Loans in a Bitcoin world

[The Sceptical Chymist]

From all I understand this would mean that less availability of loans would mean much higher hurdles to build up businesses, but also for consumers to finance their houses and cars. Economy would suffer a slowdown (at least if the other Capitalist mechanisms stay the same).

Sure, if the people looking to start businesses and purchase houses and cars have to use bitcoin to finance those things--and thus far all of that stuff is financed with fiat, loans or no loans.  Assuming we ever arrive at a world where fiat currency has collapsed and banks have failed, then there might be some serious problems with bitcoin loans, but I don't think that world is coming.  Ever.

I've not studied economics, so I may be wrong<snip>

I've studied some economics, but by no means am I an expert.  However, I do see how problematic crypto loans have been so far, but whether there's a good solution to those problems or not, I don't think most crypto lending is done to finance important stuff (like the house/car purchases and business startup mentioned above).  Nor do I think there's going to be a huge demand in the future for such loans--not while the banking system still exists anyway.

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[d5000]

This assumes that Bitcoin will be a dominant currency of the world, which is likely not gonna happen. So, even if 5% of the economy will run on Bitcoin, Bitcoin's deflation won't be a big problem.

The idea for this thread came from a discussion in the Spanish forum about the situation in countries like Argentina and Venezuela. These countries have very weak currencies and an "inflationary tradition" - this means that almost nobody has long-term confidence in the value of the currency, and they will exchange national currency to "hard money" when they can.

In these countries a system where cryptos play an important role could be a possible solution. If there were not the problem of loans. However, they're also a problem due to the inflationary national currencies: in Argentina, for example, interest rates for loans are extremely high (50% per year are not uncommon). This drives inflation because businesses have a continuous need for growing income.

Such a "crypto-dominated system" would still be probably not a 100% Bitcoin economy. But Bitcoin is the "gold standard" in this system then loans will be predominantly in Bitcoin or a bitcoin-pegged token.

So, there totally will be Bitcoin lending and banks, they probably will be very strict with their clients, [...]So, there will be much less private uncollaterized loans.

That's exactly the problem I see. It may also have benefits, like a higher resilience against economic crisis, but the whole economic cycle would be different than today.

In a completely crypto dominated utopia this may even be private money in the form of centrally issued tokens, although it's more likely to remain governmental currencies.

Yep, this is one possible way. These "centrally issued tokens" however need also some kind of "anchor" for the value, otherwise there won't be confindence in them.

In the situation I described above (a single country with weak currency adopting a Bitcoin-dominant system) there would be still external currencies to peg it to, so USD stablecoins would be possible. There could be also a kind of slightly floating peg like in the case of the Linden dollar. But in the case these tokens became dominant it would be basically dollarization.

An interesting concept I always wanted to see realized is a token pegged to different commodity prices. Preferently to commodities that are produced regionally, so there would be no need for cross-border trade to get involved in the "peg". The Petro was an interesting step in this direction but failed because the incompetent and corrupt Venezuelan government completely distorted the original concept.

The thing is, our current understanding of growth-based economy requires a heavy amount of forward-looking loaning to function, ie. businesses borrowing money "from the future" to allow for growth in the present. This system unfortunately only works if the loans are based on an inflationary currency [...]

Exactly, that's a core part of the problem. While this would change if this model wasn't possible anymore because of a credit crunch, and businesses would be more dependant on values they have created themselves, the transition to such a model could be troublesome, so a search for alternatives to traditional loans makes sense, I think.

[figmentofmyass]

This is even aggravated by another problem: in a Bitcoin world bank accounts are not really necessary because you can use always a wallet, so there would be less deposits on banks.

the emergence of CBDCs is interesting to me because it would do the same thing---people have their own wallets so they can cut out the banks.

bitcoin holders do love to see a return on their holdings though---as a group, they love to invest. maybe we'll see the emergence of savings & loan type institutions, which bring together lenders who want a return and borrowers who need loans. maybe we'll return to the days of wildcat banking, where bank notes are inherently risky.

From all I understand this would mean that less availability of loans would mean much higher hurdles to build up businesses, but also for consumers to finance their houses and cars. Economy would suffer a slowdown (at least if the other Capitalist mechanisms stay the same).

