How would loans work in a Bitcoin economy

[kooboat]

There are avenues to lend or borrow in bitcoin. Loans have always been with humans, there are people who can't do without loans due to poverty or bad habits. It seems the author of the OP is not aware that there are already means to access loans in bitcoin on various platforms such as the exchanges.

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[o_e_l_e_o]

Banks haven't really gotten involved in bitcoin or any other crypto in any meaningful way, but I suspect that they'd follow the same procedures as any other loan if they did start lending cryptocurrencies (and I don't think they will, since very few people accept it in general).

I'm often curious as to how large scale bitcoin lending operations, such as those by a central bank or similar, would work.

Obviously with lending on small scales, such as that which takes place on this forum, the lender takes bitcoin from their holdings/reserves, and sends it to the borrower's address. However, when banks lend fiat to individuals or to businesses, it's not a case of them taking any fiat from their holdings/reserves and putting it in to the borrower's account. Generally when banks give out a loan, they simultaneously create a new credit and a new debit of the same amount. New money is created out of thin air, and the bank doesn't need to move any money from their reserves, or even have enough money in their reserves to cover the loan if they wanted to.

This credit theory of money, while possible with a monetary system such as fiat where more can be created at will by centralized entities, isn't possible with a system like bitcoin. If a central entity wanted to lend out bitcoin, they would have to have the bitcoin to actually lend out. A fractional reserve system would be possible, although probably with a much larger fraction in reserve than commonly occurs in fiat banking. I for one would never let a third party store a fraction of my bitcoin whilst lending the rest out, but given the number of users who seem quite happy to hand over complete control of their coins to web wallets and exchanges, I have no doubt a fractional reserve system could exist.

[dothebeats]

Usually the idea of trust springs to mind when lending/borrowing in a bitcoin economy. If it's P2P lending and you haven't asked for any collateral for the loan, chances are you'll see that loan getting defaulted in the end and not have any funds come back to you. Basically a collateral secures the amount you loaned so in the case of a default, you still got the same price you have loaned. For a centralized platform issuing loans such as banks, of course they'd follow standard bank procedure and may still involve the creation of new money to match what was loaned to another party. I wonder if they would ever initialize this in a large scale given that not everyone is interested in crypto loans.

[timerland]

Bitcoin and blockchain technology makes the lending process much more decentralized, and instead of them being mostly bank to person, it's more person to person, due to how many platforms there are that help lenders find lendees.

Bitcoin still doesn't really change the system that much. Microloans are often P2P, while companies will look to venture capital funds, or large crypto investors that would be interested. It's just an import of the regular fiat lending system, but with more freedom and features.

Loans keep the people poor so better to have no loans than traditional loans from banks because they were printing more money to give loans for the people who were asking so the value keep decreasing when the people debts increases.

This is just dumb. Are you saying people can't take mortgages or car payments because they need to buy everything with money they have at once? Not being careful with your money is what makes people poor.

[o_e_l_e_o]

For a centralized platform issuing loans such as banks, of course they'd follow standard bank procedure and may still involve the creation of new money to match what was loaned to another party.

I'm not sure how we could create new money for bitcoin loans, though.

With fiat, a bank can just change a few numbers in their computer system and suddenly you have $10,000 in your account. They don't have to add to or move any of their physical reserves; they just create this $10,000 out of thin air. How can they do that with bitcoin? They can't put 1 BTC in your account unless they actually transfer 1 BTC from their accounts to your account, meaning their other customer's deposits are now no longer backed up.

A fractional reserve system could work (if people were stupid enough to use it for bitcoin), but banks couldn't create new bitcoin out of thin air to fund loans like they do with fiat.

[el kaka22]

I think there are collateral stuff going on and that is not remotely like loan just now, lending is not working like it should and it is very risky for people to give out loans for now. However the moment people realize that bitcoin is something that can be taxed in some countries which makes it money we will start to realize that we can make contracts for loans as well, it is too expensive and makes no sense for now but with time it will happen.

All you have to do is prepare a document, go to any "crypto bank" you want that gives loans and lender will make you sign that contract that states you will pay it back, if you fail to do so then you will be facing some bankruptcy law just like regular loans, hence crypto loans can get legit as well. It will just take some time of course, like any new thing.

[Febo]

Hello everyone,,
To my understanding people deposit money into banks and the banks use that money to give out loans. But with Bitcoin everyone is essentially their own bank, meaning there wouldn’t be anyone to give out traditional loans. My question is where would people go to get loans in a Bitcoin economy and how might those loans work?

There will be always people taking loans and giving them. There is part for this forum for that. Nothing will change with Bitcoin. But first rule of taking a loan is that you need to take it in currency where yo have income. So you only take loan in Bitcoin if you get salary paid in Bitcoin.

[el kaka22]

I am still considering a sort of automatic system, I don't know how it would work but maybe we could make an automatic system where some AI predicts if a person is worthy of a loan and there would be collateral aside from money as well. Like right now, you give 1200 dollars worth of ethereum and get 1000 dollar worth of bitcoin and that is called a "loan" in crypto world, I don't really want that type of deal, I want to be able to make a system that would allow you to give other stuff.

