crytpo economics and fractional lending

[ricksanchez101]

Hi

Can someone please explain to me how cryptocurrencies could potentially replace our current economic paradigm without a fractional reserve lending aspect inherent within the algorithm???  

[hatshepsut93]

Cryptocurrency doesn't inherently fix fractional reserving, you can still have it in some sort of crypto banks. Right now we have exchanges as the closest to such entities, but if they don't support margin trading then there's no incentive to have fractional reserve. If people used crypto as intended - storing it in their own wallet, then it would be a different story, but it would also make lending much harder, and without it you can't have a growing economy. But it all only makes sense to talk about when crypto represents a big portion of economy, and we are still very far from it.

[exstasie]

I agree with Hal Finney's prediction that we'll see a spectrum of crypto banks/custodians, some of whom will have a fractional reserve. There's no way around it: some people will opt to entrust their BTC to third parties for storage, and some of those custodians will employ fractional reserve.

Cryptocurrency doesn't inherently fix fractional reserving, you can still have it in some sort of crypto banks. Right now we have exchanges as the closest to such entities, but if they don't support margin trading then there's no incentive to have fractional reserve.

Anytime there are large pools of idle depositor money, there is incentive to dip into it. I don't think stuff like this is limited to margin exchanges: China’s two biggest bitcoin exchanges (Huobi and OKCoin) helped themselves to $150 million in idle client funds

[o_e_l_e_o]

There's no way around it: some people will opt to entrust their BTC to third parties for storage, and some of those custodians will employ fractional reserve.

Far too many people already entrust their BTC to third parties. Coinbase is rapidly approaching 1 million BTC of customers' funds which it is holding on their behalf, which is utterly ridiculous. As the link you shared pointed out, exchanges have already been caught lending out customers' funds without their knowledge or consent. I wouldn't be surprised at all if Coinbase were doing this too, given their long history of shady activities and complete disregard for their customers. You can add that to the list of risks when storing your coins on an exchange or web wallet - if there was a sudden down turn in the markets, your exchange might just find themselves unable to recoup what they've lent out and therefore unable to process your withdrawals.

We already have fractional reserve operating in crypto. For example, Bitfinex and Tether are no longer peddling the lie that USDT is backed up 1-to-1 with USD. They openly admit that it is only fractionally backed up, and even then, including by a variety of non-USD assets. If everyone who held USDT tried to cash out, it would essentially trigger a bank run, the price would crash, and many would be left holding bags they couldn't sell.

[hugeblack]

After the widespread use of stablecoins, the spread of platforms and the use of a lot of cryptos for speculative purposes "and not for the sake of buying and selling it became difficult to believe in decentralization..

There are still a few cryptos based on decentralization, but a lot of cryptocurrencies have shifted to centralization, and some countries are seriously considering creating a hybrid system that takes advantage of the low costs in the blockchain and centralization that banks provide.

There is a fine line between decentralization and distributed systems.

[davis196]

Hi

Can someone please explain to me how cryptocurrencies could potentially replace our current economic paradigm without a fractional reserve lending aspect inherent within the algorithm???  

First,cryptocurrencies will never fully replace the current economic paradigm.They might exist as some kind of addition to the financial system,but the current fiat economy will remain as a "solid" foundation for the next decades.By "solid" I mean that the governments will keep protecting the fiat+fractional reserve banking system at all cost.
Second,the peer-to-peer cryptocurrency lending platforms that had launched in previous years were a failure.Perhaps lending smart contracts and the DeFI apps could bring something new to the table.

[Wexnident]

It can't replace it. It may replace fiat currency, aka being a cashless transaction around the globe, but the inherent need of people for money requires companies to retain the ability to become a fractional reserve. Of course, just like as of today, this requires both parties to agree and form contracts and agreements built upon rules enforced, but it also has an inherent difference to the current fiat system. One of which is the limited supply a coin could have, in which banks and the government would have no way of manipulating it.

Of course, this may become a situation where it isn't the government and the banks becoming the reserves, but rather private and public companies. This may pose some problems, especially since the relationship between the crypto scene and the government/banks isn't really a positive one.

[DoublerHunter]

Hi

Can someone please explain to me how cryptocurrencies could potentially replace our current economic paradigm without a fractional reserve lending aspect inherent within the algorithm???  

^ I can also see the people entrusting their bitcoins in third party companies. Crypto-related private companies are almost the same as a commercial bank. It's just that they hold cryptocurrencies on their end. Even though the bitcoin's algorithm does not inherit fractional reserve, third party companies can act as commercial crypto-bank. But I really find it scary knowing that the government's relation with cryptocurrency-related private companies is in its negative phase. Crypto-based companies must adhere to laws to sustain their position and could potentially change our economy's paradigm. But that really is a hard one, I know business is business. Nevertheless, Crypto-based companies know how to play the game.

[mu_enrico]

@OP, Cryptocurrency doesn't remove fractional reserve because they are not related. Crypto is money, whereas fractional reserve is a means to manage liquidity.

Actually, cryptocurrency with a defined supply could potentially remove moral hazard in banking. Remember that banks often got bailouts from the government even if it was because of mismanagement. If everything is in crypto, the government couldn't do any of that stuff. Banks then have to manage their operation more carefully so that less lending default -> more profit from the lending operation -> growing reserve.

[canovan25]

It's funny, but the lack of regulation can make lending without fractional lending. Yes, that sounds weird, but that’s how it will work in my model. If anyone is interested, I can tell you.

[justdimin]

Crypto is not aiming at replacing the current economic system, crypto is the side alternative to current system for the future. The fiat economy will stay, lending will stay, banks will stay, but people will take control of their own money thanks to crypto instead of giving the power to banks.

Think of 100 billion dollars of people's money be in bitcoin and on their own wallets instead of being in bank accounts, that would result with people actually taking control of their money and that would drop the power of banks as well and they wouldn't be this big so that in the end whenever there needs to be a punishment to banks they wouldn't be "too big to fail" anymore, there needs to be more banks as well because that would mean better competition and one of them being punished to bankruptcy would give all others a scare and not hurt the world.

[fiulpro]

I myself do not believe in 3rd party handling of your bitcoins , if you are intellectual enough you would know the pros and cons of that system , instead of lending out your bitcoins switch to trading I would say , Bitcoins is like a money mine , in an instant it could go 10 times the value and I do think that people will sure regret at that very moment , because lending bitcoins is risky .
Even storing them on any third party site is very very unsecure at the same Time cryptocurrencies cannot replace the current economic system , it is really hard for people in the world to use cryptocurrencies 100% , before the poverty have been solved and before everyone has their own internet and their own mobiles I do think it is rather impossible.