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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

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?
- brian_cloutier 8y ago
  Sorry, I don't quite understand your objection. It's true that today you would probably find it difficult to find someone who will take your Bitcoin and pay you Bitcoin-denominated interest with it. However, there's no fundamental reason why it couldn't happen. The process is: You give your Bitcoin to a bank. It is put into a UTXO which they control, and you don't control. In exchange, you have a balance in the bank which you can withdraw when you choose. Your balance is "virtual bitcoin", but is still real money, because it represents your ability to ask the bank to pay people for things. (By swiping your debit card) At the same time, the bank has the original on-chain Bitcoin, and is free to use it however it wants, probably by lending it out to somebody else. In this way, there is now more Bitcoin than there were previously. Fiat currency is not involved in any way. I'm not an economist, but I'm pretty sure it's exactly the same as the difference between M0 and M1.

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?

brian_cloutier 8y ago
Sorry, I don't quite understand your objection. It's true that today you would probably find it difficult to find someone who will take your Bitcoin and pay you Bitcoin-denominated interest with it. However, there's no fundamental reason why it couldn't happen. The process is: You give your Bitcoin to a bank. It is put into a UTXO which they control, and you don't control. In exchange, you have a balance in the bank which you can withdraw when you choose. Your balance is "virtual bitcoin", but is still real money, because it represents your ability to ask the bank to pay people for things. (By swiping your debit card) At the same time, the bank has the original on-chain Bitcoin, and is free to use it however it wants, probably by lending it out to somebody else. In this way, there is now more Bitcoin than there were previously. Fiat currency is not involved in any way. I'm not an economist, but I'm pretty sure it's exactly the same as the difference between M0 and M1.