Hal Finney predicted Bitcoin banks, how does the software look like?

[takuma sato]

I was reading this post by Hal and I realized how he was basically talking about what I interpret as additional layers on top of Bitcoin. Was the Lighting Network being described here, or did he talk of something else?

Actually there is a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins. Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.

Bitcoin backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin backed. Interest rates may vary. Cash from some banks may trade at a discount to that from others.

George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.

I believe this will be the ultimate fate of Bitcoin, to be the "high-powered money" that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as... well, as Bitcoin based purchases are today.

When he mentions "issuing their own digital cash currency, redeemable for bitcoins". Would this look like in practice as a sidechain?

For instance, Adam Back recently talked about the new CMSTR token, which is a tokenized version of the MSTR shares (MicroStrategy, now known as Strategy), as described here:

Innovation in Trading

CMSTR introduces a novel method for trading MicroStrategy stocks directly against BTC on Liquid, Bitcoin’s financial layer for digital asset issuance.

The unique peer-to-peer tradability of CMSTR, combined with its 24/7/365 trading availability, also opens up new opportunities for out-of-hours price formation strategies for MicroStrategy stock.

So in a way, holders of Bitcoin are being the bank, and CMSTR is the issued digital currency. Would this meet the criteria described by Hal?

And speaking of banks, in this context, Strategy would be the world's biggest bank, since they are the public company with the biggest holdings of Bitcoin. Considering the unknown possibilities of this in the future, the stock may be undervalued the current mNAV premium of under 2x.

I was also considering ETF's serving as banks. BlackRock is filling for in-kind transactions im not sure if this points to them wanting to be something more than a traded ticker for a BTC proxy. I would still claim that Strategy would be a better bank. And so those companies would compete with each other and an interest rate would emerge as described by Selgin. In this sense, I was wondering how does the software for all of this look like. I think Strategy should hire people such as Adam Back and others and try to work this angle to monetize their massive Bitcoin stacks. This may be on their plans and right now they are still focused on acquiring more Bitcoin with intelligent leverage through the convertible bonds, ATMs and other methods.

I believe Strategy may play a big role in Bitcoin in the future that is not priced in. It's still seen as a Bitcoin proxy alternative to ETFs. I think Hal Finney described there what they are going for +1 decade ago, but how the sofware will operate is not clear to me, I would like to know if anyone has some ideas for this.

[Findingnemo]

Was the Lighting Network being described here, or did he talk of something else?

I guess it't not the LN or second layer, it's a different token backed by Bitcoin and we have the bitcoin backed tokens on multiple chains but it didn't solve anything.

The concept of Micropayments came in the year 2013 [ANNOUNCE] Micro-payment channels implementation now in bitcoin  and the concept of LN came into the discussion since 2015 and finally implemented on the year 2018.

[BlackHatCoiner]

He is clearly talking about IOUs of bitcoin, and you can tell from his mention on fractional reserve banking. What he probably imagined is a digital initiative of a gold standard. Banks used to provide IOUs of paper money, that were redeemable for gold; I understand it by the emphasis on nationalization of money:

Bitcoin backed banks will solve these problems. They can work like banks did before nationalization of currency.

(Before "nationalization of currency", there was gold standard.)

[stwenhao]

how does the software look like?

It is already there, and is implemented in centralized exchanges.

but how the sofware will operate is not clear to me

It is quite simple. The bank has some public key, which is displayed to the user. You deposit BTCs there, and they appear on your account, exactly as when you deposit physical cash into some ATM, and it is credited into your bank account.

issuing their own digital cash currency

This step is optional, and it happens only after some time. First, you have just deposits and withdrawals, and you have no token, owned by the exchange. However, as things are evolving, it is profitable to release a new token, and then you have for example things like BNB on Binance.

Some would be fractional reserve while others may be 100% Bitcoin backed.

If you have just some web page, with "deposit" and "withdraw" buttons, displaying you just some amounts, then you can have any kind of fractional reserve. But: when some exchange is getting more serious, then it is slowly moving into "100% Bitcoin backed", just to convince users, that it wouldn't collapse, as other exchanges in the past.

