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I imagine borrowing and interest would work exactly the same way they currently work with regular currency. You sign some legally binding agreement, they send

I imagine borrowing and interest would work exactly the same way they currently work with regular currency. You sign some legally binding agreement, they send you the bitcoin, you pay it back in the agreed intervals + interest over time. If you don't, the legal system gets involved.

p1necone 6y ago
I can imagine you could build a cryptocurrency system that handles debts automatically via eg smart contracts, but you'd still have to involve the legal system if the debtors account was empty.
NoPicklez 6y ago
"They" being an institution which holds a significant amount of Bitcoin (for example sake) as capital in order to be allowed to issue loans? I'm wondering if there is a smarter way to issue loans through something like smart contracts as another comment mentioned. Where we perhaps remove the need for large single institutions to hold large amounts of capital for the purpose of loans. Otherwise we would then be entering in a very similar structure of what we have today and the inherent drawbacks.
- kristjansson 6y ago
  Big institutions make the loans because small ones can’t bear the risk. A small investor might only have the capital to make a handful of mortgages, and so have a much higher variance in her outcome. A single default might eat all her return and then some. So the small investor might instead contribute to a much larger pool and earn a lower return with a much lower variance. We could imagine mediating that transaction through blockchain something something, but degree of risk pooling - centralization - is the essential feature of the transaction
  - NoPicklez 6y ago
    Agreed regarding the reasons behind big institutions with large amounts of capital to bear the risk associated with lending compared to a small investor. So if someone wanted a loan for say 300k, other small investors may choose to lend/service a portion or as much of that loan as they wish with interest?
    - kristjansson 6y ago
      I suppose small investors could realize the same diversification by lending in very small amounts to a very large number of borrowers, such that only a small fraction of their wealth is exposed to any individual borrower. Obviously given m lenders and n borrowers, a system would need to manage O(m*n) streams of payments vs O(m+n) for a centralized party. In a traditional finance/legal framework, the former is an overwhelming amount of overhead for all but the largest loans, which are syndicated across lenders. For realistic sizes of m and n though, it’s probably not unreasonable for a single smart contact (per borrower?) to manage them. That starts to look ‘centralized’ though, and a contract per borrower/lender probably starts to get expensive? I don’t have a good enough sense for the practicalities to know for sure. It would weird to borrow a 300k $10 at time though, like you’re a BigCo borrowing $10m from each of 20 banks...

p1necone 6y ago

I can imagine you could build a cryptocurrency system that handles debts automatically via eg smart contracts, but you'd still have to involve the legal system if the debtors account was empty.

NoPicklez 6y ago

"They" being an institution which holds a significant amount of Bitcoin (for example sake) as capital in order to be allowed to issue loans? I'm wondering if there is a smarter way to issue loans through something like smart contracts as another comment mentioned. Where we perhaps remove the need for large single institutions to hold large amounts of capital for the purpose of loans. Otherwise we would then be entering in a very similar structure of what we have today and the inherent drawbacks.

kristjansson 6y ago
Big institutions make the loans because small ones can’t bear the risk. A small investor might only have the capital to make a handful of mortgages, and so have a much higher variance in her outcome. A single default might eat all her return and then some. So the small investor might instead contribute to a much larger pool and earn a lower return with a much lower variance. We could imagine mediating that transaction through blockchain something something, but degree of risk pooling - centralization - is the essential feature of the transaction
- NoPicklez 6y ago
  Agreed regarding the reasons behind big institutions with large amounts of capital to bear the risk associated with lending compared to a small investor. So if someone wanted a loan for say 300k, other small investors may choose to lend/service a portion or as much of that loan as they wish with interest?
  - kristjansson 6y ago
    I suppose small investors could realize the same diversification by lending in very small amounts to a very large number of borrowers, such that only a small fraction of their wealth is exposed to any individual borrower. Obviously given m lenders and n borrowers, a system would need to manage O(m*n) streams of payments vs O(m+n) for a centralized party. In a traditional finance/legal framework, the former is an overwhelming amount of overhead for all but the largest loans, which are syndicated across lenders. For realistic sizes of m and n though, it’s probably not unreasonable for a single smart contact (per borrower?) to manage them. That starts to look ‘centralized’ though, and a contract per borrower/lender probably starts to get expensive? I don’t have a good enough sense for the practicalities to know for sure. It would weird to borrow a 300k $10 at time though, like you’re a BigCo borrowing $10m from each of 20 banks...