For example, have some partnership with gaming websites where people buy skins and accounts and so forth, after that deal when someone wants to get a loan they will give you their gaming account in full control and then if they fail to pay the loan you sell it with your partnership of that gaming website. Same with social media for example, people can give their instagram account as collateral or whatever. Basically digital stuff not money could be done too.

[o_e_l_e_o]

Basically digital stuff not money could be done too.

Digital accounts make for poor collateral. There is nothing stopping the borrower from performing an account recovery process or contacting Steam/Instagram/gambling site/whatever and saying they were hacked, and regaining control of the account, leaving the lender out of pocket and without any collateral. There are plenty of examples of users in the Lending board being scammed by this exact process.

[timerland]

For a centralized platform issuing loans such as banks, of course they'd follow standard bank procedure and may still involve the creation of new money to match what was loaned to another party.

I'm not sure how we could create new money for bitcoin loans, though.

With fiat, a bank can just change a few numbers in their computer system and suddenly you have $10,000 in your account. They don't have to add to or move any of their physical reserves; they just create this $10,000 out of thin air. How can they do that with bitcoin? They can't put 1 BTC in your account unless they actually transfer 1 BTC from their accounts to your account, meaning their other customer's deposits are now no longer backed up.

A fractional reserve system could work (if people were stupid enough to use it for bitcoin), but banks couldn't create new bitcoin out of thin air to fund loans like they do with fiat.

Probably another reason why lending in crypto is worse than fiat lending in its current state. Operations like ETHlend and other companies have tried to create platforms for lenders to find lendees, but it's not really solving the biggest issue with lending - which is what you've described in your post.

There are a lot of platforms for lenders, we don't really need more. We need a way where they are almost able to print money for people, and therefore customers are safer.

Me personally, I don't think it'll be possible for the lending scene to become decentralized. There won't be any options for large business loans, because of whales not having as much money as banks.

I'd love to see some solutions to these problems, it's definitely a sector I'm interested in.

[o_e_l_e_o]

We need a way where they are almost able to print money for people, and therefore customers are safer.

Part of the reason I (and I'm sure many others) became interested in bitcoin in the first place was precisely because central authorities can't print more money as they see fit. As you say, we need some other method where lenders can hand out loans without money creation. Fractional reserve could work, but the risk to depositors is even higher since there would be no government run lender of last resort as in the case of fiat. The only other option which occurs is simply entities with high net worth handing out their own money in loans.

Collateralized peer to peer loans work fine for small amounts and over short terms, but if we are looking at bitcoin as a global currency, then we need to start thinking about big loans - mortgages and business loans, for example - of hundreds of thousands of dollars over years or decades.

[pjcaruci]

I understand that bitcoin loans should have a price at the time of taking the loan + %, I do not see other options

[FIFA worldcup]

Unfortunately the price of bitcoins is super volatile and therefore I think loans could prove bad for both the giver and taker .
Take for example the loan is given by someone and bitcoins suddenly flew to 10* times the price of the time he gave the loan at , now I could only imagine the situation the person who gave the loan would be in.
I think Its a really bad idea , also if you take loan in money and then convert it into bitcoins you could loose everything or maybe gain a lot..
No one knows , this is scary .

First of all, bitcoin does not move 10x upwards or downwards in short / midterm duration. So this is not scary as much as you are trying to project it. It may move a little upwards or downward direction, but both the loan giver and taker knows this and they will agree to return the full amount in satoshi regardless of the usd price.

Getting loans in bitcoins have a real advantage that you can get loans from anywhere in the world and you are not restricted to geographic restrictions as in the case of fiat loan.

[Naida_BR]

Hello everyone,,
To my understanding people deposit money into banks and the banks use that money to give out loans. But with Bitcoin everyone is essentially their own bank, meaning there wouldn’t be anyone to give out traditional loans. My question is where would people go to get loans in a Bitcoin economy and how might those loans work?

In my opinion, every loan system would need a centralized authority that would keep the properties of both counterparts until the payback time.
I don't think that two sides can trust each other in a loan system. Someone needs to ensure the flow of properties to each side.

[eternalgloom]

Some of them ask for collateral and some don't.It depends on what you can guarantee that you can repay.

If you don't ask for collateral when lending either crypto or fiat, you're asking for trouble.  It's just way too easy for someone to run away with the money if they don't provide collateral for a loan, and I've seen it happen many times.

Banks haven't really gotten involved in bitcoin or any other crypto in any meaningful way, but I suspect that they'd follow the same procedures as any other loan if they did start lending cryptocurrencies (and I don't think they will, since very few people accept it in general).  Banks are risk-averse and there's no way they'd make a loan to someone with a irreversible currency without getting collateral from them.  I'm not sure why lenders on this forum give out no-collateral loans, because they're extremely risky.  You don't know if someone has bought an account here, and reputation in the form of a trust score is next to meaningless.  I learned that the hard way a few years ago.

