Topic: Why controlling BTC supply is possible - page 2. (Read 1974 times)

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.

No different than a fiat based bank. Fiat based banks don't issue more loans than they have in deposits.  They do have interbank agrements (line of credit) so if you include those then yes they more debt than they have in deposits.

So do you want to include interbank lines of credit?
Yes = then both fiat and bitcoin banks would "lend" more than they have in deposits.
No = then neither fiat or bitcoin based banks "lend" more than they have in deposits.

In either case if depositors attempt to withdraw funds in excess of the reserve then the bank will fail (in the absence of a lender of last resort).

In your example

In your example you say "go out and spend it" that is different than withdrawing it.   Withdrawing = cash = blockchain.  If the depositor tries to spend it by withdrawing his $10 in cash to pay a merchant in cash the bank will very much fail.   The illusion on works if the depositor "spends" it by using some non-withdraw mechanism that uses the interbank line of credit.   You can replace $ with BTC and the example still works as long as the depositor spends it via some interbank agreement.

They wouldn't loan more coins than they actually have or they can't?

It's a separate topic from a fractional reserve as fractional reserve plays no role in being able to send more coins than you have.

They wouldn't and if there is only one fractional reserve bank then the effective money supply wouldn't expand.  However if there is one there will always be more.  You could say the same thing about fiat banks.  How can a fiat bank lend more cash than it actually has.  The answer is that it doesn't, it never does but it will acts a multiplier on the monetary base.   Fractional reserve banking predate fiat currencies by more than a century.  It was used in gold banks (and still could be today).  

Monetary Base * Money Multiplier = Effective Money Supply.

In a fiat currency the monetary base is created from nothing by the central bank.  The money multiplier is based on the compounding effect of fractional reserves.  In the Bitcoin world the monetary base is fixed (or can only grow based on the minting algorithm).  The effective money supply is then the monetary base times the money multiplier.  That being said I expect fractional reserve banks (lacking FDIC and a lender of last resort) to be both unpopular, prone to failure, and limited by large reserve requirements.  That means the money multiplier will probably be very low but it isn't guaranteed to be 1 as fractional reserve banking is still possible.


Ok very simple example which is exactly the same as your example.

Two bitcoin banks exist.  Bank A and Bank B.  Bank A & Bank B have a mutual line of credit for 10 BTC.

Bank A has 10 BTC in deposits with 1 depositor.
Bank A lends out 9 BTC.
It has 1 BTC is reserve.

The one depositor spends his 10 BTC with a merchant who uses Bank B as a processor.
Bank A has now 10 BTC (owed to Bank B) in debt with 1 BTC in reserves (and 9 BTC is assets = the loan).

You seem to draw a difference where none exists.  It is the exact same scenario as your fiat bank.   Fractional reserve banking predate fiats currencies.  You can replace your dollar example with Bitcoins or gold or salt and it still applies.


That is the monetary base.  The monetary base can't be raised but the effective money supply is the monetary base * the money multiplier.   You can have a money multiplier larger than one even with a fixed monetary base.  The rise of fiat currencies is a relatively new invention and the rise of central banks even newer.  Fractional reserve banking existed long before that. 


NOTE: Before I get a called a fiat promoter or some other nonsense.  I don't think BTC based banks will be either popular or successful.  I do think they will implode just about as often as the wildcat banks did without a central bank acting as a lender of last resort.  These will ensure the money multiplier remains very low (and may at times collapse back to exactly 1).   That doesn't mean fractional reserve banking is impossible.   Impossible means impossible.  It is very possible.  Fractional reserve banking was possible with precious metals as well.

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.

Edit: Fiat banks DO loan out more money than they have. If they only have 1 depositor, for $10 total lets say. They loan out $9, now they have $1. Your account has $10 in it and you can go spend it. Your bank now owes the other institution $10 of money that it doesn't have (actually the 10-1). In America this would be backed by the FDIC as you stated, which also "insures" more money that it holds. You know that all money comes out of nowhere from the federal reserve banks right? People are being loaned money that doesn't exist. Thanks to unlimited printing and digital accounts.

A fiat bank can never send you more cash than they have either*.  Your fiat bank example works just fine until everyone tries to withdraw at once and then you have a bank run.  The bank can't pay everyone, other banks aren't going to accept lines of credit from the sick bank and the bank implodes.  This is avoided in modern fiat systems by the combination of FDIC and a central bank (who can print as many quadrillions of dollars necessary to make sure the banks don't fail).  See my post above.   It is very possible to have a bitcoin bank but when it fails it will fail hard with no federal reserve printing the value of the coins into oblivion to prevent that failure.  The risks of using bitcoins banks will be extreme and hopefully that will mean people don't use them but if they do eventually the banks will fail and depositors will be wiped out.


