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> They don't have an actual printing press that prints bitcoins. Instead they create a transaction that credits a BTC address but debits no addresses, thus crea
by thebean11 5y ago
> They don't have an actual printing press that prints bitcoins. Instead they create a transaction that credits a BTC address but debits no addresses, thus creating new bitcoins out of thin air. On the bitcoin blockchain the number of bitcoins that can be created in this way is limited, but off-chain there is no such limit.
Crediting a Bitcoin address is an on-chain event, so I'm not sure what you mean. If the address was not credited on chain, my Bitcoin node will not reflect the new balance, so the credit simply did not happen from the perspective of any honest node on the network.
- lottin 5y agoThe transaction happens off-chain. If you struggle to understand this you need to look up "fractional reserve banking". As soon as crypto users flock to centralised payment platforms, fractional reserve banking becomes a possibility and the supply of bitcoins is no longer limited to 21 billion. In the real world, central bank money (which in the bitcoin world is the equivalent of on-chain bitcoins) represents only a small fraction of the money supply.
- thebean11 5y agoA transaction that credits a BTC address cannot happen off chain. Do you know what a BTC address is? I understand that an exchange can show you a UI, saying you have BTC that the exchange does not own..
- lottin 5y agoIt DOESN'T credit any BTC address, that's why it's an OFF-CHAIN transaction.
- thebean11 5y agoFrom your comment: > Instead they create a transaction that credits a BTC address but debits no addresses Apologies if I misunderstood?
- lottin 5y agoThis is how they print bitcoins on-chain. Centralised payment platforms can do the same thing, except they would credit an internal account, instead of a BTC address. Hopefully now it's clear.
- thebean11 5y agoGot it, yeah that's clear. Centralized platforms can certainly credit accounts for BTC that don't exist, on a technical level. Will this happen in practice? Will it be legal? Will it be possible to transfer these fake BTC to other platforms? I don't think so. In the case of USD, the answer is yes. Banks are incentivized to accept fractional reserve dollars from other banks, because in practice they are exactly the same. Why is that the case? Because the issuer of those dollars, the government, has specifically deemed it to be a legitimate practice. There's no risk in accepting fractional reserve dollars. Fractional reserve dollars can be withdrawn as cash, used to pay taxes, used to pay debts etc. Let's think about Bitcoin now. Fractional reserve BTC cannot be used to pay on-chain transaction fees. It cannot be used on the lightnight network. It cannot be used to participate in smart contracts. Would Coinbase accept fractional reserve BTC from Gemini? There would be no way for Coinbase to redeem them for on chain BTC, without trusting Coinbase to fulfill it. There's no government that can print extra BTC to fulfill Gemini's debts..so it would be surprising if Coinbase accepted these IOUs from Gemini. The issue with fractional reserve BTC is that they are completely unportable. Usable within the issuers ecosystem, sure, but not beyond that.
- lottin 5y agoThe thing is that these fractional reserve BTC are indistinguishable from normal BTC. If you receive a payment to your BTC address, you have no way of telling whether these BTC have been created by an exchange. So, to answer your question, yes, Coinbase would accept fractional reserve BTC from Gemini, because they wouldn't know, they would just receive BTC. As long as Gemini has enough BTC reserves to remain solvent, nobody would notice that they have been creating BTC out of thin air.