How would loans work in a Bitcoin economy

[fenixosup]

Thats all about smart contracts and kyc providers. There will be credit score like in typical market

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[befriendmywater]

It will work out the loans in the Bitcoin economy base on the account status of the one who wants to apply for loan. The higher the ranks the more chances to be accepted and of course the contract has done through collateral basis.

But how to identify borrowers who are sure to provide 100% of their real information?
The current KYC is still fake a very sophisticated way. What is the lender's solution for this?

[Oilacris]

It will work out the loans in the Bitcoin economy base on the account status of the one who wants to apply for loan. The higher the ranks the more chances to be accepted and of course the contract has done through collateral basis.

But how to identify borrowers who are sure to provide 100% of their real information?
The current KYC is still fake a very sophisticated way. What is the lender's solution for this?

Try to ask LoyceV and Omegastarscream on whats the set-up or main requirements on having no collateral loans.
https://bitcointalk.org/index.php?topic=5135395.0

[LoyceV]

To my understanding people deposit money into banks and the banks use that money to give out loans.

That how it should be, but unfortunately the reality of Fractional-reserve banking is this:

Fractional-reserve banking is the common practice by commercial banks of accepting deposits and making loans, while holding reserves equal to only a fraction of the bank's deposit liabilities.

But with Bitcoin everyone is essentially their own bank, meaning there wouldn’t be anyone to give out traditional loans.

That wouldn't be any different if everybody would only use cash, and hold on to their own cash. The moment you give something to a bank, the bank can lend it out. Bitcoin users have proven to give large amounts of their coins to exchanges, and some exchanges have been lending these coins out for trading already.

My question is where would people go to get loans in a Bitcoin economy and how might those loans work?

The real problem is going to be paying back the loan when Bitcoin goes up ten-fold in value.

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.

I think you're wrong here. I'd really hate to see fractional reserve banking introduced in Bitcoin, but I'm pretty sure it's going to happen once banks start losing business: suppose a bank holds 10,000BTC, and gives out 10,000 loans of 10 BTC each. As long as it's not withdrawn (meaning it's only used to transfer between accounts at the same bank), it's good business for the bank!
Withdrawing everything won't be possible, and would be called a bank run. Just like in fiat.
Luckily, you can just opt to store your Bitcoins on your own address, and unlike fiat money, you can still make near instant payments without using a bank.

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.

Banks don't create actual banknotes either When it comes to loans from banks, Bitcoins will be like banknotes, and anything else that happens within the bank will be as crazy as regulators allow.

I saw this topic before, but didn't post yet. I got sommoned by Maggiordome:

Try to ask LoyceV and Omegastarscream on whats the set-up or main requirements on having no collateral loans.

Mine is very simple: I offer Little Lightning Loans, worth around $1 only. It's meant to test LN, not for serious loans (yet).
There's not much I can lose, and until now I haven't encountered a scammer who went through the trouble of setting up a Lightning wallet.

[slocker]

Dont think it would be possible. Bitcoin can be stolen no matter how good security is. Maybe in case of hardware wallet this can be done and to be safe, this could be example.
Think in any other case this wont be possible. And then remains interest how could be payed and backed up with bitcoin or any other crypto or with cash. How will they pay. Many questions and many set back are not good for this.

[o_e_l_e_o]

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.

Banks don't create actual banknotes either When it comes to loans from banks, Bitcoins will be like banknotes, and anything else that happens within the bank will be as crazy as regulators allow.

True, but they don't need to be able to create bank notes in a fiat system. If I take a loan for $10,000 for example, the bank in question just creates both a credit and a debit of $10,000 in my name. Their bottom line doesn't change, but they've created $10,000 of new credit. If I spend or otherwise transfer that new money to a business or another bank, then again, things are just settled electronically, usually without any movement of actual assets. This isn't possible with bitcoin. Sure, they can "credit" my account with 1 BTC without actually moving any bitcoin, but as soon as I spend or transfer that bitcoin to a business or other provider, then they have to actually take that bitcoin from their reserves and send it to the other party.

Given that they would actually need to transfer the bitcoins held in their reserve, coupled with the fact there would be no lender of last resort to bail them out in the event of a bank run, a fractional reserve system would have to keep a much higher fraction in reserve than they traditionally do with fiat.

[LoyceV]

Sure, they can "credit" my account with 1 BTC without actually moving any bitcoin, but as soon as I spend or transfer that bitcoin to a business or other provider

Why?
Say you take a 1BTC loan to buy a car. You get 1BTC in your account at BigBitcoinBank, then go to the car dealer, and pay 1BTC to his account at BigBitcoinBank. The 1BTC never even left BigBitcoinBank!