No-collateral loans could possibly work, if the amounts are low enough and if there is some level of proven trust in play.
But yeah, even banks ask for collateral and extensive proof of income etc. when applying for larger loans.

Look at BTCjam, they essentially ended up getting buried by the many people scamming them. I think it's a fate for any such service that might pop-up in the future.

[vintages]

Hello everyone,,
To my understanding people deposit money into banks and the banks use that money to give out loans. But with Bitcoin everyone is essentially their own bank, meaning there wouldn’t be anyone to give out traditional loans. My question is where would people go to get loans in a Bitcoin economy and how might those loans work?

It will only work best if two parties come together and decides to perform the transaction with the lender collecting a visible collateral from the borrower aside from the interest rate.
Where the problem may arise is if the  price of Bitcoin should increase, the lender might be losing as the value won't be same when borrowed. The only way for this to work is having a personal agreement regarding in the time of borrowing.

[Theb]

From what I know some banks are already doing this. Some banks are already lending Bitcoin to bypass the Swift transfer system which is a big wall in transferring fiat currency into another foreign money. I recall that the German bank, German Radoslav Albrecht, has created Bitbond a official online bank to transfer out loans with Bitcoin and the user has the option to payback those loans with either fiat currency or through Bitcoin again. In the future I could see the same thing being done by other banks if they tried to compete to the banks who are already doing it. The best thing about this kind of Crypto bank is they are like traditional banks in terms of their clients can also invest their own Bitcoin for interest, they in turn will be the ones who will loan out your BTC to loanees.

[barbara44]

In my opinion, every loan system would need a centralized authority that would keep the properties of both counterparts until the payback time.
I don't think that two sides can trust each other in a loan system. Someone needs to ensure the flow of properties to each side.

There is something that you will think will not be possible until you see people carrying it out smoothly without issue. I know that when it comes to loan, lender would either need collateral to do so before lending the loan and some interest rate will apply to it, but now that we are talking of bitcoin, don’t forget that it is a decentralized system, and everything would just operate n decentralization and those who would offer the loan would have also mapped out exactly how it will go.

If I was ready to go into loan business now, I would have just gone to the loan section to really see how things are being doing there, and I will ask you to really visit that place, I am sure you will get more understanding about the way people offer crypto loan without a physical collateral.

[pawanjain]

Banks haven't really gotten involved in bitcoin or any other crypto in any meaningful way, but I suspect that they'd follow the same procedures as any other loan if they did start lending cryptocurrencies (and I don't think they will, since very few people accept it in general).

I'm often curious as to how large scale bitcoin lending operations, such as those by a central bank or similar, would work.

Obviously with lending on small scales, such as that which takes place on this forum, the lender takes bitcoin from their holdings/reserves, and sends it to the borrower's address. However, when banks lend fiat to individuals or to businesses, it's not a case of them taking any fiat from their holdings/reserves and putting it in to the borrower's account. Generally when banks give out a loan, they simultaneously create a new credit and a new debit of the same amount. New money is created out of thin air, and the bank doesn't need to move any money from their reserves, or even have enough money in their reserves to cover the loan if they wanted to.

This credit theory of money, while possible with a monetary system such as fiat where more can be created at will by centralized entities, isn't possible with a system like bitcoin. If a central entity wanted to lend out bitcoin, they would have to have the bitcoin to actually lend out. A fractional reserve system would be possible, although probably with a much larger fraction in reserve than commonly occurs in fiat banking. I for one would never let a third party store a fraction of my bitcoin whilst lending the rest out, but given the number of users who seem quite happy to hand over complete control of their coins to web wallets and exchanges, I have no doubt a fractional reserve system could exist.

Good wondering. Obviously the same lending operations as banks do, cannot be carried out with bitcoin. Firstly, because bitcoins' supply is limited.
If we put the credit theory here and if bitcoin reserves would lend out bitcoin to other then that must create new bitcoins out of thin air but that is again impossible.
So the total idea of lending in the same way fails right here. Just imagine how would lending work id they had out lend gold. Not money based on gold but actual gold.
Reserves would have to give out actual gold and that would not create new gold out of thin air. Although new gold can be mined but then there is a limited supply to gold, we just don't know how much.

As for the large scale bitcoin lending, well it might be possible in some way, probably huge collaterals based on trusted entities and escrows.
Even that would only be possible if bitcoin is trusted and accepted as a legal currency.

[audaciousbeing]

Hello everyone,,
To my understanding people deposit money into banks and the banks use that money to give out loans. But with Bitcoin everyone is essentially their own bank, meaning there wouldn’t be anyone to give out traditional loans. My question is where would people go to get loans in a Bitcoin economy and how might those loans work?

For a loan economy to even thrive, there should be the availability of collateral which cannot even happen without verification of such collateral and that is the challenge with bitcoin usage and its applicability to work effectively which is what we are facing with the KYC. However, we have seen economies developed because of the availability of credit facilities for both individuals and corporate entities. For me personally, the idea of a bank even negates the essence of the autonomy of bitcoin because it means all of us have to gather our bitcoin for it to be loaned to an individual after he must have fulfilled some obligations.