* I used cash because it makes for an easy example, but wires and ach/sepa transfers require the receiving bank to trust the sending bank.  Banks have interbank lines of credit and when a bank gets sick the other banks tend to pull those lines of credit.  They won't credit wires received from the sick bank because they are unsure the sick bank can cover that debt.  This is normally where the central bank and national deposit insurance (i.e. FDIC) step in.  That won't happen in the Bitcoin banking world and when a Bitcoin bank falls on hard times it will fail.

Wait what? You have 10,000 bitcoins lets say. You lend me 1,000. You now have 9,000 coins do whatever with. This is completely fine because you had more bitcoins than you lent to me. I'm not saying loans are impossible by any means. Loans do and will always happen. What I'm saying is that you or a bank can never send me more bitcoins than they actually own. This is completely different than the current debt lending that goes on in banks. Banks take a deposit for 10, they lend out 9 dollars and yet your account still shows $10 of spendable money because that "money" is just written into the computer, it was created from nothing.

It is possible to have fractional reserve with a fixed money supply.  That is true for Bitcoin, and it was true for gold as well.   So anyone saying it is "impossible" is just uninformed.  I don't think it will become very popular with Bitcoin for a couple reasons and the good news for those who steer clear is it is a self correcting problem.


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.  Bank runs have always been a problem throughout history.  Even the fear that a bank was insolvent has caused banks to fail (as they don't have the ability to pay all depositors) so it creates a self fulfilling prophecy.  FDIC (or other national equivalents) and central banks have greatly reduced the risk of depositor losses and as a result many bank runs that would have bankrupted the bank simply never occur.  The central bank acts as the lender of last resort.  When nobody else will lend the central bank does and they know in many cases they will take a "loss" as a result.  This means absent the ability for the central bank to print money from nothing the central bank would eventually fail.  Even if there was a lender of last resort in the bitcoin world they can't create bitcoins from nothing to cover the losses on the loans to their affiliate banks.  

Putting your money in a "bitcoin bank" that is engaged in fractional reserve banking would be extremely risky, something on the same level of risk as the wildcat banks of the early 1800s.  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.  There will be a lot of gnashing of teeth but no central bank to subsidize the stupidity.  That reality will act as a damper of such foolishness in the future.   It is possible to have lending without fractional reserve banking (case in point corporate bonds traded on an exchange).  I find it more likely that bitcoin lending will eventually pull itself out of the gutter and we will see better financial products offered than we will see wildcat bitcoin banks. 

lythos, you can't lend more real BTC than you own, but you can lend debt BTC.
It is the same process as now : You can't lend more bill than your own. But you can lend debt.

This is equivalent to say : I have 10000 $ in my bank account, I lend you 1000$, now I have 9000$. These 1000$ are not bills, but debt.


I completely agree, again, I am not forming an argument about that, if I thought debt Bitcoin were good, I would stay with our paper money, and don't care about bitcoin.

What I say is that today, you are accepting both : Bills and wire transfer to get paid for your work.
Bills and wire transfer is exactly the same as "real BTC" and "debt BTC".
If in one point of time, people accepted to be paid in both, Debt and Paper, then why this would not be the case again with BTC ?

I wouldnt want any kind of debt with bitcoin too, as many stated, thats the reason of the currently crisis, people just spent more money in raw materials than what they can afford to buy with, and thats why the ripple protocol has failed too, https://ripple.com/ all related to debt and promises to pay is bad.

You can never lend out more Bitcoins than you actually have. Period. You could give "promise notes" for more bitcoins than you actually have, but you could never lend out more bitcoins than you own.

Edit: Fractional reserve banking is still possible. But you cant actually hand out more bitcoins than have been deposited with you, as other people keep stating.


Quoted in case someone edits later.

That's true, but sadly something bitcoin can't prevent in some years.
On the other hand, gov intentions were good : protecting its people from damage of putting their trust into wrong hands.
But as you say, it also imply the bankers to have the hand in our collective pocket if things go wrong for them.

The point is that I don't see bitcoin preventing that happening again, even if the goal of the creation of this money was to get rid of this system.

A big factor in this is governments willing to step in an insulate banks from the risk. They tell us that the FDIC is there to protect us but it really protects the banks and encourages bad decisions by protecting against the consequences.

