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Author Topic: Economics - How does Bitcoin use Reverse Fractional Banking without regulation?  (Read 1855 times)
coastermonger
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January 28, 2013, 07:50:05 PM
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So it's easy to understand that the total number of Bitcoins will never exceed 21 million, and will in fact only decrease over time as some get lost. 
It's further a simpler step to understand that they can be subdivided (to a point) so that they can be used to pay for all sorts of things.  I.e. if the price of a bitcoin climbs to about $2000 per usd, I can still get by coffee for 0.0015 BTC. 

But I've heard that reverse fractional banking will be the ultimate savior to bust through the roof of this limit, because it will allow the total number of Bitcoins in circulation to effectively exceed 21 million.  My only question is, how on earth do such things become regulated?  Would lending get out of control?

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January 28, 2013, 10:38:30 PM
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I don't understand how you can have more bitcoins than whats in circulation ? It's impossible.

If you loan someone bitcoins, and they cannot pay back, then they default on the debt. .  with bitcoins, there's no creating new money out of thin air.

Please correct me if I'm wrong.

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January 28, 2013, 11:12:13 PM
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You can issue non-blockchain promissory notes in lieu of actual bitcoin. This happened with gold in the 19th and 20th centuries, for example.

Whether there'll actually be any incentive to do that voluntarily, of course, is another matter.

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January 29, 2013, 02:31:00 AM
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You can issue non-blockchain promissory notes in lieu of actual bitcoin. This happened with gold in the 19th and 20th centuries, for example.

Whether there'll actually be any incentive to do that voluntarily, of course, is another matter.

Correct, money supply as now measured with M2, include bank deposits, that means the supply can be multiplied. But bitcoin is different from fiat money since there is no central bank and lender of last resort, and it will not be possible to bail out a bank or having a government guarantee of deposits. There will be runs on banks and people will experience losses, therefore fractional reserve banking can not go so far as it currently does.
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January 29, 2013, 02:37:43 AM
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Bitcoin fractional reserve banks can be reulated by requiring a minimum reserve fraction for the bank. Of course, only 100 % reserves will be good enough to protect against a bank run, but in that case the bank would not be fractional. You will also not get interest on deposits in such a bank, and you will have to cover the cost of your deposit.
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January 29, 2013, 04:22:29 PM
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There will be runs on banks and people will experience losses, therefore fractional reserve banking can not go so far as it currently does.

One might say that free banking is inherently regulated by bank runs.

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January 29, 2013, 04:24:31 PM
 #7

But I've heard that reverse fractional banking will be the ultimate savior to bust through the roof of this limit

That is one theory.  Another theory is that the limit is not a problem.  Another theory is that if the limit ever appears to be a problem, satoshis can possibly be subdivided.

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January 29, 2013, 04:27:13 PM
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. . . reverse fractional banking . . .
The term you are looking for is Fractional Reserve Banking.

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January 29, 2013, 08:51:55 PM
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This thread died out when on top. Thats great guys.
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January 29, 2013, 09:25:30 PM
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How would subdividing a Satoshi work?
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January 29, 2013, 09:33:02 PM
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How would subdividing a Satoshi work?
Create a separate cryptocoin that is pegged to the value of a satoshi rather than allowing the value to float freely.

or

Modify the current protocol and get an overwhelming majority of users and miners to all agree to use the new protocol.

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January 29, 2013, 09:36:11 PM
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How would subdividing a Satoshi work?

Internal accounting off the blockchain.

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January 29, 2013, 10:21:55 PM
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How would subdividing a Satoshi work?
In addition to what is already said: The nanobitcoin term could be used, even if it is not possible to pay such a small amount.
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January 30, 2013, 02:37:02 PM
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I wonder if the market for such financial tools is there. I personally would not want to involve my bitwealth in fractional banking.

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January 30, 2013, 05:30:56 PM
 #15

If you don't want to be involved, the solution is quite simple, store your own bitcoins.

Or use a 100% reserve bank.

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January 30, 2013, 05:35:37 PM
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I don't understand how you can have more bitcoins than whats in circulation ? It's impossible.