Do we have a solution for that?

you can't have your cake and eat it too. austrian economists say perpetual growth as a goal is ridiculous, and that we should get used to economic stagnation as the normal course of things.

if you want to build a global economy on a currency with a completely inelastic money supply, you better prepare for a big slowdown in growth. austrians welcome that. if you want bitcoin to replace fiat money, then you should too.

[d5000]

bitcoin holders do love to see a return on their holdings though---as a group, they love to invest. maybe we'll see the emergence of savings & loan type institutions, which bring together lenders who want a return and borrowers who need loans.

Yep, that would be basically the P2P lending business. It could be perhaps refined, if banks would take care of risk management and could give a pseudonymous rating to those who want to borrow money, according to the securities they show as collateral.

maybe we'll return to the days of wildcat banking, where bank notes are inherently risky.

I don't think this is a desirable scenario. At least, there should be some possibility to invest in an asset that is at the same time secure and simple to understand, like money now. This perhaps could be commodity-backed currencies like those I outlined in the previous answer.

austrian economists say perpetual growth as a goal is ridiculous, and that we should get used to economic stagnation as the normal course of things.

if you want to build a global economy on a currency with a completely inelastic money supply, you better prepare for a big slowdown in growth. austrians welcome that.

Economic stagnation would be okay if we have already a world in which basic needs are guaranteed to everybody, like today in "First World" countries. In this case, efficiency and productivity gains due to technological progress would be enough to continue to rise the living standards. We're unfortunately a bit away from that still. Above all in the "Venezuela" scenario I mentioned before, a mechanism should exist which would help to build up the economy - above all infrastructure - fastly. This is today achieved by loans and growth.

It isn't necessary that this mechanism is based on loans, I have some hopes with respect to better bartering systems, maybe based on cryptocurrency technology. At the end the economy always boils down to a trade of goods (including work and services) for other goods, the intermediary "glue" (which is fiat money, in the current economy) is the interesting part where the mechanism would work.

[figmentofmyass]

bitcoin holders do love to see a return on their holdings though---as a group, they love to invest. maybe we'll see the emergence of savings & loan type institutions, which bring together lenders who want a return and borrowers who need loans.

Yep, that would be basically the P2P lending business. It could be perhaps refined, if banks would take care of risk management and could give a pseudonymous rating to those who want to borrow money, according to the securities they show as collateral.

a savings & loan would usually be organized like a credit union, where the institution is mutually held by the depositors and borrowers, who have voting rights re how it is run. i think that's much more attractive in terms of liquidity vs p2p lending, since depositors pool their money together in a joint venture. creditworthiness would probably be handled similarly to financial institutions today.

maybe we'll return to the days of wildcat banking, where bank notes are inherently risky.

I don't think this is a desirable scenario. At least, there should be some possibility to invest in an asset that is at the same time secure and simple to understand, like money now. This perhaps could be commodity-backed currencies like those I outlined in the previous answer.

it comes down to a question of free markets. the wildcat banking era (also known as the free banking era) came to be because of a lack of regulation or enforcement mechanisms around banking. what was the ultimate solution? creating the fed!

pick your poison, i guess.

At the end the economy always boils down to a trade of goods (including work and services) for other goods, the intermediary "glue" (which is fiat money, in the current economy) is the interesting part where the mechanism would work.

the problem is it's not just fiat money that is the intermediary glue, but robust systems of credit. interbank lending, collateralized lending, central bank QE, fractional reserve based retail lending etc etc. i dunno how robust these systems would be in a bitcoin-based economy.

that hard cap on the bitcoin supply really lends itself to hoarding.

[odolvlobo]

In a Bitcoin world however, a fractional reserve system can be imagined ... but it would be very risky for banks, because there is no Central Bank and thus no lender of last resort. Banks would never be able to operate with a reserve as low as the 1% currently standard in Europe and the US, but probably need reserves of 30 or even 50%. This would indirectly lead to less availability for loans, a situation called credit crunch or credit squeeze.

Keep in mind that central banks existed when there was a gold standard. There is no reason there couldn't be a lender of last resort on a Bitcoin standard. However, as your wrote, since the banks are backed by reserves (instead of a printing press), the reserve requirement could not be as low as it is now.

