Shower thoughts on a 2nd layer Bitcoin network and why big blockers are scared

[Wind_FURY]

Credit comes from loans issued by private banks, yes?

There were loans that were made in gold and silver, and others, before fiat came to dominate the way we transact, yes?

Then it is possible that loans denominated in Bitcoin can become standard, in theory, in some parts of the world, yes?

So eventually, in theory, a group of private banks can build a fractional reserve banking system as a 2nd layer Lightning Network on top of Bitcoin.

Possible? I believe yes, but I would like to hear all your thoughts. Plus maybe "banks using Bitcoin" is what the big blockers and other networks like Ripple fear.

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[achow101]

The Lightning Network cannot operated as a fractional reserve system because all amounts used are committed in transactions and into the blockchain. There is no lending of money or fractional reserve banking system.

AFAIU, it is impossible to implement a fractional reserve system in a decentralized manner. Furthermore, such a fractional reserve system can be done with Bitcoin without needing any second layers or protocol changes; you can create a service that acts exactly like a bank but uses Bitcoin as the currency instead of fiat.

[Kakmakr]

The way I see it, is that they fear that Lightning nodes might be dominated/centralized by a few strong Lightning nodes or payment hubs and that the rest of the nodes will be unable to compete. I think what Bitcoin needs is strong competition and the fact that anyone can host a LN node, means that competition is still possible.

You can still open a direct channel between two individuals or entities, so nobody is blocking you to participate. You are also not creating new bitcoins from thin air, like it is done in fractional reserve systems, but merely transacting directly with people with the same bitcoin on a off-chain channel. The balance after all the transactions are done are just distributed to the participants and later added back to the Blockchain. <The same amount that was used in the channel>

[buwaytress]

Sorry of this will break the chain of discussion but I had unanswered questions from previous threads that seemed to be about LN grievances, citing nodes as banks charging interest - something I couldn't find reference to.

Is this possibility OP discusses (and achow clarifies) where this idea of interest bearing loans come from?

My take. There's already that possibility without a need for a 2nd layer as achow says. And I think there already are projects proposing to do just that. Loan facilities backed by actual coins. This isn't a technological breakthrough though, just an innovation in lending.

The significant benefit pointed out by Kakmakr is that coins aren't dreamed up with this system.

[HeRetiK]

As mentioned by the others above, I don't see this happening in a trustless, decentralized setting. Any alt that would go this route would likely die of hyper-inflation, due to everyone trying to gain as much leverage as possible. Any protocol layer on top of Bitcoin would go bust as soon as enough people are trying to run for the door -- ie. on-chain settlement.

However in a way it's already (potentially) happening in the form of BTC futures, leveraged trading and arguably USDT. All of which are run by central, more or less trusted entities, however.

Sorry of this will break the chain of discussion but I had unanswered questions from previous threads that seemed to be about LN grievances, citing nodes as banks charging interest - something I couldn't find reference to.

Is this possibility OP discusses (and achow clarifies) where this idea of interest bearing loans come from?

I guess "nodes as banks charging interest" refers to LN transaction fees? Seems like a weird comparison though, as we already have a similar thing going on in the form of miner fees for on-chain transactions. Difference being, that in the case of LN nodes the fee market is much more favorable for people trying to transact money.

[Anti-Cen]

So eventually, in theory, a group of private banks can build a fractional reserve banking system as a 2nd layer Lightning Network on top of Bitcoin.

The banks on the lightning network is a step in this direction and who's to say that fake BTC won't be pumped into the
off-chain private ledgers !

https://www.youtube.com/watch?v=UYHFrf5ci_g

Pump-en-dump by bankers using Bitcoin is not something that can be stopped and clearly the miners have no loyalty towards
users so my guess is that it will all crash anyway given all the gambling and naked speculation.

[Anti-Cen]

I guess "nodes as banks charging interest" refers to LN transaction fees? Seems like a weird comparison though, as we already have a similar thing going on in the form of miner fees for on-chain transactions. Difference being, that in the case of LN nodes the fee market is much more favorable for people trying to transact money.

You have eaten the problem-reaction-solution cake when it comes to lightning being a fix for Bit-coins not scaling and it's been designed so that
BTC credits remain in ledgers and the movement is not liquid so that in effect we get charged interest on top of transaction fees needed to keep the
channels open.

Transaction fees + interest = banks 

[Xavofat]

Plus maybe "banks using Bitcoin" is what the big blockers and other networks like Ripple fear.

Ripple is actively working with banks.  If anything, that's the main function of their network.  

Bitcoin users and "big blockers" would both generally be okay with banks using Bitcoin if they wanted to - but users should have the option to continue using a decentralised network, and many of these Bitcoin users would avoid any suggestions from banks.  Distrust of banks is what turned a lot of people to Bitcoin in the first place.  I also can't see many reasons why a bank actually would use Bitcoin anyway.

Also, the Lightning Network is completely unrelated to fractional reserve banking.

[HeRetiK]

[...]

That's true, but their argument is acceptable since user will be faced with 2 choices (considering the only routing channel is through strong LN nodes) :
1. Use strong LN nodes which have routing channel that user need, but with additional fees (this is what they really fear).
2. Make a new channel which consume time and on-chain fees.

[...]

Their biggest argument isn't about how much the fees, but the one who receive the fees which is Banker who run LN nodes in this case and how Banker will convince user to connect through their nodes.

It's relatively easy to run a "strong" LN node though. Unlike mining you don't have a whole lot of infrastructure overhead. I'm not sure whether even economy of scales can be meaningfully applied to the cost of running a LN node.

Put differently -- how would a bank that is trying to make a profit undercut a hobbyist running a LN node in his basement? Anyone can run a LN node. Having bank-scale capital doesn't improve your odds.

[Wind_FURY]

So eventually, in theory, a group of private banks can build a fractional reserve banking system as a 2nd layer Lightning Network on top of Bitcoin.

The banks on the lightning network is a step in this direction and who's to say that fake BTC won't be pumped into the
off-chain private ledgers !

https://www.youtube.com/watch?v=UYHFrf5ci_g

Pump-en-dump by bankers using Bitcoin is not something that can be stopped and clearly the miners have no loyalty towards
users so my guess is that it will all crash anyway given all the gambling and naked speculation.

Sorry, I was not talking about the Lightning Network. Lightning has coins backed and locked down to the last satoshi. It will never be the same as a fractional reserve banking system.

I was thinking about how the biggest banks could create their own "2nd banking layer" on top of Bitcoin but operates as a fractional reserve banking system. No need to FUD.