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As I pointed out in another comment in this thread, fractional reserve is just as possible with Bitcoin as it is with cash, it's not like banks increase the mon

As I pointed out in another comment in this thread, fractional reserve is just as possible with Bitcoin as it is with cash, it's not like banks increase the money supply by printing cash. If you give your money to a bank it won't be sitting in an account you have the key to, it'll be the bank's to control and they'll be free to lend it to other people. This might even be a desirable state of affairs: money which you don't give to a bank collects 0% interest.

dogma1138 8y ago
As I pointed out no where was stated that it’s not technically possible but that it’s not practiced or supported by current mainstream cryptos. If anything some of the larger blockchains “naturally” move towards a “central bank” like model. Say you have a blockchain that requires you to sync 100’s of terabytes if not petabytes of information to setup a new node and 100’s of gigabytes a day to keep it upto date. It’s not going to be feasible for individuals to talk to it directly. Now you already have exchanges that keep ledgers other than the blockchain and that already do most of their transactions off the blockchain these are your banks. In this model the blockchain essentially offers only value store for the exchanges and keeps only the exchanges honest this is essentially your central reserve. The blockchain offers also a consensus protocol where either the miners if it’s PoW or the exchanges if it’s PoS hold the important seats, that’s your board of directors. So yes I don’t think that current crypto is incapable of mimicking the model of banking we currently use some already do it unintentionally to some extent. But currently there isn’t a single crypto that offers a built in fractional reserve and credit system as part of its blockchain its off possible to implement it.
- brian_cloutier 8y ago
  That's not really true though. For one: > supported by current mainstream cryptos There's nothing that needs to be supported. Bitcoin already "supports" it, in the same way that cash does. All you have to do is find a counterparty and draw up a contract. > it’s not practiced That part's mostly true because with this kind of volatility who would risk owing you a bunch of bitcoin, but loans involving Bitcoin are starting to appear: https://saltlending.com/ https://saltlending.com/ I wouldn't necessarily trust https://www.bitbond.com/ https://www.bitbond.com/ with _my_ bitcoin, but theoretically I could, and this is starting to look a lot like fractional reserve.
  - dogma1138 8y ago
    Ofc it has to support it you can’t loan more bitcoins than you have unless you use some other tools like say options by even that isn’t straight forward unless you have a clear secondary settlement process. If you want to do fractional reserve in say crypto you need to have a blockchain where the “bank” can print crypto like they do with current currency until then it’s off the books accountign or a ponzy scheme like MtGox.
    - brian_cloutier 8y ago
      > If you want to do fractional reserve in say crypto you need to have a blockchain where the “bank” can print crypto like they do with current currency until then it’s off the books accountign or a ponzy scheme like MtGox. Okay, I think maybe what we're arguing about is definitions. I'm trying to say, "off the books accounting" is perfectly legitimate fractional reserve. It is not possible to create more on-chain Bitcoin, but something which looks exactly like fractional reserve is possible today and would end up creating "off-chain" Bitcoins, increasing the Bitcoin money supply without increasing the number of on-chain Bitcoin beyond 21 million. Maybe you don't think that such a system should be called Fractional Reserve, I guess that's where we disagree. > you can’t loan more bitcoins than you have Fractional reserve isn't about loaning more than you have. In fact, kind of the the entire point is that you must loan less than you have: you loan out at most some fraction of your deposits and reserve the rest.