I don't think it would result in a credit crunch since the value of the money would increase until the supply is sufficient to meet demand.

[hugeblack]

If the loans with interest, we return to the pre-1971 point where you will need a lot of money but you do not have sufficient cover for this money. The governments solve this problem by printing more money, but we cannot do that. In other words, in the long run, lending will fail using Bitcioin.

Second layer may be a solution to this problem, and one of the scenarios that can do this is this project ---> https://github.com/omnilaboratory/OmniBOLT-spec.

Build upon BTC/OmniLayer network, implements HTLC operations on the graph/network of Poon-Dryja channels;
 Uses atomic swap to exchange assets among networks, lnd and obd;
Off chain smart contract written in Turing complete script languange for various finance scenarios. Easily embed into existing applications;

This feature will provide the possibility of lending in BTC/ALT/stablecoins, such as USDT, and Bitcoin can act as a partial reserve system.

[bits4books]

Again, you come up with a Bicycle-starting it with the fact that instead of a round wheel, put a square one. Why BTC and not another cryptocurrency? Why can't I use any stablecoin for lending? Why replace all Fiat exclusively with cryptocurrency at all - this will not give the expected effect, but will only lead to the change of one Unicode character to another? So many questions and so few answers...

[exstasie]

Keep in mind that central banks existed when there was a gold standard. There is no reason there couldn't be a lender of last resort on a Bitcoin standard. However, as your wrote, since the banks are backed by reserves (instead of a printing press), the reserve requirement could not be as low as it is now.

I don't think it would result in a credit crunch since the value of the money would increase until the supply is sufficient to meet demand.

That doesn't address the cost of borrowing money, which may be prohibitive given BTC's scarcity, or the potential lack of lending liquidity that could occur for the same reason.

Let's say the world population quadruples, or increases 100x for that matter. Bitcoin's money supply would of course stay the same, but in order to sustain this population, we would obviously need a much higher economic output.

How does Bitcoin scale in this scenario? How can it be effectively distributed to every borrower in the economy who needs a loan? And how do you get lenders to keep rates cheap enough that borrowers can keep their heads above water? As demand increases for borrowing liquidity, rates will increase. As the population increases, demand for loans increases. This is a vicious cycle. I don't see a way out.

[Febo]

Bitcoin is really unfair when it comes to sudden changes in its price due to its volatility and most of the bitcoin holders are aware about that. That's why you should not loan in bitcoin but loan in USD, because loaning in bitcoin can bring advantage or disadvantage for you. When you make a loan of 1 bitcoin for example, and the price of bitcoin increases in USD, then that's a bad thing for you. But if a price of bitcoin decreases, then that's a good thing for you. But once the price of bitcoin decreases, you are advantageous of the opportunity to pay BTC that you've loaned in a smaller amount in USD.

In general first thing of taking loans is that you take it in currency you get income in. So if you get salary in CHF you dont take loan in Euro. Or the opposite. IF you get salary in Bitcoin you dont take loan in USD. Not now not in 10 years time.

[odolvlobo]

Keep in mind that central banks existed when there was a gold standard. There is no reason there couldn't be a lender of last resort on a Bitcoin standard. However, as your wrote, since the banks are backed by reserves (instead of a printing press), the reserve requirement could not be as low as it is now.

I don't think it would result in a credit crunch since the value of the money would increase until the supply is sufficient to meet demand.

That doesn't address the cost of borrowing money, which may be prohibitive given BTC's scarcity, or the potential lack of lending liquidity that could occur for the same reason.

Let's say the world population quadruples, or increases 100x for that matter. Bitcoin's money supply would of course stay the same, but in order to sustain this population, we would obviously need a much higher economic output.

How does Bitcoin scale in this scenario? How can it be effectively distributed to every borrower in the economy who needs a loan? And how do you get lenders to keep rates cheap enough that borrowers can keep their heads above water? As demand increases for borrowing liquidity, rates will increase. As the population increases, demand for loans increases. This is a vicious cycle. I don't see a way out.

Assuming that economies continue growing, Bitcoin is deflationary. That means that its value grows to meet the demands of the world's economies.

