks have in the absence of FDIC and a lender of last resort is to be both conservative and transparent (provable reserves can be used to verify the reserve %).  How low of a reserve is possible?  No idea but lets say no less than 50%.  So the multiplier would be something like (0.2/0.5) + 0.8 = 1.2X.  That would mean the sustainable monetary expansion would be no more than 20% more than the monetary base (13M or 21M BTC).  Honestly I would hope even that won't happen but it is possible.  Remember without a central bank to print infinite money to back up failed banks it is possible the money multiplier could spike but if not sustainable then as the banks implode it would crash back towards zero.   Those holding "real BTC" would see their purchashing power rise as the banks failed and the money multiplier collapsed.

I'm sorry DeathandTaxes, you actually brought up a really good point with coinbase and circle. I'm sure a LOT of people are going to use these services for convenience and the prevalence of fractional reserve banking may actually take a good hold in the bitcoin marketplace too. I was really thinking that most of the advantages of an electronic money would make less people rely on bankers. At least if we hold our own BTC we won't have to worry about these companies imploding, but I suppose the increase in effective money would devalue our actual btc holdings...

If you have a coinbase account and you pay a merchant who has a coinbase account guess what?  The tx is off blockchain.  Now imagine Coinbase and Circle setup a mutual line of credit for 10,000 BTC.  You could pay a Circle merchant from your coinbase account and it still wouldn't be on the blockchain.   Now imagine one of those companies lent out 1 BTC.  Tada that is fractional reserve banking.    

That risk would not and could not be adequately compensated.  No doubt some people will try and eventually the bank will have a run and implode.  People will lose huge sums of wealth in the process.

Most people don't put money in the bank for interest.  Have you seen the interest on checking accounts lately.  People put money in the bank for safety and availability.  You can't pay online or over the phone with cash.  Checks, ACH, wires, debit cards all require a banking account.

This means absent the ability for the central bank to print money from nothing the central bank would eventually fail.  

On a separate note: As far as Bitpay goes, I don't know too much about them but I was under the impression that bitpay accepts coins, sells them on Bitstamp and then sends USD (yes via electronic bank debt) to the companies that allowed the bitcoin as payment (for instant USD). Are they actually doing something else?

Lythos, currently, I think you have no problem into believing that there exist more numerical money in bank account than printed bills.
And also you accept both, bills and wire transfer to get paid.
You know that if everyone ask for bills in the bank, then there will not be enough cash. But you don't care because you can pay goods and services in both, cash and wire, or credit card.

Now, even if the cash supply is not expanded, if someone move the reserve legal, it will provoke more "numerical money" to be spendable, thus making the money supply bigger.

All of this is possible just because you are accepting both debt (your bank statement is debt from the bank), and cash as payment.

Sure, moving the legal reserve does not impact cash supply, but it impact money supply.



True, not possible on the blockchain... As you can't lend more cash than you own...  
BUT the banking system can lend more money than it own. Why is that ? (As I explained with the iterations)
It can because now, you accept both cash, and the bank's debt as payment.
If tomorrow people start accepting bank's promise to pay them back instead of real BTC, we will get in the same trap.

And it start happening with BitPay.

all transactions are done in cash then fiat fractional reserve banking is equally impossible.


Then likewise banks can never lend out in cash more than they have in deposits.   You are simply using one context for fiat and another for bitcoin where no such distinction exists.

This is 100% impossible on the blockchain. This is why I'm saying as long as the BTC transfers are on the chain you could never loan more than you have.

My argument is that you could never loan more coins than you actually have. This has to be in the context of bitcoins and thus of course on the blockchain.

You usually have good responses and I consider you to be a smart guy. But please read my post again. How could anyone, ever loan more coins out (actual bitcoin transfers in the block chain) than they actually have? Irregardless if they are a fractional reserve or not (which would actually just lower their coin amount by even more and make it even more impossible) Think about that for a few minutes and then respond.

This is 100% impossible on the blockchain. This is why I'm saying as long as the BTC transfers are on the chain you could never loan more than you have. Off the blockchain I could do ANYTHING I wanted. I could say deposit 10 BTC with me and you instantly have 100BTC!!! Then setup other "banks" that are completely off record and basically allow myself to ponzi everyone's coins up.

My argument is that you could never loan more coins than you actually have. This has to be in the context of bitcoins and thus of course on the blockchain.