If you loan someone bitcoins, and they cannot pay back, then they default on the debt. .  with bitcoins, there's no creating new money out of thin air.

Please correct me if I'm wrong.

Basically, you deposit 1 BTC in a bank to earn interest.  The bank lends out that 1 BTC.  Now you think you have 1 BTC and the borrower has 1 BTC.  So it is as if there are 2 BTC now in the economy.  Although technically, there is still only 1 BTC.

How would subdividing a Satoshi work?

51% of the network would have to agree to allow you to transfer a smaller precision than currently allowed.  

My only question is, how on earth do such things become regulated?  Would lending get out of control?

Free markets are self-regulating.  If the bank lends out to too many bad people, it will go bankrupt.  Banks that lend money out to good people, will stay in business longer - attracting more business & getting a better reputation.  Trying to use regulation to babysit people will only keep them from learning from their mistakes, while punishing those that know the difference but have to pay for the regulation regardless.

The only reason to limit the block size is to subsidize non-Bitcoin currencies
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January 30, 2013, 05:38:58 PM
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. . . 100% of the network would have to agree to allow you to transfer a smaller precision than currently allowed . . .
I assume you are talking about changing the protocol.  In which case I FTFY.   Smiley

There are other solutions that don't require the network to agree at all such as a separate cryptocurrency that is pegged to the value of bitcoin or various off-blockchain accounting measures.

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January 30, 2013, 06:04:24 PM
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. . . 100% of the network would have to agree to allow you to transfer a smaller precision than currently allowed . . .
I assume you are talking about changing the protocol.  In which case I FTFY.   Smiley

As I understand it, it depends on the change.  If the old blocks will continue to be valid in the new protocol, then you will need 51+% so that the chain with the more precision is longer.  If the old blocks will be invalid, then any percentage will work because you've basically just created a new cryptocurrency.

The only reason to limit the block size is to subsidize non-Bitcoin currencies
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January 30, 2013, 06:21:41 PM
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. . . 100% of the network would have to agree to allow you to transfer a smaller precision than currently allowed . . .
I assume you are talking about changing the protocol.  In which case I FTFY.   Smiley

As I understand it, it depends on the change.  If the old blocks will continue to be valid in the new protocol, then you will need 51+% so that the chain with the more precision is longer.  If the old blocks will be invalid, then any percentage will work because you've basically just created a new cryptocurrency.
If the new blocks are not valid under the old protocol, then the blockchain will fork.

There will be 2 blockchains that share the same blocks up to the point where it forks.  Then those miners and users that run the new protocol will see only new protocol blocks added from that point, and miners and users that continue with the old protocol will continue to see old protocol blocks added from that point.

If the new blocks are valid under the old protocol, then you haven't really changed the protocol (since the protocol is what defines what is valid).

If even one miner continues to mine using the old protocol, then the "original" bitcoin protocol will continue to exist, and anyone who runs the new protocol will be running something different than bitcoin that the users happens to be trying to call bitcoin.  If any significant number of miners and users stay on the old protocol you will end up with two separate systems both trying to call themselves the "real" bitcoin.  There will be a period of uncertainty when you won't know if the payment you are making on "your" bitcoin will be received on the "receivers" bitcoin unless you first determine which protocol they are using. A user of the old protocol who still has unspent outputs in the blockchain from before the split will be able to "double spend" their bitcoins, sending them once to someone on the new protocol (which nobody on the old protocol will see), and then again to somebody on the old protocol (since they will appear to be unspent there).

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January 30, 2013, 08:22:24 PM
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If the new blocks are valid under the old protocol, then you haven't really changed the protocol (since the protocol is what defines what is valid).

If I write a new protocol to accept precisions up to 8 or 9, then my client will accept both blocks.  The old protocol will reject my blocks (because it only accepts precisions up to Cool, but I don't really care as long as I have more than 50% of the hashrate because I will always have the longer chain.  Of course, all non-miners could abandon the new bitcoin protocol regardless of hashrate.  This would cause the hashrate to return to the original protocol because it'd be worth more.  At the end of the day, its really about what currency is most valuable.  And a currency with more precision (if needed) will be worth more.

The only reason to limit the block size is to subsidize non-Bitcoin currencies
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