Higher interest rates are ok. Borrowers that cannot afford debt should not borrow. Excessive borrowing is destructive and low rates encourage excessive borrowing.

[verita1]

I have seen that the NEXO platform offers loans at very low interest rates at 5.9% they demonstrate that they are competitive in the global market to reach a loan on your platform you need to approve KYC and deposit in your bitcoin wallet and you can receive the 50% of what you have in the deposit.
OP has mentioned that banks could have bank accounts with less deposits, I think there will be supply and demand for fiat.

[exstasie]

That doesn't address the cost of borrowing money, which may be prohibitive given BTC's scarcity, or the potential lack of lending liquidity that could occur for the same reason.

Let's say the world population quadruples, or increases 100x for that matter. Bitcoin's money supply would of course stay the same, but in order to sustain this population, we would obviously need a much higher economic output.

How does Bitcoin scale in this scenario? How can it be effectively distributed to every borrower in the economy who needs a loan? And how do you get lenders to keep rates cheap enough that borrowers can keep their heads above water? As demand increases for borrowing liquidity, rates will increase. As the population increases, demand for loans increases. This is a vicious cycle. I don't see a way out.

Higher interest rates are ok. Borrowers that cannot afford debt should not borrow. Excessive borrowing is destructive and low rates encourage excessive borrowing.

Since interest rates would grow with the population, it's inevitable most of the population (including otherwise viable businesses) would eventually be unable to obtain credit, through no fault of their own. It wouldn't have to do with excessive borrowing but rather scarcity of lending liquidity.

That doesn't seem okay to me. Ideally a currency should scale to the size of the economy, not break the entire credit system as the population grows.

[FanEagle]

What lending does to regular currency is creating money that doesn't exist. Let's say there are three people, A and B and C, these three people have a total of just one dollar, person A has 1 dollar and person B and C do not have any money at all.

Now, there is just 1 dollars in between them right? Let's assume person A loans the money to person B, that means Person A has rights for 1 dollar and could spend 1 dollar saying he will be paid back by person B right? And Person B has 1 dollar because he got it from person A as a loan.

Now, let's say Person B gives it to person C, same happens, now person B can spend 1 dollar saying person C will pay him and Person C has 1 dollar because person B gave it to him. Then, we can say there is 3 dollars in the market, person A will get it from person B, person B will get it from person C and person C got it from Person B. In reality there is 1 dollar total, but 2 dollar debt, and 3 dollar total money owned by people. That's the problem with loans.

[audaciousbeing]

My contribution to this is that, the reason why fiat seems stable and can be used for everyday transactions as well as for provision of loans and borrowings is because of the regulatory factor and the forces of government in other to ensure that. The moment a particular currency begin to be fluctuate, that is the beginning the of the crumbling of the economy which is something that the country will not take and these seems to put bitcoin at a disadvantage remove all of these interventions and regulations in fiat, it will be the same thing as bitcoin if not worse.

[TheGreatPython]

It’s not just about loans, imagine that the world decides to start making use of Bitcoin and there is no more Central bank, how do you imagine the world is going to be? The government will no longer be able to monitor how money goes in and out of the country, things are seriously going to change. And people will be doing whatever they want and acting however they want to without having any problem. When you’re scammed there will be no way to trace it, and if you are rich, since all your money is stored in cryptocurrency anyone can break in and steal everything from you and that’s how you will end up losing it.

After the collapse of famous BTC based lending site "bitjam" (please correct me if it was btcjam or something similar to that), I don't think lending into a complete stranger will be working without proper collateral. Because, to deal against complete stranger, we must need how banks are working on that. Without that kind of mechanism, I'm still not thinking about the possibility of successful lending opportunities in bitcoin world.

[apaben]

It’s not just about loans, imagine that the world decides to start making use of Bitcoin and there is no more Central bank, how do you imagine the world is going to be? The government will no longer be able to monitor how money goes in and out of the country, things are seriously going to change. And people will be doing whatever they want and acting however they want to without having any problem. When you’re scammed there will be no way to trace it, and if you are rich, since all your money is stored in cryptocurrency anyone can break in and steal everything from you and that’s how you will end up losing it.

