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

Oh god, if one day bitcoin encounter the problem of too much people buying coffee through the blockchain, then the blockchain scalability would not be my problem anymore... the amount of lemon in my mojito would be. 

But without blockchain we would come back really quick to an "influencable" money supply right ?

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.

That was what I meant by 1-2 wallet (1 of 2), except that both should be able to spend, so the user can loose its key without loosing money.
Yes, the wallet can be hacked, but the reserve is provable.

Actually, instant confirmation is possible with a 2-2 wallet as you describe. If the two parties trust the eWallet provider to not double spend, then they don't have to wait for confirmation in the blockchain, a simple signed transaction is enough.

For reduced blockchain volume, Blockchain would need to scale one day or another, so I don't think this is a concern. Yes by bypassing the blockchain, it will be slimer... but this just give time to a problem surfacing later without any doubt.

Bitcoin makes provable reserves possible.  I don't know of any online wallets that use reserve proofs but it can be done.   Some exchanges use this (became a selling point after it turned out MtGox didn't have a full reserve and probably hadn't for years).  There is no reason online wallets can't as well.   Of course provable reserves require users (at least some) to verify the proof is correct (by locating their balance in the reserve tree).  If users don't then it is possible for online wallets (and exchanges) to still cheat.  There are no material difference between an online wallet (that uses a shared wallet) and an exchange when it comes to proving reserves, but I guess users of online wallets have so far not demanded them.  Services like blockchain.info are more like a desktop client in the sense that keys are not shared with the wallet service and users have unique sets of keys.  FRB wouldn't be possible on a wallet like blockchain.info without fraud and that fraud would be very easy to detect.

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).

I don't know enough on existing online wallet, but I guess some (will?) implement 1-2 wallet which would limit the effet a FRB system would have, while allowing users to not take too much responsability on their key.
Does such wallet exist ? I speak to people I know about bitcoin, and how great it is, but sincerely, when they ask me if they should buy, I respond no for 3 reasons.
1. They would not be responsible enough for their key, and will loose them, (In this age of technology most people are always computer illiterate)
2. I don't want to take the risk of keeping their key for them,
3. I don't want they turn their money to an online wallet, because if they do that in masses, I would be worried about the flood of fake BTC appearing after some years.

Control is probably the wrong word, influence is a better choice.  Still the purchasing power of a unit of currency is based on the effective money supply.  If FRB raises the effective money supply by 20% then the purchasing power of each currency unit is likewise reduced.  It doesn't matter if you hold "real BTC" or "fake BTC" the purchasing power is devalued.  This is no different than the fact that you can not use a bank and do all your transactions in cash (dollars) but it doesn't change the fact that inflation will affect prices.  It isn't like merchants value "cash" dollars more than "bank" dollars.


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.

You can't technically control a crypto-currency via fractional reserve lending.

Unless you control all the wallets, it's impossible.

They only way you can do something like that is if people use the wallet on "your" exchange, and trade only with each other. Sure, you can modify the numbers.

Anywhere else, however, and you have to send the actual Bitcoins. It can't be a make-believe number from another source.

That is why fractional reserve lending is impossible with a decently-designed crypto currency.

It all comes down to the numbers. If you use online wallets, you get promises of bitcoins. Use your own wallet, however, and suddenly those are YOUR bitcoins, no questions asked.

Lending doesn't require FRB but FRB frees up liquidity constraints.  Modern banks create the loans first then they find the reserves afterwards to close out their balance sheets end of day.  They either get the reserves from intrabank lending or if no other banks lend to them to go to the Central Bank.

I agree w you there are a lot of examples of non-commercial bank lending.  And there is a lot of "shadow" banking outside the Federal Reserve System. 

But I seriously doubt modern economies can run without FRB.  The liquidity constraints would drive interest sky high

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.

You are right.  Credit is a type of risk.  So before banks give credit, the borrower has to show that they are credit worthy.  You can put up collateral have co-signer, credit history/ rating, etc...

I see the problem in this forum is that most people think of money in terms of commodity but in practical applications money is more like stock & flow. 

Economies can be broken down to goods - services - finance.  Then you have govt as a regulator.  Its impossible to remove finance & banking from the economy.  So you are correct we always end up at the same place.  But theres nothing inherently "bad" about this.

You could create a banking system w colored coins representing convertible notes based on a BTC reserve.  But in order to get to this point you have to convince people BTC is at the top hierarchy of money.  In the past gold was at the top.  The reasons are historical.  But in modern economies it doesn't work like that anymore.  In MMT the explanation for why fiat has value is because the govt demands taxes in form of legal tender.  Fiat can collapse if the issuing state collapse.  But as long as the state doesn't collapse then fiat is what everyone will use

BTC derives value from speculation so if the speculation collapse the BTC will collapse.  This is one reason why in its current state BTC is not useful as money.   

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

Glad to see such precise argument, when I posted this in french on the french forum, I almost got burned on the bush as an heretic saying that the money could be expanded, without any claim telling why it should be different this time.

