Just to make sure: they report their balance structure to the authorities to prove that the fraction of the issued loans that is the reserve does not exceed the regulatory minimum. They just book that new loan in their system, creating new money. The wording of “lends the rest” suggests as if some money is moved around.
In your example, if you deposit your bitcoin in a bank, or any kind of financial institution, you don’t have that bitcoin anymore. You just have an IOU, a piece of paper (speaking metaphorically). This paper is as good as the institution that issued it.
You know, before central banks existed, this is how it would work. Your USD would be issued by multiple banks, and each bank had their own banknotes. If some bank printed too many banknotes and didn’t have enough gold to cover for it, so it was proven to be unreliable, then the news would spread and people would not accept these banknotes, or at least not in 1:1 ratio. My friend read a book about it and explained it to me, I have to ask him the name of the book.
Anyway, since in the past it was much tougher to keep the banks in check, people could fall victim of unreliable banks. So the central bank was created to “cover for” all the banks. This system has some advantages, but it also has its problems, one being increased centralisation. So there will be fewer small hiccups, but the risk of systemic failure increases. What I mean is, you don’t want to have monopolies and banks that are “too big to fail”.
To the sentence “This paper is as good as the institution that issued it…” I would add “…plus the guarantee from the central bank”
Regards Bitcoin in the future, if the idea is that we would have unregulated banks ( /financial institutions / crypto exchanges) not covered by a central bank, this would seem to be a riskier place to deposit my money, I would feel safer keeping my savings in CHF in UBS.
This would seem to be a barrier to BTC being taken up here. If I was in Nigeria I would probably feel differently
With BTC is the idea that physical BTC would be moved? Or promissory notes / paper money e.g. “I promise to pay the bearer of this note 1 BTC”
There is only one chain, no long or short or second chain, one single chain of blocks and you can view it entirely here: https://mempool.ninja/
All miners compete to find the same block.
There is no" lag island":
You create a transaction and sign it
You broadcast the transaction to the network
The transaction is added to the mempool
Miners pick transactions based on their fees and add them to a block
The block is mined, transactions are confirmed by nodes connected to the network
Only point 2 requires an internet connection for you. You can be on Mars for 1, it does not matter, when sync the transaction will be added to the Mempool and resume.
Check what happened in China on April 17th when we lost 25% of miners hash rate. It was a non-event, everything was adjusted in 12 hours. It did not affect the chain, just the Mempool had more transactions in it for a while.
The general idea is to put the btc as a collateral.
So let’s say you lend me $10k at 5% for a year, I will put 1 btc on an escrow account as a collateral for you in case I don’t repay the money + fees.
We use a 2-3 multisignature escrow account with a trusted third party, meaning that you have a key, I have one, and the trusted third party have one as well. If I pay you as expected, we use our keys to release the collateral. If I don’t pay you back, you and the third party use your keys to get the collateral as a pay back. If bitcoin price crashes, you and the third party liquidate the contract and get the bitcoin before the price crosses the value of the loan.
The trusted party can be anyone: a bank, a p2p platform, Bojack, etc.
It’s actually quite straightforward, sorry if I’m not clear
Are we even talking about bitcoin here I am really confused.
Either your node is synchronized or it is not, and if not because you had no internet, your node will automatically start to download the missing blocks to be again in sync. Same for miners, if they are offline, they will have first to re-sync.
If you are not in sync, that does not create a fork, you need to have a majority consensus between nodes even for a soft fork.
And if there is any discrepancy between nodes, it is reconciled every time a block is mined. You can actually check the reconciliation script if you are a dev.
The company made what it called incorrect promo payouts in bitcoin instead of US dollars to customers, however it said a number of users had already withdrawn the coins before BlockFi could backpedal.
Thanks for the answer, however I was looking for an example where BTC has completely replaced USD in society. So for example how would it work if you wanted to get a mortgage in a BTC world? Per the example from @Bojack I understand the vision is that we would not have any lender of last resort or regulation. To my mind that would lead to higher risk for people putting money in the bank / crypto exchange vs today, and higher interest rates
(ps I also don’t understand the example - why would I lend you money in one currency, then you put the same amount in another currency in escrow? You don’t have any more money than you started with - that is not a loan, more like a speculative FX trade )
Sounds like a secured loan (e.g. mortgage, lombard loan). It sounds good for leveraged investing, but not as useful for civilization as equity/debt financing (when you can fund a venture based on expected future cash flows).
I also wonder how a bitcoin maximalist world would replace banks (e.g. entities that can borrow short and lend long to allow people to do longer term venture).
Absolutely don’t understand, do you have any literature on that? I’d like to learn more.
I am checking my node right now and as far as I can see, my node mempool is the same as what I find on the different blockchain explorers that exist.
Also reminder that we don’t know which miners will find which block as it is random, it does not prevent a transaction in one location to be added on a block by a miner from a different location. So no, I am really sorry I don’t understand but I am happy to look into it if you can share some documentation.