After the collapse of famous BTC based lending site "bitjam" (please correct me if it was btcjam or something similar to that), I don't think lending into a complete stranger will be working without proper collateral. Because, to deal against complete stranger, we must need how banks are working on that. Without that kind of mechanism, I'm still not thinking about the possibility of successful lending opportunities in bitcoin world.

I am not sure if the world uses bitcoin as the basis of the state. Bitcoin is not fulfilling beliefs as the basis for the country's economy or anything else in my opinion. for me bitcoin is still vulnerable in security and now a lot of theft in the digital world. if bitcoin as a small transaction payment instrument in the scope of simple needs i agree about it because the risk is not very large. if bitcoin is the basis of the country's assets i am still in doubt because the risk is very large later ..

[chip1994]

We all want Bitcoin to replace fiat, right? And banks too.

Well, one of the things that needed to be replaced is the feature of banks to provide loans. Loans are important for businesses, but also for consumers if they want to finance costly goods like houses and cars.


I've not studied economics, so I may be wrong, but from my limited knowledge in the area that's what I think that could be issues the Bitcoin community would have to solve before really reaching mass adoption.

it's just your mind and some of the crypto fans are fans, it's clear that a market that works in the background can't be sure of anything. In my opinion, Bitcoin and crypto will never replace fiat money and that is also one of the plans of whales. The whales created this market and fomo of the impossibility for traders and investors to be psychologically manipulated, a trick to manipulate and make money easier. Even if the economy collapses, our coins will die, don't expect it to be something that goes against the rules of nature.

[d5000]

Keep in mind that central banks existed when there was a gold standard. There is no reason there couldn't be a lender of last resort on a Bitcoin standard. However, as your wrote, since the banks are backed by reserves (instead of a printing press), the reserve requirement could not be as low as it is now.

Yes, a "Bitcoin Central Bank" would be basically a bank like every other. In theory, one could imagine a state-backed Central Bank even in a society with a Bitcoin standard. Such an instituion could give out Bitcoin-pegged, state-backed stablecoins in times they want to increase supply. A kind of "Government Tether", basically a bond with "character of money". This approach has been used in countries like Argentina (the infamous "Lecop") already, with some (limited) success, although obviously not with Bitcoin but the US dollar as standard.

However this approach would be limited if the Bitcoin price had still a tendency to go up, due to the risk of a state insolvency. It would not be suited for the "Venezuela scenario" I had in mind, but perhaps in the long term when Bitcoin reached a relatively stable price after a period of mass adoption.

I don't think it would result in a credit crunch since the value of the money would increase until the supply is sufficient to meet demand.

I don't understand fully what you mean here. Just the phase with increasing money value would be the one where access to credit would be severely limited.

Second layer may be a solution to this problem, and one of the scenarios that can do this is this project ---> https://github.com/omnilaboratory/OmniBOLT-spec.
[...]
This feature will provide the possibility of lending in BTC/ALT/stablecoins, such as USDT, and Bitcoin can act as a partial reserve system.

True, technical solutions like Omnibolt can definitively help. A partial reserve system based on these tools is surely interesting.

What however could be a problem (if my interpretation is right) is the total transparency: Let's say a Bitcoin bank issues partially backed stablecoins. If the level of the reserve goes down because the bank tries to increase liquidity, this would be visible for everybody, and this could unleash a domino effect of sinking trust in this bank and problems to maintain the Bitcoin peg.

One possible idea is to combine the Bitcoin peg with a commodity-based peg. Banks could invest in "real-life" commodities and use these investments to back their Bitcoin-based stablecoin partially.

@extasie: Pretty much this. It would be a systemic fault. While an excessive credit liquidity is also not good, the crunch imo would exceed greatly a "sane" reduction of that liquidity.

[Metazen]

Not now but in the future Defi-Style Lending ; Because while DeFi is covering a wider range of areas — from remittances to derivatives and investments — its most promising sector involves credit and lending. That's because, thanks to the openness, security and transparency of blockchains, it's possible to make loans and credit available to a larger pool of people than ever before, while the interoperability of blockchains opens up the possibility for creating a spectrum of new lending products and services.