Why Fractional Reserve Banking Didn't Prop Up Yet?

[da2ce7]

I have seen both of the money as dept videos, while I thought that it brought up many issues with the current baking system, the rational why usury is bad extended to nothing more than "It is bad, because it is bad, mmmmk."

There is nothing wrong with loaning somebody something and expecting a payment in return; if people decide that usury is wrong and enforce it, they infringe on my right to conduct voluntarily transactions with other people.

When a bank uses the money deposited in it for loans, it therefore has risk.  Thus they offset that risk by giving it's depositors a proportion of the income gained upon it.  If somebody deposits into a bad bank and the money is lost, it is their own fault, they obviously didn't audit the bank thoughtfully enough!

A bank that uses fractional lending should qualify for more risk on deposit, so a higher return should be demanded from deposits.  The system is simple, and there is nothing economically or morally wrong with it.

The key difference in the bitcoin world of banking is that instead of trading promises of bank account amounts between people (eg. bank money / checks / cash), you trade the real thing, e.g. bitcoins.  So the world of bitcoin at it's foundations is solid.  If a bitcoin bank goes down, only those who use the 'bitcoin bank notes' and those who have deposited in it will be effected, not everyone like the current cash system.

The bitcoin banking wold will work identically to when we had banks who stored and loaned gold, and all the transactions were conducted in gold also.  However, gold is physical, bitcoin is not.

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[kiba]

Any other suggestion on how to verify the integrity of banks/e-wallet/whatever.

[grondilu]

There is nothing wrong with loaning somebody something and expecting a payment in return; if people decide that usury is wrong and enforce it, they infringe on my right to conduct voluntarily transactions with other people.

When a bank uses the money deposited in it for loans, it therefore has risk.  Thus they offset that risk by giving it's depositors a proportion of the income gained upon it.  If somebody deposits into a bad bank and the money is lost, it is their own fault, they obviously didn't audit the bank thoughtfully enough!

A bank that uses fractional lending should qualify for more risk on deposit, so a higher return should be demanded from deposits.  The system is simple, and there is nothing economically or morally wrong with it.

+1

[The Madhatter]

Any other suggestion on how to verify the integrity of banks/e-wallet/whatever.

A 3rd party audit. That's probably the best way.

[grondilu]

Any other suggestion on how to verify the integrity of banks/e-wallet/whatever.

A 3rd party audit. That's probably the best way.

A 3rd party audit is just a displacement of the trust from the bank to an auditing company.  It doesn't solve anything.

[davout]

Any other suggestion on how to verify the integrity of banks/e-wallet/whatever.

A single "this is our safe" address + BBE

EDIT : + a published list of anonymized accounts with their respective balances, every user should find his own and the sum should be equal to the balance of the "safe" address

[The Madhatter]

A 3rd party audit is just a displacement of the trust from the bank to an auditing company.  It doesn't solve anything.

Sure. Now we are back to 'reputation' again. Why would the auditor lie and risk tarnishing their reputation?

[The Madhatter]

A single "this is our safe" address + BBE

EDIT : + a published list of anonymized accounts with their respective balances, every user should find his own and the sum should be equal to the balance of the "safe" address

That isn't a bulletproof plan either. The e-wallet company could just lie about the number of accounts in their database so that those figures more or less line up with the BBE.

[The Madhatter]

Hmm.. If the public could track a spend's lineage into and through an e-wallet provider, that might work. A "BBE" specific to mybitcoin, for example.

It could upset the users because it would remove some of their privacy. You'd be able to see spends between e-wallet users and tie their commerce together.

It's not an easy problem to solve. lol!

[Stephen Gornick]

Which free "bank" / "e-Wallet" services are there:
MtGox
MyBitcoin
dragons.tl

any others?

For up to 100 BTC, ClearCoin.appspot.com escrow is free, and in a way could be used as an e-wallet.

[The Madhatter]

any others?

Vekja.net has one too.

[grondilu]

Sure. Now we are back to 'reputation' again. Why would the auditor lie and risk tarnishing their reputation?

Because the banker might have paid him to do so, for instance.

[The Madhatter]

Sure. Now we are back to 'reputation' again. Why would the auditor lie and risk tarnishing their reputation?

Because the banker might have paid him to do so, for instance.

Sure. It can and does happen. I was merely remarking on the paradox of trust. (You can audit and auditor that audits another auditor.. ad infinitum...)

Lucky for us, we have the option to trust no one by holding our own wallets with the Bitcoin client.

