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Anyone who doubts why something like Bitcoin would be of use in banking should read the part about net settlement and counter party risk. This article describe

by pmorici 11y ago

Anyone who doubts why something like Bitcoin would be of use in banking should read the part about net settlement and counter party risk. This article describes the system for moving money within one country but similar mechanisms exist for moving money internationally. Imagine the counter party risk involved between banks who are governed by different central banks in different countries half way around the world. Bitcoin removes the counter party risk in transfers by making settlement instant per transaction instead of net daily settlement in traditional banking. The reason this is important is that these transfers revolve around credit and when there is a banking crisis and everyone suspects everyone else's credit worthiness then payment systems can break down.

thinkmoore 11y ago
"Instant." I just need to wait for the transaction to be finalized in a block, and then wait for enough blocks to be reasonably sure there isn't a longer chain elsewhere. I'm sure that won't take any time at all. /s Don't forget there is still counter-party risk on the side that is sending Bitcoin in exchange for goods as well.
- pmorici 11y ago
  You illustrate the misunderstanding a lot of people have. You are conflating the completion of payment between end users with the settlement. In Bitcoin they are one in the same. The issue is not whether the payment takes 1 minute or 20 minutes to complete it is whether settlement is incidental to the payment or deferred. Deferred settlement creates credit risk. The issue of risk of non delivery of goods is one that is a insurance service someone provides on top of a payment system and isn't particularly relevant to this discussion. Physical exchange of cash and Bitcoin are the only two payment systems that I've ever heard of that don't have counter party credit risk in some form.
  - joosters 11y ago
    The OP is pointing out that bitcoin can take hours for your transaction to be included in a block. So it's far from 'instant' payment or settlement. You then have to wait for several block confirmations to be sure that your transfer took place. Currently, people are reporting three or more hours wait to get a transaction on to the blockchain, because bit-coin has a capacity problem.
  - ryanjshaw 11y ago
    Cryptocurrencies reduce (but hardly eliminate) counterparty risk in exchange for an increase in systemic and personal risk. The dominant financial markets have exhibited a preference for reducing systemic risk over other forms of risk. I tend to think they have made the right trade-off. I have not seen a convincing argument for the alternative.
roymurdock 11y ago
Settlement would not be instant - blocks would still need to be validated multiple times before that money would be cleared for a new transaction. So instead of the current system of "net" settlement where the net value of all inflows and outflows is reported to the banks 3 times a day, there would be constant individual settlement. Settling each transaction individually decreases the risk of double spend and counterparty risk (exponentially with each additional validation), but adds latency between every single transaction to the network. Instead of 3 "spikes" of latency throughout the day, you would have billions of miniscule "drops" of latency added onto the transactions. It also introduces a new fee structure - how do you decide validation priority when you have billions of transactions to process and check? In the bitcoin protocol, a fee is built into every transaction as a percentage of the transaction amount. The miner that verifies the transaction by performing the necessary proof of work gets to collect the fee. Thus the miner has an incentive to verify larger transactions before smaller ones. In an interbank clearing scenario there would be no explicit fees because the banks would be doing the validation themselves rather than using a distributed network of miners, but the banks would no doubt prioritize larger transfers first. This would make micropayments hard. I'm not sure how a blockchain would get around this, unless there were multiple different chains for different sized transactions?
hibikir 11y ago
The security problem in a Bitcoin world is real though: The "instant" settlement is equally instantaneous, and equally non reversible, when someone has access to a private key. At the same time, if I lose the key, the coins are gone. So instead of being afraid of everyone else's credit worthiness, we now need Fort Knox level security, and any breach of said security means losing everything, permanently. It's like keeping savings inside a mattress, except people can use automated to try to hack into everyone's mattresses. You can have a different opinion of course, but seeing how even Bitcoin exchanges get hacked all the time, it seems to me that the traditional banking system is far less risky.
- deleted 11y ago
  [deleted]
- pmorici 11y ago
  The difference is you have no control over counter party risk you can only choose to accept it or not. You can do a a lot of simple things to prevent your Bitcoin from being stolen. The security problem with Bitcoin is largely a myth boosted by people and companies that were paying little to no attention to security or who were outright dishonest. People who kept their Bitcoins on deposit with exchanges. didn't own Bitcoin they put themselves in a position of being a Bitcoin creditor of an exchange.
  - ryanjshaw 11y ago
    Regularly improving regulatory requirements protect the average person on the street from the majority of material risks. Cryptocurrencies have no such protection. Banking systems were not forced on the world; they evolved to solve real problems, and continue to evolve. It's is unreasonable to dismiss the structure of these institutions without a deeper discussion considering the reasons for complexity and where the industry is headed. I believe that cryptocurrencies may present some improvement in the status quo at some point in the future, but not until there is more regulation (through government and/or through private contracts enforceable by civil law).
- icebraining 11y ago

by pmorici 11y ago

thinkmoore 11y ago

"Instant." I just need to wait for the transaction to be finalized in a block, and then wait for enough blocks to be reasonably sure there isn't a longer chain elsewhere. I'm sure that won't take any time at all. /s Don't forget there is still counter-party risk on the side that is sending Bitcoin in exchange for goods as well.