I think what happened in the history, can happen again.
At first people were exchanging gold, then stored them inside bank, and exchanged bank notes instead. (because it is more practical)
Such bank notes could be exchanged with an exact amount of gold.

Then banks printed more bank notes than gold.
Some of them abused, and they crashed in bank runs.

Then the government declared a legal reserve to prevent abuses.
Now that banks notes had the same legal reserve, it was effectively the same money, which bring the dollar.

And as you know, after 1930 dollars became fiat.

Actually the same history is coming back.

At first people exchanges real BTC.
Then some stored inside bank and exchanged bank notes instead. (Mt Gox with there BTC debt)

They abused the printing and crashed from bank run. (Mt Gox again)

The logical next step would be instauration of legal reserve... and then I see nothing that would prevent what already happened with gold.

I think it would be something you could do with an alt coin backed by bit coin. It would be incumbent on the lender to disclose this to their depositors. Like i said I would not support it in any form but I do think this kind of discussion is a worthwhile thing. I have learned more about economics from the crypto world than I learned in 4 years of college.   

Ron, I don't support it either, I am just saying that people will support it because of incentives to do so. (Interest rates, or for simplicity purpose, like bitpay or mtgox)


My guess is that this is the real reason why mtgox fell actually. And this is a good thing.
But if the BTC debt become spendable as easily as real BTC, it won't happen. (As currently, there is no purpose to hold cash rather than a bank account)

Fractional banking is 10000000000000% impossible with bitcoin however 1000000000% for exchanges.

I can lend out way more BTC than I own as long as all the depositors don't ask for their money back.. this is how are retarded system currently works..

The rothschilds and rockerfellers should be hung, publicly.

Fractional reserve is part of the reason fiat currency is failing. I would not support any form of it with BTC.

I am not an economist, just a developer, so please, if some of my premises are wrong, point them out clearly to justify your position.

First, my reasoning is not limited to BTC, but apply to any fixed supply resource.
Second, I will explain why, contrary to what you'd expect, the "supply of BTC" is not limited to what you see in the blockchain.

There is some incomprehension I see about the legal reserve.
Some people says that a legal reserve is impossible with BTC, it is untrue, since the concept of legal reserve is orthogonal to the concept of fiat.
I've seen the wrong assumption that if you deposit 100$ in a bank with a legal reserve of 10%, then the bank can lend 1000$, this is a myth... But true in the long run.
This is true for the 100$ your bring as a capital at the creation of the bank, but not for your deposit.

If you deposit 100$ they will lend 90$ however, by chaining these lending we will effectively get the creation of 900$ of debt + 100$ of reserve.
The thing is almost everybody makes no difference between 900$ of debt and 100$ of real dollar, since they are both spendable.

Let's take a concrete of a 10% legal reserve with 100 BTC:

You deposit 100 BTC in BANK1. (I will come back to why someone has incentives to do that)
BANK1 put 10 BTC in reserve and can lend 90 BTC.
LOANER1 makes a 90 BTC loan and give to SELLER1.
SELLER1 deposit 90 BTC in BANK2.
BANK2 put 9 in reserve, and can lend 81 BTC.

At this point of time, there it always 100 real BTC, however the supply of BTC goes up.
At this point of time, there is a total 19 BTC in reserve, and 171 BTC in debt.
The amount of BTC cirulating is thus 171.

Continue experiment with 36 iterations.



You notice there will be 900 BTC circulating for 100 real BTC.

Now you can agree on something : those 900 BTC are not spendable in the blockchain.
But actually spending such debt BTC out of the blockchain is already happening, MtGox transactions, or Bitpay, or maybe future paypal, such transaction will happen outside the blockchain.

Why people will be pushed to deposit BTC in banks ? The response to that question is in the hand of the people that already keep their money inside bitpay, or exchanges.
We may agree, that for today, it is not possible to make one BTC transfer from one exchange or bank without passing by the blockchain.
But what if there is a big conglomerate of regulated exchange and banks that make exchange of BTC debt out of the blockchain possible ?
What if banks offer incentive to store BTC, like an interest rate ? Yes BTC is deflationary, and you know it will go up in value, but why would you chant of a siren that promise to give you x% per year without moving your finger ?

People will stop making difference between BTC debt and real BTC as soon as both will be spendable the same way.
At such point, the entity that control the legal reserve, can control the supply of BTC.

Once more time : I agree, debt BTC are not spendable on the blockchain... but who says you can't spend debt BTC out of blockchain ?