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In the non-blockchain space this is called "credit creation" and it absolutely is something that happens there. But this doesn't happen with Bitcoin. It's tru

by nl 4y ago

In the non-blockchain space this is called "credit creation" and it absolutely is something that happens there. But this doesn't happen with Bitcoin. It's true that there are a number of DeFi apps that will loan BTC. However if you look at the loan mechanism it is different to how it is done in traditional finance. A BTC loan is done in one of two ways: 1) The original owner of the BTC is given an IOU in the form of a different token (lets call it "Wrapped BTC" or wBTC) and the original BTC token is given to the person taking the loan, OR 2) The person taking the loan is given another token ("wBTC"). This is more common. In both these cases no new BTC is actually created. It's possible to create more of this other token though. In the specific case of wBTC[1] they say it is 1:1 backed with BTC, but other tokens might not have the same backing. I don't have a strong opinion on the utility of BTC, but I think it is worth being accurate in our discussion. [1] https://wbtc.network/ https://wbtc.network/

Nursie 4y ago
> But this doesn't happen with Bitcoin. It doesn't happen on the bitcoin blockchain. Exchanges are black boxes though, we don't always know what's going on in there.
- nl 4y ago
  No, that makes no difference. If you think otherwise explain the mechanism you think is happening.
  - Nursie 4y ago
    Exchange has all customer deposits intermingled. Exchange offers crypto loans. Exchange shows positive balances across all users that exceed deposits (though may or may not balance out with negative balances). Everything keeps functioning because the exchange is a black box and not everyone wants to move their BTC at the same time. More people can 'own' BTC on paper than there is BTC in existence on the blockchain. In the same way that most BTC transactions don't involve the blockchain either, they take place entirely within exchanges.
    - nl 4y ago
      It's true this is how it would work if you are treating BTC as a traditional asset and creating dollars by loaning the same deposits out multiple times. But for BTC you can't do this. If they have 100 BTC deposited from all their users and then try to loan out 101 that 101st transaction is impossible because the bitcoin isn't there.
      - matheusmoreira 4y ago
        > that 101st transaction is impossible because the bitcoin isn't there. The exchange's BTC reserves only matter when customers try to withdraw their coins. Until then, the coins are nothing but digits in their database. They can inflate that number as much as they want.
        nl 4y ago
        This might work inside the exchange, but doesn't work if you do a loan outside of the exchange. In DeFi apps you need an actual token to use. If you don't have a the token you can't do a transaction, and apps choose which tokens they support. So an exchange can create its own token, say it is backed 1:1 by BTC and lend that. But it isn't BTC so apps have to specifically opt into it. If they loan out the actual BTC they have in the exchange they can only loan out 100% of what they have (not more) because control and use of each BTC token is dictated by the public ledger which is out of their control. You can do other things (eg use the BTC as collateral for a dollar loan), but again you aren't lending BTC.
      - Nursie 4y ago
        I'm sorry this is just nonsense, as has been pointed out many times, exchanges are not constrained by the blockchain of any particular cryptocurrency, most of their transactions don't take place on a blockchain and their customer balances are not stored on the various blockchains. You may as well talk about this being impossible with paper money, the bank can't give out more than it has! There are only so many notes! But it doesn't need to. People can trade within the bank and between banks so long as the reserves cover the activities. Quadriga CX worked this way, until it didn't and everyone discovered their cryptocurrency was fictional.

by nl 4y ago

Nursie 4y ago

> But this doesn't happen with Bitcoin. It doesn't happen on the bitcoin blockchain. Exchanges are black boxes though, we don't always know what's going on in there.

nl 4y ago
No, that makes no difference. If you think otherwise explain the mechanism you think is happening.
- Nursie 4y ago
  Exchange has all customer deposits intermingled. Exchange offers crypto loans. Exchange shows positive balances across all users that exceed deposits (though may or may not balance out with negative balances). Everything keeps functioning because the exchange is a black box and not everyone wants to move their BTC at the same time. More people can 'own' BTC on paper than there is BTC in existence on the blockchain. In the same way that most BTC transactions don't involve the blockchain either, they take place entirely within exchanges.
  - nl 4y ago
    It's true this is how it would work if you are treating BTC as a traditional asset and creating dollars by loaning the same deposits out multiple times. But for BTC you can't do this. If they have 100 BTC deposited from all their users and then try to loan out 101 that 101st transaction is impossible because the bitcoin isn't there.
    - matheusmoreira 4y ago
      > that 101st transaction is impossible because the bitcoin isn't there. The exchange's BTC reserves only matter when customers try to withdraw their coins. Until then, the coins are nothing but digits in their database. They can inflate that number as much as they want.
      - nl 4y ago
        This might work inside the exchange, but doesn't work if you do a loan outside of the exchange. In DeFi apps you need an actual token to use. If you don't have a the token you can't do a transaction, and apps choose which tokens they support. So an exchange can create its own token, say it is backed 1:1 by BTC and lend that. But it isn't BTC so apps have to specifically opt into it. If they loan out the actual BTC they have in the exchange they can only loan out 100% of what they have (not more) because control and use of each BTC token is dictated by the public ledger which is out of their control. You can do other things (eg use the BTC as collateral for a dollar loan), but again you aren't lending BTC.
    - Nursie 4y ago
      I'm sorry this is just nonsense, as has been pointed out many times, exchanges are not constrained by the blockchain of any particular cryptocurrency, most of their transactions don't take place on a blockchain and their customer balances are not stored on the various blockchains. You may as well talk about this being impossible with paper money, the bank can't give out more than it has! There are only so many notes! But it doesn't need to. People can trade within the bank and between banks so long as the reserves cover the activities. Quadriga CX worked this way, until it didn't and everyone discovered their cryptocurrency was fictional.