Banks have their way of taking tangible things, and turning it into nothingness, while making people believe it has the same value.
That started with gold, which was replaced by banknotes, because they made it much easier to "create more money". Then, when even creating a piece of paper turned out to be too much effort, they replaced it with just numbers on a screen. And still people believe it has value!
I can totally imagine they'll go from Bitcoin to Bitcoin-backed-banknotes to fractional-reserve-Bitcoin. Or more likely: they skip the Bitcoin-backed-banknotes and go straight to fractional-reserve-Bitcoin.
And I can totally imagine people will actually use it. People are used to their trusted bank that takes care of everything, and an account protected by a large corporation is much better than keeping your own wallet, right? Right?
Add some legislation that convinces the general population that direct Bitcoin transactions are only used by criminals, and Bitcoin transactions on BigBitcoinBank are the only trusted transactions, and we're stuck with banks for another century

[stompix]

True, but they don't need to be able to create bank notes in a fiat system. If I take a loan for $10,000 for example, the bank in question just creates both a credit and a debit of $10,000 in my name.

Their bottom line doesn't change, but they've created $10,000 of new credit. If I spend or otherwise transfer that new money to a business or another bank, then again, things are just settled electronically, usually without any movement of actual assets.

This isn't possible with bitcoin. Sure, they can "credit" my account with 1 BTC without actually moving any bitcoin, but as soon as I spend or transfer that bitcoin to a business or other provider, then they have to actually take that bitcoin from their reserves and send it to the other party.

I really don't understand why this ain't possible with bitcoin.
I get a 5000$ loan, I blow it all on hookers, are those still just settled automatically? And no money is moved?

I get an apartment, the bank just moves bits in my mortgage account but it DOES have to pay that guy the money.
He decides he wants to buy a car, are assets getting moved? Yes, they are!

The same way for BTC I get a 10BTC loan, I get an apartment and the transfer goes to the previous bank account owner. Does it require an on-chain transaction? No, not until the guy getting the BTC decides to withdraw them. (If ever!).

[o_e_l_e_o]

Say you take a 1BTC loan to buy a car. You get 1BTC in your account at BigBitcoinBank, then go to the car dealer, and pay 1BTC to his account at BigBitcoinBank. The 1BTC never even left BigBitcoinBank!

Yes, which I why I specified moving money to a different business or bank. Exchanges and web wallets already move bitcoin between customers' wallets without actually moving any bitcoin. With fiat this happens between institutions as well - balances are transferred and settled without moving assets. It isn't possible to settle bitcoin balances between institutions without actually moving bitcoin, unless you end up with a system of ever escalating "IOU"s or something equally nonsensical.

And I can totally imagine people will actually use it.

Unfortunately, you are almost certainly right.

I get a 5000$ loan, I blow it all on hookers, are those still just settled automatically? And no money is moved?

My point wasn't that cash is never involved, it was that banks don't need the ability to print physical cash to be able to create money out of nothing.

[atjiat]

Maybe I still have not fully realized the possibility of taking a loan in cryptocurrency, but given the fact that people buy a loan for several years to buy very expensive things, such as an apartment or cars, and over the past three years, Bitcoin has jumped from $ 1,000 to  20,000 dollars and dropped to 2,500 dollars, then scary you might think how the loan will be repaid.

[breathlessz]

Maybe I still have not fully realized the possibility of taking a loan in cryptocurrency, but given the fact that people buy a loan for several years to buy very expensive things, such as an apartment or cars, and over the past three years, Bitcoin has jumped from $ 1,000 to  20,000 dollars and dropped to 2,500 dollars, then scary you might think how the loan will be repaid.

I think loans in the form of bitcoin, will be repaid in units of bitcoin too. if as you describe, it feels unfair. so when the price of bitcoin falls, then return it is not in fiat units, so both parties must know about bitcoin, and there is no dispute in the end

[RealMalatesta]

I think it is more about how can you force your loan claim than where the money goes.

If you get a loan from a bank and then move it to another bank nobody really cares because as long as you pay your loan to them they will have more money in the end, they are risking inflation as well which people are forgetting, if you buy a house right now at 100 thousand dollars and pay it in 10 years for example by the end of 10th year when your loan is finished you paid back lets say 150 thousand dollars, well the house now worth more and 150 thousand dollars may worth less in 10 years then 100 thousand today, hence banks are already taking a risk but know you will pay back.