Yeah, thank you for taking all that time and logical arguments to explain that to me. Do you have a good resource or starting point into better understanding fractional reserves, effective money supply, multipliers and metrics such as the M1 vs M2 vs M3? I can read the standard definitions of the M metrics, but it doesn't help that much with understanding the concepts behind them.

Edit: NVM going to grab myself an economics textbook

Woo hoo we understand each other now.  Well I got to balance the bad with the good.  The good news is that in my opinion any such devaluation should be small (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 (11% monetary inflation)  but eventually will slow down and it is capped at 21M BTC.  So with 12M BTC outstanding we know that even if you live for a hundred years the monetary base can't even double.   That puts a limit on the upper bound of the effective money supply (much like a gold standard did) and unlike a fiat system where independent of the affiliate banks the central bank can expand the monetary base at will.
Lets compare this to the federal reserve. http://research.stlouisfed.org/fred2/series/BASE/

1985:  $182B
2014:  $3,984B

So growth of the monetary base will be slower and capped that already means even if bitcoin banks were equal to fiat banks the money supply would grow much slower.  The money multiplier 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?  Lets look first at the US fiat system.  The reserve requirement is 10% and the % of funds are on deposit is very high probably more than 90%+ .  Cash not on deposit is a small portion of the overall money supply.  So the max money multiplier is ~10x.  In reality bank tend to be more conservative.  Right now the M2 money multiplier currently is ~3x.  The fed no longer tracks the M3 some estimates put it at 50% higher than the M2 making the money multiplier more like 5x.
http://research.stlouisfed.org/fred2/series/M2

Will Bitcoin banks be able to sustain a money multiplier of 5x, I can't see that being plausible.  How much of a multiplier is possible.  My guess would be <2x and probably something like 1.1x or 1.2x.  The first reason is that unlike the fiat world a larger portion of the money will not be involved in a fractional reserve scheme.  "Real BTC" is much easier to use than cash.  It is easier to prove the reserve level of exchanges (should be 100%) and even banks (will need to be much higher due to the increased risk).  When you add factors like no central bank or FDIC, and possibly not much demand for borrowing BTC I can't see a multiplier of more than 1.2x.  That combined with a fixed based means that monetary expansion will be far more constrained if it does happen (which it may not).

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...

Thank you for increasing my knowledge base

Well, that's what happened to MtGox, so yes, it will happen again and this is a good lesson.


This is very true, and this is were Bitcoin shine. But I think that if paypal or bitpay goes big about bitcoin, sellers will start to store their BTC in their account instead of their own wallet.
But for the average consumer, this is true, I don't see any reason now, except a promise from a bank to "give interest".


Agree, but to my understanding dollar and gold before 1930, is exactly equivalent to debt BTC with a legal reserve and real BTC .
Before 1930, there was, say, 100 000$ worth of gold circulating, but only 10 000$ of gold were real.

Then, the FED have gone broke, so it declared dollar a fiat to print whatever they want.

Imagine that a central bank tomorrow goes broke, and don't have real BTC left.
Would not they be able to say : "I declare debt BTC to not be backed on real BTC", thus making any payment possible by using these debt BTC instead of real one ?

Such scheme would imply that people accept to be paid in both, real BTC and debt BTC. But this is starting to happen with services like BitPay, or maybe future paypal.

If they are really doing that, this is great. If they start offering "to keep your bitcoin safe" this will become a problem.
If people starts to fall in the trap again, then the history will repeat. But maybe DeathAndTaxes is right : banks will not proliferate, and I hope it will be true.

I'm only speaking in terms of what's on the blockchain, no other intermediates. Intermediates can fool people however they want. Perfect examples are Mt Gox, Inputs.IO and I'm sure dozens of others. With bitcoin there is no need for intermediates to make electronic payments we can just use well developed wallets and thus eliminate the need to be trapped. That is my sole argument. Will people be scammed in the future? Of course. Will I be one of them? Nope.



Ok so we agree that on the blockchain you could never loan out more coins than you actually have. That is all I'm talking about. Now my second point would be that I don't believe we will have anywhere near the same need for bitcoin banks as we did/do for fiat. Keeping large amounts of fiat under your matress probably wouldn't end well, which gave us a need for banks. Another need was for electronic payment. With bitcoins we can do individual cold storage + small hot wallets and it's already electronic. Two of the biggest drivers for bank savings. IMO.

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?

If 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.

Fiat FRB
If all transactions involve cash = impossible.
If some transactions involve interbank agreements = possible.

Bitcoin FRB
If all transactions involve cash = impossible.
If some transactions involve interbank agreements = possible.

Saying it is impossible if everything is on the blockchain =/= it is impossible.  Today not all transactions ARE on the blockchain.  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.    

There is no requirement that all transactions be on the blockchain.  Likewise if everyone took their funds out of fiat banks and conducted all transactions in cash (the fiat equivalent of on blockchain transactions) then fiat based FRB would also be impossible.

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.

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 ?