Was the Lighting Network being described here, or did he talk of something else?

Would this look like in practice as a sidechain?

None of them. Because when you have LN or a sidechain, then you can explore many details, related to your coins. So, it no longer behaves like a typical bank. Because if you deposit some cash into some ATM, then can you really go into your bank account, and trace your banknotes, by seeing their serial numbers? Can you see, that your $100 bill went from bank A to bank B, then it was taken out of another ATM, and deposited back into bank C? Can you count all coins, and audit the supply?

In case of LN and sidechains, you can see a lot of traces. In case of exchanges, you just see, that you have N coins, you can see some order book, and check the latest price. But: all of that is not backed by any proofs, exactly like in banks, so after you deposit 1 BTC, you no longer know, if that exchange still have your 1 BTC or not. You just trade, and things are getting "real", and you can get some "details", only when you click "withdraw" (while in sidechains and LN, you need to approve your actions with your signatures, and you can read a lot of traffic, related to the whole network).

[Synchronice]

I didn't know about this post of Hal Finney, I guess I should dig more into this forum and understand the past days of Bitcoin. But I don't understand why he says that Bitcoin can't scale to have every single financial transaction included on blockchain. Why did he think that it was impossible? If we modify the Bitcoin's code and make block sizes dynamic, I think it's very possible, especially today when you can buy a terabytes of storages for a few bucks and I imagine in the next 10 years there will be something more evolutionary and cheap. We advance, technology advances, Bitcoin should advance too to my mind.

I think that he thought about Bitcoin as a reserve currency of other currencies instead of gold. I.E. today there is a talk about national Bitcoin reserves. As I understand from this quote, he thought that Bitcoin would be the reserve currency for banks that would have their own version of digital cash, i.e. their own altcoin. If I'm wrong, correct me.

[d5000]

I understand that he meant mainly IOUs and Bitcoin stablecoins (=stablecoins pegged to Bitcoin's value). But also sidechains could be described as such a "bank" -- they would be one of the "100% bitcoin backed" solutions, with a special technical mechanism responsible for the two way peg.

Finney mentioned George Selgin and his idea of a free, competitive banking sector. If we think a bit about it, and take into account that BItcoiners have embraced and popularized the idea of "not your keys, not your coins", probably the competition in the Bitcoin banking sector could eventually make it almost mandatory for players in this sector to offer a way of self-custody of their own "financial asset", i.e. of their Bitcoin-pegged token. That would be sidechains and solutions like Ark. Just like the "proof of reserves" became popular some years ago after the major crypto exchange hacks.

However, even with a "Bitcoin Banking sector" comprised mostly by "sidechains" and other L2 variants which allow self-custody, there is still a loophole for something very similar to fractional banking: premined sidechain utility tokens. Such tokens would indirectly dilute the system: although they wouldn't dilute the Bitcoin-pegged coin directly, they could be used to raise funds which otherwise would flow into Bitcoin and redirect a big part of them to the bank owners. This is basically what "L2s" like Stacks (or Arbitrum on Ethereum) are doing.

[Wind_FURY]

OP, I believe "Bitcoin banks" could be anything that utilizes Bitcoin as THE currency where everything is settled. It could something like what you have already posted. An off-chain layer like Lightning, a sidechain that pegs its currency with Bitcoin, there's wBTC in other blockchains with the Bitcoins stored in a centralized entity. OR perhaps in the future a sort of Bitcoin derivative issued by the legacy banking system?

That probably makes a debate for Bitcoin doesn't need bigger blocks to "scale" and "have all the world's transactions on-chain in Bitcoin", no?

[stwenhao]

But I don't understand why he says that Bitcoin can't scale to have every single financial transaction included on blockchain.

Because if you have just the mainchain, which has no upper layer, then you have to keep all data from the Genesis Block, to the current time. And that history is always growing, and never shrinking, so you have more and more data to process (and less and less nodes, willing to do so).