However, if you fail to pay back they will put a claim on everything you own and they will seize your property as well, if crypto loans get that power then we will see a TON of banks doing the same.

[SirLancelot]

I can totally imagine they'll go from Bitcoin to Bitcoin-backed-banknotes to fractional-reserve-Bitcoin. Or more likely: they skip the Bitcoin-backed-banknotes and go straight to fractional-reserve-Bitcoin.
And I can totally imagine people will actually use it. People are used to their trusted bank that takes care of everything, and an account protected by a large corporation is much better than keeping your own wallet, right? Right?
Add some legislation that convinces the general population that direct Bitcoin transactions are only used by criminals, and Bitcoin transactions on BigBitcoinBank are the only trusted transactions, and we're stuck with banks for another century

I do see different scenario from you.

People now are having more awareness than our ancestors. They do cross-check everything that they come across. They may stop using their traditionally trusted banks when they start realizing "how worst bubble their fiat is", those cyclic recessions will tech them big lessons.

But, I am sure governments and central banks will mislead people like bitcoins are meant for something illegal. At the same time most people will not listen to them (as they are having enough statistics and other resources to conclude the actual truth). This way, I am sure we may not need to stuck with traditional way of banking for another hundred years.

This does not mean cryptos will straight forwardly going to replace traditional banks. But, banks may adopt bitcoins to ensure fulfilling common people's expectations. This way bitcoin banking and traditional banking may co-exist and this may turn into ONLY bitcoin based on banking only after centuries when governments are dealing against/with aliens by realizing the importance of NOT having borders for their countries.

[bering]

Never cross in my mind how bitcoin economy works because we are still far away to reach that achievement but in bitcoin economy maybe there are plenty of possibility to get loan and one of them is bitcoin lending services companies will growing rapidly and most of them probably independent because maybe there is no investors to support their companies then they use their own bitcoin to give people loan

[TheClownSong]

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, bitcoin was created not to replace money but as a peer to peer payment instrument that does not involve third parties such as banks. If in the past fiat money was created with a back up of gold, it could have been if bitcoin was recognized as an asset, fiat money was created with backups of bitcoin as a reserve. But in my opinion this is still far away, because the central bank certainly does not want to lose its role in the economy

[EdenHazard]

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, bitcoin was created not to replace money but as a peer to peer payment instrument that does not involve third parties such as banks. If in the past fiat money was created with a back up of gold, it could have been if bitcoin was recognized as an asset, fiat money was created with backups of bitcoin as a reserve. But in my opinion this is still far away, because the central bank certainly does not want to lose its role in the economy

I think we are living in 'bitcoin economy' already now .. the bank services like a traditional loan and a peer to peer lending services been around for the last few years side by side, as time goes by this kind service would become mainstream and people would'nt even realized that it's powered by blockchain technology,  because of course yes they care only about how they receiving an easy loan as quick as possible .

Banks will always be there with their product even they could adopt the blockchain technology to compete in the advanced market era ( at this point it's about how to deliver a loan effectively efficiently )

[Lapatai]

I wouldn't take loan in crypto. Except if the price was tied to USD, not BTC.

[mitchr4]

I wouldn't take loan in crypto. Except if the price was tied to USD, not BTC.

I also prefer to take a loan at a price tied to USD. It's good because we don't know who will profit and lose between the lender and the borrower when the price of Bitcoin will not necessarily be stable at that price If the loan was tied to BTC.

[yoseph]

I wouldn't take loan in crypto. Except if the price was tied to USD, not BTC.

It would really suck when you take a loan and in the day's between the value skyrockets and you will have to pay sometimes double or even triple of what you initially borrowed. I really think should use make sure that all lending is price tied to the USD so that they also don't end up losing when the value plummets.

[timerland]

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.

Haha, same! It feels much safer holding your assets in a currency that is unable to be manipulated, then holding fiat currency, which could lose it's valued due to government manipulation and is constantly being printed with no cap on things.

It is one of the problems with BTC though. P2P trades are fine for most people, but if BTC was truely able to replace fiat currencies, how will companies be able to get millions in BTC as loans, how would mortgages work? All very good points you've brought up here.

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.

I don't think no-collateral loans would ever work in a decentralized system, there are so many ways to exit scam, and unless KYC or something similar to credit scores are enforced, no lender would ever risk such a thing.

And if we did implement KYC, it'll be pointless and ruin the point of BTC, so tough situation.