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Author Topic: Bitcoin: Now with fractional reserve?  (Read 1065 times)
gmaxwell
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June 20, 2011, 11:05:04 PM
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Since we know that more was removed from Mtgox than they were previously claiming (http://blockexplorer.com/address/1Q9ET7WzGaxkGnxMhffJnUGb1BT4m9KqVe see Kevin's post) and it's clear that mtgox's daily float requirements were far smaller than their balance (e.g. the >400k wallet) is there now a risk that mtgox will go back into operation with effectively fractional reserve, thus artificially inflating the supply of bitcoin?

They can only do so within their exchange, but thats by far the most economically significant place to create inflation.

How can the bitcoin community be confident that exchanges aren't doing this?



 
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June 20, 2011, 11:08:06 PM
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Might have been like this for a long time, who knows?

That's why I like to keep my BTC out of those places.

I predict we will see the first Bitcoin bankrun.
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June 20, 2011, 11:11:35 PM
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They can only do so within their exchange, but thats by far the most economically significant place to create inflation.

I don't think mt. gox will have a lot of economic significance after this.

For the others - Independent auditing is required. A portion of fees collected should be spent to provide audits of wallets.

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June 20, 2011, 11:13:43 PM
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Might have been like this for a long time, who knows?
That's why I like to keep my BTC out of those places.
I predict we will see the first Bitcoin bankrun.

The concern we should all have is that undisclosed fractional reserve practices on the part of major exchanges have an inflationary effect on the whole bitcoin economy.  If you use bitcoin and a major exchange engages in this practice you are harmed even if you never use the exchange personally.   You might not be the victim of a bankrun, but you will be harmed by the decreased value of bitcoin when you use it.
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June 20, 2011, 11:18:32 PM
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I think they can cover 643 coins out of pocket.

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June 21, 2011, 12:42:13 AM
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For the others - Independent auditing is required. A portion of fees collected should be spent to provide audits of wallets.

they can prove their BTC holdings easily by publishing the address and signing something using the private key of this address.
however, the first exchange already announced they wanna introduce trading on margin. then it'll officially be fractional-reserve.
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June 21, 2011, 01:34:36 AM
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The only way to really be sure for any service really that we deposit our Bitcoins into that they actually have our Bitcoins in their possession is for them to always keep them in the address we deposited to so that we can always simply check the blockexplorer.com and have full transparency.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

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gmaxwell
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June 21, 2011, 02:24:41 AM
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For the others - Independent auditing is required. A portion of fees collected should be spent to provide audits of wallets.
they can prove their BTC holdings easily by publishing the address and signing something using the private key of this address.
however, the first exchange already announced they wanna introduce trading on margin. then it'll officially be fractional-reserve.

Will it?  If they don't create more coin than exists— they actually have the assets they are loaning out— then there is no fraction-reserve.

IIRC intentionally selling a stock you can't deliver on is unlawful in the US (because it can be used to glut the market and crash the price of things pretty much at will).

They could also make their input addresses automatically public by using the type-2 deterministic wallets I described in another thread, but I don't think thats enough. We'd need to know that the sum of internal account balances is not greater than the sum of real coins held. I think that can only be solved with auditing.
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June 21, 2011, 02:35:52 AM
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Will it?  If they don't create more coin than exists— they actually have the assets they are loaning out— then there is no fraction-reserve.


most likely yes.
the coins are probably not lent by the exchange but taken from other user's deposits - without subtracting them from their statements.
so it is a bet that not all people withdraw their coins at the same time, which they cant fulfil without liquidating the margin accounts. fractional reserves.
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June 21, 2011, 02:59:05 AM
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We need an answer about this. MagicalTux should make some form of public statement
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June 21, 2011, 03:03:06 AM
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I don't really get this sentiment. If I was running a system that dealt with something like Bitcoin, I would not keep all of the holdings in one place. Think about it - users have a withdrawal limit on their funds, so naturally you only really need to keep enough BTC around for the automatic systems to work as expected.

Keeping anything more on a live, internet connected system is just asking for it. The idea that "Hey! They only moved some 400kBTC when the server got hacked, obviously they don't have the funds they claim they do" is ill-founded.

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June 21, 2011, 03:39:48 AM
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There is nothing inherently wrong with fractional reserve as long as the banks are up front about it.  If you don't trust fractional reserve accounts, you can bank with an institution that doesn't lend money out and you pay a storage fee.  Or you could designate a certain percent of you demand deposit account as fractional and get interest for that portion, and pay a storage fee for the non-fractional.

The immoral thing is when central banks counterfeit money to back up the fractional reserve banks.  That is essentially stealing from everyone holding the money to bail out the banks.

Gold itself can be fractionally reserved without a central bank.  It is just that a bank run will crash the system without it. (Which is good IMHO, because it makes the banks very cautious about lending, i.e. no subprime)
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June 21, 2011, 03:50:01 AM
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IIRC intentionally selling a stock you can't deliver on is unlawful in the US (because it can be used to glut the market and crash the price of things pretty much at will).

No, not really.  Well, it might actually be illegal.  But as far as I know, no one has been punished meaningfully for doing it, at least not lately, and the FTD data suggests that no broker seriously believes that there is any real risk in it.

The sad thing is that the brokerages have constructed a giant recursive borrowing machine to make it nearly impossible for a broker to be actually unable to locate a stock to borrow for a (technically) covered short, but there are still loads and loads of FTDs.

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