pmorici 11y ago
You illustrate the misunderstanding a lot of people have. You are conflating the completion of payment between end users with the settlement. In Bitcoin they are one in the same. The issue is not whether the payment takes 1 minute or 20 minutes to complete it is whether settlement is incidental to the payment or deferred. Deferred settlement creates credit risk. The issue of risk of non delivery of goods is one that is a insurance service someone provides on top of a payment system and isn't particularly relevant to this discussion. Physical exchange of cash and Bitcoin are the only two payment systems that I've ever heard of that don't have counter party credit risk in some form.
- joosters 11y ago
  The OP is pointing out that bitcoin can take hours for your transaction to be included in a block. So it's far from 'instant' payment or settlement. You then have to wait for several block confirmations to be sure that your transfer took place. Currently, people are reporting three or more hours wait to get a transaction on to the blockchain, because bit-coin has a capacity problem.
- ryanjshaw 11y ago
  Cryptocurrencies reduce (but hardly eliminate) counterparty risk in exchange for an increase in systemic and personal risk. The dominant financial markets have exhibited a preference for reducing systemic risk over other forms of risk. I tend to think they have made the right trade-off. I have not seen a convincing argument for the alternative.

roymurdock 11y ago

Settlement would not be instant - blocks would still need to be validated multiple times before that money would be cleared for a new transaction. So instead of the current system of "net" settlement where the net value of all inflows and outflows is reported to the banks 3 times a day, there would be constant individual settlement. Settling each transaction individually decreases the risk of double spend and counterparty risk (exponentially with each additional validation), but adds latency between every single transaction to the network. Instead of 3 "spikes" of latency throughout the day, you would have billions of miniscule "drops" of latency added onto the transactions. It also introduces a new fee structure - how do you decide validation priority when you have billions of transactions to process and check? In the bitcoin protocol, a fee is built into every transaction as a percentage of the transaction amount. The miner that verifies the transaction by performing the necessary proof of work gets to collect the fee. Thus the miner has an incentive to verify larger transactions before smaller ones. In an interbank clearing scenario there would be no explicit fees because the banks would be doing the validation themselves rather than using a distributed network of miners, but the banks would no doubt prioritize larger transfers first. This would make micropayments hard. I'm not sure how a blockchain would get around this, unless there were multiple different chains for different sized transactions?

hibikir 11y ago

The security problem in a Bitcoin world is real though: The "instant" settlement is equally instantaneous, and equally non reversible, when someone has access to a private key. At the same time, if I lose the key, the coins are gone. So instead of being afraid of everyone else's credit worthiness, we now need Fort Knox level security, and any breach of said security means losing everything, permanently. It's like keeping savings inside a mattress, except people can use automated to try to hack into everyone's mattresses. You can have a different opinion of course, but seeing how even Bitcoin exchanges get hacked all the time, it seems to me that the traditional banking system is far less risky.

deleted 11y ago
[deleted]
pmorici 11y ago
The difference is you have no control over counter party risk you can only choose to accept it or not. You can do a a lot of simple things to prevent your Bitcoin from being stolen. The security problem with Bitcoin is largely a myth boosted by people and companies that were paying little to no attention to security or who were outright dishonest. People who kept their Bitcoins on deposit with exchanges. didn't own Bitcoin they put themselves in a position of being a Bitcoin creditor of an exchange.
- ryanjshaw 11y ago
  Regularly improving regulatory requirements protect the average person on the street from the majority of material risks. Cryptocurrencies have no such protection. Banking systems were not forced on the world; they evolved to solve real problems, and continue to evolve. It's is unreasonable to dismiss the structure of these institutions without a deeper discussion considering the reasons for complexity and where the industry is headed. I believe that cryptocurrencies may present some improvement in the status quo at some point in the future, but not until there is more regulation (through government and/or through private contracts enforceable by civil law).
icebraining 11y ago