      - dogma1138 8y ago
        That’s not a fractional reserve since that one needs to be in the same unit of account if you are using two units of account that’s not a fractional reserve that is an exchange rate. If you loan less than your total then again it’s not fractional lending it’s simply lending.
        brian_cloutier 8y ago
        Okay, I'm not sure I should answer because it's starting to seem like you're trolling. Giving you the benefit of the doubt: > if you are using two units of account that’s not a fractional reserve The system I described only has one unit of account, Bitcoin. It doesn't matter whether they're on-chain or "virtual", they're both Bitcoin, and are worth the exact same amount. > If you loan less than your total then again it’s not fractional lending it’s simply lending. You have misunderstood fractional reserve banking. Banks are not allowed to give out more money than they have received in deposits. Here's Wikipedia: > Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities. Say the reserve ratio is 10%. Then, given $100, the bank is allowed to give out $90 and must keep $10 on hand.
throwaway8121 8y ago
You can't do that with Bitcoin as the interest rate they'd have to pay on deposits would kill the bank, and the interest rates on loans would make the loans undesirable.
QML 8y ago
Talks about a credit system built upon a blockchain naturally transition to talks about an identity system; otherwise, how would you prevent Sybil attacks [1]? However, I am unsure to how the latter will be solved without a central, trusted party. What is the digital analogue of a passport or driver's license, a piece of identification that is hard to forge? To add on to why fractional reserve will be hard to implement with cryptocurrencies, another unexplained problem is the issue of collateral backed by a volatile asset. If that underlying asset rises in value, then the effective interest rate would be equal to the original interest rate + % increase in value; if the opposite occurs, a decrease in value, the 'bank' in this scenario might lose money on that lend. You might argue that a digital stable-coin is a possible solution. But a digital asset backed by a physical object is probably bound to encounter regulations; and the performance of a stable-coin backed by algorithms is currently unknown to work. These are two hard problems that have to be solve before fractional reserve is viable on a blockchain. [1] https://en.wikipedia.org/wiki/Sybil_attack https://en.wikipedia.org/wiki/Sybil_attack
- brian_cloutier 8y ago
  Okay, I think I see where the misunderstanding is. I'm not imagining an on-chain and fully decentralized solution. You're right that that sounds difficult. I'm imagining a contract with a bank. As in, you literally go and talk to Chase bank and draw up a contract and give them Bitcoin and they promise to give it back to you later plus interest. Such a system is very possible today, and in that sense Bitcoin _does_ support fractional reserve. Fractional reserve is not a feature you explicitly add, it's an emergent property of a banking system, you really don't need to do very much to "support" it.
  - mseebach 8y ago
    I'm with you so far, but the bit I don't understand is that for bitcoin to be said to support fractional reserve, don't you need to have the balance of your loan issued in bitcoin as well, so that you can pay other people for services in bitcoin, and they can use that to get a new loan etc? It doesn't seem fair to say that bitcoin works for a given purpose, if "working" presumes the presence of a trusted fiat money system?