[davout]

A single "this is our safe" address + BBE

EDIT : + a published list of anonymized accounts with their respective balances, every user should find his own and the sum should be equal to the balance of the "safe" address

That isn't a bulletproof plan either. The e-wallet company could just lie about the number of accounts in their database so that those figures more or less line up with the BBE.

No, the users can collectively verify that the data is good :
hash of my account id lined up with my balance is easily verifiable.

If one single user comes up and says "i didn't find my account id hash, or it had incorrect balance" you know the bank is cheating.

How do you cheat that ?

[The Madhatter]

How do you cheat that ?

You'd omit accounts from the list that haven't been used or logged into for a long period of time.

Edit: Oh, and you're assuming that the e-wallet provider is storing all of the Bitcoins on one address. That may not be the case.

[davout]

You'd omit accounts from the list that haven't been used or logged into for a long period of time.

Nope, you couldn't really cheat like that because maybe I deposited 10 BTC in an inactive account to catch you red-handed.
And you could only do that with accounts with small balances therefore reducing your cheating ability.
So high risk of getting caught, not so great benefit.

Edit: Oh, and you're assuming that the e-wallet provider is storing all of the Bitcoins on one address. That may not be the case.

You don't even need the BBE part to check for the absence of fractional reserving anyway.
You'd need BBE to check that what you send to the address that is given to you remains as balance of that address, which should be the case I guess with the accounts functionality of the client.

[The Madhatter]

Nope, you couldn't really cheat like that because maybe I deposited 10 BTC in an inactive account to catch you red-handed.

You can't deposit 10 BTC into an inactive account and still call it inactive.

Lets say that you were proactive enough to leave 10 BTC in an account for a year just to try to catch an e-wallet provider cheating. Say the e-wallet provider published its books right now. You would have had to known this exploit a year ago. Did you really think about this a year ago? You lose.

And you could only do that with accounts with small balances therefore reducing your cheating ability.
So high risk of getting caught, not so great benefit.

If the e-wallet provider were caught and backed into a corner they could say that they exclude inactive accounts from their reporting algorithm because it skews their statistics or something. Most of the users would believe it was a sort of accounting mistake and keep using it. They would move on to finding another way to cheat. (We are assuming they are evil for the sake of discussion, remember.)

You don't even need the BBE part to check for the absence of fractional reserving anyway.
You'd need BBE to check that what you send to the address that is given to you remains as balance of that address, which should be the case I guess with the accounts functionality of the client.

Again, you'd be missing spends between users at the same e-wallet company. The balances would not line up. This would not provide adequate proof of anything. Read this thread again; the part where I talked about why giving users a backup of their own wallet files wouldn't work. It's the same reason.

[davout]

Nope, you couldn't really cheat like that because maybe I deposited 10 BTC in an inactive account to catch you red-handed.

You can't deposit 10 BTC into an inactive account and still call it inactive.

Lets say that you were proactive enough to leave 10 BTC in an account for a year just to try to catch an e-wallet provider cheating. Say the e-wallet provider published its books right now. You would have had to known this exploit a year ago. Did you really think about this a year ago? You lose.

Hopefully the place where i put my saving lasts more than one year so that's a non problem.
also s/inactive/inactive after an arbitry amount of time has passed/

And you could only do that with accounts with small balances therefore reducing your cheating ability.
So high risk of getting caught, not so great benefit.

If the e-wallet provider were caught and backed into a corner they could say that they exclude inactive accounts from their reporting algorithm because it skews their statistics or something. Most of the users would believe it was a sort of accounting mistake and keep using it. They would move on to finding another way to cheat. (We are assuming they are evil for the sake of discussion, remember.)

No, because that would be a basic accountability rule : publish a report, on demand that shows anonymized accounts along with their respective balances. Skewing statistics is irrelevant here because such a report wouldn't be about statistics, we're assuming publishing *all* the account balances are published since it's part of the hey-check-it-out-for-yourself-we-don't-do-fractional-reserve set of rules.

You don't even need the BBE part to check for the absence of fractional reserving anyway.
You'd need BBE to check that what you send to the address that is given to you remains as balance of that address, which should be the case I guess with the accounts functionality of the client.

Again, you'd be missing spends between users at the same e-wallet company. The balances would not line up. This would not provide adequate proof of anything. Read this thread again; the part where I talked about why giving users a backup of their own wallet files wouldn't work. It's the same reason.

Of course not, if a user sends funds to another user, the sum of the balances of the full account balances report will still end up as the exact same figure.


With a couple of honeypot inactive account this system just works.
(Or even if the "bank" thinks there are going to be honeypot accounts).