Indeed, in my example you are lending me real money so I can use it to add leverage, for example. So with your USD I would buy more bitcoins and expect a sufficiently high return to pay you the fees and the money back. Note that if you use a platform like Blockfi, the collateral is not locked in an escrow, they use it to generate additional revenue by lending the collateral to hedge fund.
Additionally, and as mentioned by @nabalzbhf you could have a secured loan with that, and if not repaid you get the collateral.
Now where it gets interesting is to borrow liquid bitcoin (that uses the lightning layer 2) with real bitcoin, and that could become a new form of consumer credit loan in the future. Instead of selling my btc which is somewhat slow and expensive (all things being relative), I could borrow Liquid BTC to gain agility for my every day spending (or to day trade if you are really into it). The benefits vs. a normal loan is that you don’t need to talk to your bank, show your credit scores and wait several days to get your money. Everything can be done in a matter of minutes with your phone. I’m not a fan of personal loans to buy consumer goods, but it’s a massive market.
The risk is limited because you always have the collateral available in case there is no repayment.
Edit: we are probably still way too early for the last use case, but it is interesting to explore it
In fact, the issue rely more on the P2P nature of Bitcoin rather than on the protocol itself. It’s just how the internet works that allow this.
I know they released a tool called ASMAP that Bitcoin Core can run in order to mitigate (but not totally eliminate) the risk of these kind of stealth partition attack. It basically generates a map of the internet which is used to avoid nodes from being traped behind autonomous services who acts as network bottlenecks.
I honestly don’t fully grasp my mind around all the intricacies of the topic. But I’m quite sure that the update I’m talking about won’t be enough to leave Bitcoin unhurt should it faces an extreme situation (like a state-attack from China). Not sure if it would be enough to kill Bitcoin but one thing is certain, we clearly don’t want to see this happening before the devs clamp the issue for good.
If I follow your example well, what you are talking a about is a currency trade (long BTC, short USD) as opposed to a consumer banking transaction.
What I am trying to understand is how consumer lending would work once fiat has been eliminated and replaced with BTC.
So for example, I get a salary in BTC and have a few BTC saved up. You wan’t to build a house but only have a small deposit of BTC so you need a mortgage. How will it work?
I am struggling to see how. There is higher risk involved for me to depost my BTC in a P2P exchange (or whatever) without a central bank in the equation. So I demand a higher interest rate, which gives you a disincentive to borrow, which results in lower investment and a smaller economy.
Or perhaps I am missing the point and the assumption is that BTC will exist alongside fiat, but that doesn’t make sense to me either
Please tell me why I wrong
I see the use case in countries like Nigeria or Venezuela in the short term because their currency, government and Central Bank are all so screwed up that people trust BTC more, actually they don’t really have a better choice right now. Is that enough to justify the current high price though?
I think what you’re asking is how should a system without fractional reserve and money creation work. This issue was raised during the referendum to bring Switzerland’s CHF back to the gold standard. It also touches upon islamic banking, where usury is prohibited. Usury is making money from lending money (interest). It is seen as immoral and as a sin in islam.
But islamic banks still make money and there are a few ways to bypass this ban on usury.
One of the is murabaha. This means that the bank buys the flat and owns it and it sells the flat to you in installments, at a higher price. So as you can see, no money is created. The original owner of the house gets paid by the bank with its “bitcoin”. Then you slowly pay back the bank.
Then there is ijara or leasing.
In mudarabah the bank provides 100% of capital needed for your investment, but it has a share in the profits of your business (but does not interfere in your business decisions). In musharakah it becomes a real partner.
Interesting solution. But what is the incentive for non-Islamic, developed countries to move to such a system ? It doesn’t seem beneficial versus today (?)
Key points I took from it:
-BTC has no intrinsic value, but has some value based on mutual trust within the crypto community (not sure I would put my NW in such mutual trust…I guess people would say similar applies to gold, but I don’t invest in gold either)
-central banks are not worried about it yet as not integrated into the economy. There is no “too big to fail” concern
[edit: to get past paywall try typing “ Cryptocurrency holders take on central banks at their peril” in browser on a phone]
Can someone explain how that would actually work in a bitcoin (or cryptocurrency) world? (e.g. with a real example, remembering that the monetary supply is fixed)
I have a vague idea how that can work with liquidity pools, but I don’t think it can scale and when liquidity evaporate there’s a major crisis (since there is no lender of last resort to calm things).
I also cannot explain how you’d do large investment (e.g. how can a country fund fusion power plant, or space program, etc. and obviously I guess any form of economic stimulus would be impossible since that’d go beyond any possible liquidity pool). But in practice I don’t think the monetary supply can ever be fixed, as long as new cryptocurrencies are created regularly (you’d need one crypto to win and ban all other possible cryptos)
I think it’s crucial to keep in mind that money in itself really does not help build anything. Printing more money does not stimulate anything. In the end it’s the people who do the work and who contribute their physical resources, that makes it possible to build something.
Everytime a bank “prints” money, to my understanding, it makes all existing money a little less worth. So new money “steals” a bit of value from other money.
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I am really confused.