dogma1138 8y ago

As I pointed out no where was stated that it’s not technically possible but that it’s not practiced or supported by current mainstream cryptos. If anything some of the larger blockchains “naturally” move towards a “central bank” like model. Say you have a blockchain that requires you to sync 100’s of terabytes if not petabytes of information to setup a new node and 100’s of gigabytes a day to keep it upto date. It’s not going to be feasible for individuals to talk to it directly. Now you already have exchanges that keep ledgers other than the blockchain and that already do most of their transactions off the blockchain these are your banks. In this model the blockchain essentially offers only value store for the exchanges and keeps only the exchanges honest this is essentially your central reserve. The blockchain offers also a consensus protocol where either the miners if it’s PoW or the exchanges if it’s PoS hold the important seats, that’s your board of directors. So yes I don’t think that current crypto is incapable of mimicking the model of banking we currently use some already do it unintentionally to some extent. But currently there isn’t a single crypto that offers a built in fractional reserve and credit system as part of its blockchain its off possible to implement it.

brian_cloutier 8y ago
That's not really true though. For one: > supported by current mainstream cryptos There's nothing that needs to be supported. Bitcoin already "supports" it, in the same way that cash does. All you have to do is find a counterparty and draw up a contract. > it’s not practiced That part's mostly true because with this kind of volatility who would risk owing you a bunch of bitcoin, but loans involving Bitcoin are starting to appear: https://saltlending.com/ https://saltlending.com/ I wouldn't necessarily trust https://www.bitbond.com/ https://www.bitbond.com/ with _my_ bitcoin, but theoretically I could, and this is starting to look a lot like fractional reserve.
- dogma1138 8y ago
  Ofc it has to support it you can’t loan more bitcoins than you have unless you use some other tools like say options by even that isn’t straight forward unless you have a clear secondary settlement process. If you want to do fractional reserve in say crypto you need to have a blockchain where the “bank” can print crypto like they do with current currency until then it’s off the books accountign or a ponzy scheme like MtGox.
  - brian_cloutier 8y ago
    > If you want to do fractional reserve in say crypto you need to have a blockchain where the “bank” can print crypto like they do with current currency until then it’s off the books accountign or a ponzy scheme like MtGox. Okay, I think maybe what we're arguing about is definitions. I'm trying to say, "off the books accounting" is perfectly legitimate fractional reserve. It is not possible to create more on-chain Bitcoin, but something which looks exactly like fractional reserve is possible today and would end up creating "off-chain" Bitcoins, increasing the Bitcoin money supply without increasing the number of on-chain Bitcoin beyond 21 million. Maybe you don't think that such a system should be called Fractional Reserve, I guess that's where we disagree. > you can’t loan more bitcoins than you have Fractional reserve isn't about loaning more than you have. In fact, kind of the the entire point is that you must loan less than you have: you loan out at most some fraction of your deposits and reserve the rest.
    - dogma1138 8y ago
      That’s not a fractional reserve since that one needs to be in the same unit of account if you are using two units of account that’s not a fractional reserve that is an exchange rate. If you loan less than your total then again it’s not fractional lending it’s simply lending.
      - brian_cloutier 8y ago
        Okay, I'm not sure I should answer because it's starting to seem like you're trolling. Giving you the benefit of the doubt: > if you are using two units of account that’s not a fractional reserve The system I described only has one unit of account, Bitcoin. It doesn't matter whether they're on-chain or "virtual", they're both Bitcoin, and are worth the exact same amount. > If you loan less than your total then again it’s not fractional lending it’s simply lending. You have misunderstood fractional reserve banking. Banks are not allowed to give out more money than they have received in deposits. Here's Wikipedia: > Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities. Say the reserve ratio is 10%. Then, given $100, the bank is allowed to give out $90 and must keep $10 on hand.

throwaway8121 8y ago

You can't do that with Bitcoin as the interest rate they'd have to pay on deposits would kill the bank, and the interest rates on loans would make the loans undesirable.

QML 8y ago

Talks about a credit system built upon a blockchain naturally transition to talks about an identity system; otherwise, how would you prevent Sybil attacks [1]? However, I am unsure to how the latter will be solved without a central, trusted party. What is the digital analogue of a passport or driver's license, a piece of identification that is hard to forge? To add on to why fractional reserve will be hard to implement with cryptocurrencies, another unexplained problem is the issue of collateral backed by a volatile asset. If that underlying asset rises in value, then the effective interest rate would be equal to the original interest rate + % increase in value; if the opposite occurs, a decrease in value, the 'bank' in this scenario might lose money on that lend. You might argue that a digital stable-coin is a possible solution. But a digital asset backed by a physical object is probably bound to encounter regulations; and the performance of a stable-coin backed by algorithms is currently unknown to work. These are two hard problems that have to be solve before fractional reserve is viable on a blockchain. [1] https://en.wikipedia.org/wiki/Sybil_attack https://en.wikipedia.org/wiki/Sybil_attack

brian_cloutier 8y ago
Okay, I think I see where the misunderstanding is. I'm not imagining an on-chain and fully decentralized solution. You're right that that sounds difficult. I'm imagining a contract with a bank. As in, you literally go and talk to Chase bank and draw up a contract and give them Bitcoin and they promise to give it back to you later plus interest. Such a system is very possible today, and in that sense Bitcoin _does_ support fractional reserve. Fractional reserve is not a feature you explicitly add, it's an emergent property of a banking system, you really don't need to do very much to "support" it.
- mseebach 8y ago
  I'm with you so far, but the bit I don't understand is that for bitcoin to be said to support fractional reserve, don't you need to have the balance of your loan issued in bitcoin as well, so that you can pay other people for services in bitcoin, and they can use that to get a new loan etc? It doesn't seem fair to say that bitcoin works for a given purpose, if "working" presumes the presence of a trusted fiat money system?