If we modify the Bitcoin's code and make block sizes dynamic, I think it's very possible

Great idea, we have 600 GB blockchain, and people don't want to start full nodes, because of that. So, let's make it bigger, so even less users will do that.

especially today when you can buy a terabytes of storages for a few bucks

It is not about storage, it is about verification time. To better understand it, you can try to run a full node for some CPU-mined altcoins. Their history takes just a few GB, but it requires more than a month of verification time. Why? Because if their hash function requires for example 10k tries, to hit a block, then verifying 10k blocks is as hard, as mining a new block.

[ABCbits]

how does the software look like?

It is already there, and is implemented in centralized exchanges.

Along with several custodial wallet/service. Some of them even have feature to send by email, phone number or username rather than Bitcoin address.

If we modify the Bitcoin's code and make block sizes dynamic, I think it's very possible, especially today when you can buy a terabytes of storages for a few bucks and I imagine in the next 10 years there will be something more evolutionary and cheap. We advance, technology advances, Bitcoin should advance too to my mind.

Good luck getting majority of Bitcoin community agree with block size increase, especially when you only consider storage capacity. There are so many factors such as CPU, RAM, storage I/O, network connection and block/TX propagation.

[DannyHamilton]

It sounds to me like Hal was describing something very close to the WBTC (Wrapped Bitcoin) that's managed by BitGo, Kyber, and Ren.

[Wind_FURY]

It sounds to me like Hal was describing something very close to the WBTC (Wrapped Bitcoin) that's managed by BitGo, Kyber, and Ren.

That truly questions, or opens a debate, towards the big blockers' stance on the matter of "scaling". Because centralizing the network towards a few entities could be self-damaging to its existence, it also questions the motivations of the higher in the ranks of big blockers. But it's also that the either don't care, profit-seeking reasons, or they simply didn't learn enough for how this works.

I believe profit-seeking is the strongest motivation.

[BlackBoss_]

It is his idea as same as ideas for Escrow years ago are different than now, but to be honest, I don't care too much about Bitcoin banks, ideas and how it can be deployed by any business entity.

Because with Bitcoin wallet software, open source, non custodial, I store my bitcoin in it, and I have my own bank. It's easily achievable with non custodial Bitcoin wallet, and I no longer need any bank, commercial bank to Bitcoin bank.

Be your own bank with your Bitcoin non custodial wallets.

[Apocollapse]

Although the idea is working since send coins via off-chain not require any fees, but if everyone agree with this, it will make all Bitcoin will belong to centralized institutions. Not many people use Bitcoin in daily transaction, hence there should be a limit how many coins belong to centralized institutions in order to prevent from Bitcoin getting controlled by centralization.

[Wind_FURY]

It is his idea as same as ideas for Escrow years ago are different than now, but to be honest, I don't care too much about Bitcoin banks, ideas and how it can be deployed by any business entity.

Because with Bitcoin wallet software, open source, non custodial, I store my bitcoin in it, and I have my own bank. It's easily achievable with non custodial Bitcoin wallet, and I no longer need any bank, commercial bank to Bitcoin bank.

Be your own bank with your Bitcoin non custodial wallets.

 👍

It shouldn't matter what they build on top of Bitcoin to improve UI/UX as long as the parameters in the base layer hold to maintain and protect Bitcoin's censorship-resistant feature - its main value proposition.

Upper layers built on top actually illustrates that the network isn't merely about "Bitcoin the network". It also shows that "Bitcoin the currency" is valued enough that groups of developers are working on applications to make Bitcoin easier to use.

Although the idea is working since send coins via off-chain not require any fees, but if everyone agree with this, it will make all Bitcoin will belong to centralized institutions. Not many people use Bitcoin in daily transaction, hence there should be a limit how many coins belong to centralized institutions in order to prevent from Bitcoin getting controlled by centralization.

I believed that during the early phase of my journey. But almost nine years later, that has never happened.

[pooya87]

What is described here sounds more like a bigger category that also includes side-chains. Generally it is anything that is "pegged" to bitcoin, from shittokens like Wrapped Bitcoin all the way to anything that claims to have been pegged to bitcoin with any rate (1:1 or 1:10 or anything) whether it is created as a sidechain or not.