[The Madhatter]

Hopefully the place where i put my saving lasts more than one year so that's a non problem.
also s/inactive/inactive after an arbitry amount of time has passed/

They could very well modify and improve their "inactive account" algorithms to profile smart/stupid people based on habits, useragent strings (geeks use linux or something lol), etc. It could leave the inactive accounts that belong to smarter clients in the holdings report, and drop the accounts that belong to what the system believes to be stupid people. It would drastically reduce the chances of getting caught.

No, because that would be a basic accountability rule : publish a report, on demand that shows anonymized accounts along with their respective balances. Skewing statistics is irrelevant here because such a report wouldn't be about statistics, we're assuming publishing *all* the account balances are published since it's part of the hey-check-it-out-for-yourself-we-don't-do-fractional-reserve set of rules.

I should clarify. I meant for their own internal statistics. Spends per hour, funded accounts, etc. If they excluded inactive accounts from their statistics (well, they fall off the stats because they are inactive) they could use that as an excuse for excluding them from a published holdings report when "called out" by the public. (Blame it on a software bug.) Those unreported coins could be siphoned off by spending the difference to a new master bc address and publishing a bogus report. The bogus report would check out and the BBE would confirm that the total holdings match the bc address.

They could even put up a hash checker on the same page. When someone goes to calculate their hash with that handy tool it would just add them to the list on the fly (assuming they aren't already on it), and move the activity date up on the account. lol! I just thought of that one.

Of course the entire list could be published as a flat text file that is PGP signed with the date/time inside of it. That would keep it from being changed on the fly. lol

Of course not, if a user sends funds to another user, the sum of the balances of the full account balances report will still end up as the exact same figure.

Sure, but that doesn't matter if you can exclude some users and spend those coins behind the scenes.

Anyway, it is better than nothing. I'll agree with you there. I just think there are ways to steal if one is very creative. You assume that everyone else is as skilled as you are. Most of the people who will be drawn to e-wallet systems will be people who are basically non-techs that want to use Bitcoin. They are the easiest to steal from unnoticed.

This could go on and on and I do need to sleep sometime.

Cheers!

[davout]

They could very well modify and improve their "inactive account" algorithms to profile smart/stupid people based on habits, useragent strings (geeks use linux or something lol), etc. It could leave the inactive accounts that belong to smarter clients in the holdings report, and drop the accounts that belong to what the system believes to be stupid people. It would drastically reduce the chances of getting caught.

Accounts with significant balances are likely to be closely monitored as I said, so there wouldn't be much to gain.
Also this can be easliy beaten by having to publish a list of opened/closed accounts, so everyone can check the counts match, if suddenly an account is missing in the global balance sheet then that means that it has to be accounted for somewhere else where it can be scrutinized.

If a bank wants to hide an account it has to take the risk that someone is going to find out their account has been claimed as closed. Not worth the risk.

I should clarify. I meant for their own internal statistics. Spends per hour, funded accounts, etc. If they excluded inactive accounts from their statistics (well, they fall off the stats because they are inactive) they could use that as an excuse for excluding them from a published holdings report when "called out" by the public. (Blame it on a software bug.) Those unreported coins could be siphoned off by spending the difference to a new master bc address and publishing a bogus report. The bogus report would check out and the BBE would confirm that the total holdings match the bc address.

That would be plain stupid, it would make for an even worse reputation : "we do banking, our software is buggy, yea you can trust us".
So that's a non issue.

I should clarify. I meant for their own internal
They could even put up a hash checker on the same page. When someone goes to calculate their hash with that handy tool it would just add them to the list on the fly (assuming they aren't already on it), and move the activity date up on the account. lol! I just thought of that one.

Even stupider idea of them to do such a thing, the day someone double checks they're dead.

Of course not, if a user sends funds to another user, the sum of the balances of the full account balances report will still end up as the exact same figure.

Sure, but that doesn't matter if you can exclude some users and spend those coins behind the scenes.

Point is you can't
If you advertise the fact you're not fractional reserving, and you put such control mechanisms up there's no way you could effectively cheat and gain something worth a tenth of the risk out of it.

Anyway, it is better than nothing. I'll agree with you there. I just think there are ways to steal if one is very creative. You assume that everyone else is as skilled as you are. Most of the people who will be drawn to e-wallet systems will be people who are basically non-techs that want to use Bitcoin. They are the easiest to steal from unnoticed.

The good part about that system is that it can be automated and checked by a third party who has no financial incentive in addition to random skilled people checks.

A whistle needs only to be blown once

This could go on and on and I do need to sleep sometime.

I need to go do some fiat currency paid work :p