And I have to say it is a terrible idea specially the part about "fractional reserve banking". They may provide some utility and attract some costumers but they'll destroy Bitcoin market until it ceases to exist. Because if such a system is created and largely used and then it can print bitcoin out of thin air without cap, the supply will no longer be limited! That will hurt bitcoin reputation and the price, but eventually it will be categorized as a shitcoin and stops having anything to do with Bitcoin...

The description is not like Lightning Network either. LN is not a separate "chain" with a separate token that is pegged to bitcoin. It is a second layer (not a sidechain) and a second layer is built on top of a first layer and depends on it. A pegged coin on the other hand, does NOT depend on what it is pegged to. For example if Bitcoin were to disappear today, technically WBTC can continue to exist because it does not rely on bitcoin network (it's a useless token on a token creation platform).
Same with the banking system that is being described, since it wouldn't have anything to do with bitcoin and doesn't rely on it from a technical perspective, it can continue to exist and operate without Bitcoin!

[Catenaccio]

What is described here sounds more like a bigger category that also includes side-chains. Generally it is anything that is "pegged" to bitcoin, from shittokens like Wrapped Bitcoin all the way to anything that claims to have been pegged to bitcoin with any rate (1:1 or 1:10 or anything) whether it is created as a sidechain or not.

Wrapped Bitcoin cryptocurrencies are altcoins and they are not bitcoins.

Wrapped Bitcoin tokens have their pegs to Bitcoin price but pegs can depeg, and if depeg happens, holders of Wrapped Bitcoin tokens will lose their money like many people lose money to Terra and their ironic and terrible "algorithmic stable coin" UST.

Stable coins are risky and I warned this risk in Tether minted more USDT.
They are tokens, not even coins.
Definition of tokens.

If people want bitcoin, only purchase bitcoin, and avoid all Wrapped Bitcoin tokens.
If they want to store capital in not volatile currency, use fiat currencies, and avoid stable coins. Fiat currencies aren't good, but they are better than stable coins.

[davis196]

I agree that Hal Finney predicted the sidechain/offchain solutions as layers on top of the Bitcoin blockchain. He knew that the BTC blockchain can't handle large amounts of transactions. What he didn't predict back in 2010 was the price volatility of Bitcoin. I don't agree that volatile assets can serve as a collateral of other assets. Bitcoin lending failed as a business model, so the idea of "Bitcoin banks" is also a failure.
The Lighting Network didn't receive mass adoption, as Bitcoin failed to gather mass adoption as a currency for everyday retail payments.
The concept of "competitive banks issuing their own competitive currencies" has been created by Friedrich Hayek, not by the guy mentioned by Finney.

[betswift]

It is his idea as same as ideas for Escrow years ago are different than now, but to be honest, I don't care too much about Bitcoin banks, ideas and how it can be deployed by any business entity.

Because with Bitcoin wallet software, open source, non custodial, I store my bitcoin in it, and I have my own bank. It's easily achievable with non custodial Bitcoin wallet, and I no longer need any bank, commercial bank to Bitcoin bank.

Be your own bank with your Bitcoin non custodial wallets.

Your keys, your bank, that's how it goes

[goldkingcoiner]

I do not think he was talking about actual banks in the traditional sense. Maybe he was thinking of an early type of DeFi? After all, the very point of Bitcoin is "to be your own bank".

Anyway, I think the point is moot with the dawn of altcoin DeFi. If only we had a better way to integrate Bitcoin into the DeFi ecosystem, then maybe it would really become a type of decentralized reserve...

[betswift]

I do not think he was talking about actual banks in the traditional sense. Maybe he was thinking of an early type of DeFi? After all, the very point of Bitcoin is "to be your own bank".

Anyway, I think the point is moot with the dawn of altcoin DeFi. If only we had a better way to integrate Bitcoin into the DeFi ecosystem, then maybe it would really become a type of decentralized reserve...

Today many out there think about that bank being in their reserves, so Hal's insight about that role of BTC was particularly ahead of its time.
And even then, way back, he saw through the block-size wars years later..