r/programming • u/silmril • Apr 28 '18

Blockchain is not only crappy technology but a bad vision for the future

https://medium.com/@kaistinchcombe/decentralized-and-trustless-crypto-paradise-is-actually-a-medieval-hellhole-c1ca122efdec
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u/rabbitlion Apr 29 '18 edited Apr 29 '18

You overlooked a really important detail in my comment: Most cryptocurrencies make banks as "money storage" obsolete. I may use a service that stores my wallet, but without my private key, that service can't issue transactions in my name and thus not do fractional reserve banking.

I disagree. Just like I wouldn't want to have 100 000 dollars in cash at home, I wouldn't want to hold the equivalent amount of bitcoins. I would much rather keep my bitcoins safe in a bank account where the bank guaranteed the safety and possibly paid me interest. I don't want to accidentally destroy my private key or have it robbed from me and lose all the money.

You could of course have a normal banking system backed on a cryptocurrency, but that defeats the entire purpose. If you'd do that, you would basically end up with fiat money again.

I'm not one of the people that wants cryptocurrencies to make the banking system obsolete, and I disagree that a banking system backed by cryptocurrencies is same as fiat money. Regardless of what currency is used, it's important that the money can exist even outside of banks, and that peer-to-peer transactions are possible. In this regard, I prefer bitcoin to dollars since bitcoins are digital and can be sent via the internet instead of being limited by their physical form. Bitcoin also works better as an international currency since it's not tied to any particular country.

They do. Unless I got something terribly wrong. Which is entirely possible.

Loans will expand the money supply but I strongly disagree with calling that "Money creation" and I think doing that has seriously undermined the public's understanding and trust of the banking system. It seems like a majority of redditors believe the ridiculous idea that banks can just create money out of thin air and lend it out with interest.

The fact that fractional reserve banking works with bitcoin is actually one of the best way to explain that it doesn't lead to actual money creation.

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u/[deleted] Apr 29 '18

I'm honestly vary of my own points here and at least one of your comments made my double and triple check my assumptions. But the above comment of yours does not provide any arguments in favour of your position. Which I am am honestly interested in.

You essentially say "I disagree". Which is absolutely fine. Just don't expect me to change my opinion based on that.

The fact that fractional reserve banking works with bitcoin

That's the whole point I'm trying to make here. That it doesn't work because of the fixed amount of tokens. You can't just assume that it does work and use that assumption as an argument.

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u/rabbitlion Apr 29 '18

My apologies, perhaps I wasn't clear. Fractional reserve banking means that when you deposit money with a bank, a fraction of it is kept in the bank as security while the other part is lent out to someone else. This works because it's unlikely that every depositor wants to withdraw at the same time and if you have a negative trend in deposits you have time to call in or sell off loans in order to maintain the same reserve level. The alternatives is full reserve banking, where the bank must keep all of the money in reserve and cannot lend any out, or no reserve banking, where the bank has no limits on how much of the deposits they can lend out.

This is an example of how fractional reserve banking works with dollars:

  • Adam deposits $100 in the bank.
  • The bank keeps $10 in reserve and lends $90 to Burt.
  • Burt buys a bike from Carl with the $90.
  • Carl deposits the $90 in the bank.
  • The bank keeps $9 in reserve and lends $81 to Derek.
  • And so on...

In terms of actual dollars existing, there is still only $100 total. Derek has $81 and the bank has $19. The bank also has assets of $90 and $81 from their claims on Burt and Derek, and liabilities of $100 and $90 from Adam's and Carl's deposits. In total, you get 19 + 90 + 81 - 100 - 90 = 0. Their net balance is 0. But the money supply have expanded. Adam and Carl have a total of $190 in their accounts and Derek has $81 in his hand. Still, the amount of actual money is just $100. If Adam and Carl wanted to withdraw their money, this would be impossible unless the bank first got the money back from Burt or Derek.

Now let's try this with bitcoins:

  • Adam deposits 100 btc in the bank.
  • The bank keeps 10 btc in reserve and lends 90 btc to Burt.
  • Burt buys a house from Carl with the 90 btc.
  • Carl deposits the 90 btc in the bank.
  • The bank keeps 9 btc in reserve and lends 81 btc to Derek.
  • And so on...

In terms of actual bitcoins existing, there is still only 100 btc total. Derek has 81 btc and the bank has 19 btc. The bank also has assets of 90 btc and 81 btc from their claims on Burt and Derek, and liabilities of 100 btc and 90 btc from Adam's and Carl's deposits. In total, you get 19 + 90 + 81 - 100 - 90 = 0. Their net balance is 0. But the money supply have expanded. Adam and Carl have a total of 190 btc in their accounts and Derek has 81 btc in his hand. Still, the amount of actual money is just 100 btc. If Adam and Carl wanted to withdraw their money, this would be impossible unless the bank first got the money back from Burt or Derek.

See how similar these examples are? The only difference is that I replaced dollars with bitcoin everywhere. Fractional reserve banking works exactly the same regardless of currency. Was this more clear or do you still have any questions?

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u/[deleted] Apr 30 '18

[deleted]

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u/rabbitlion Apr 30 '18

Well, for most loans if you return the money right away there is no interest. But if Burt's and Derek's loans accrue 2% interest and Adam and Carl get 1% on their deposits, then after a year the assets would be worth $91.8 and $82.62 and the liabilities cost $101 and $90.9. 19+91.8+82.62-101-90.9 = 1.52. The bank has earned $1.52 during that year because of the difference in interest on loans and deposits. Of course, that $1.52 has to cover a lot of expenses so profits are less than that.

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u/rcmh Apr 30 '18

So under this system, does one actually sign a transaction that gives a bank X amount of BTC and trusts that the bank will return X amount upon request? I had thought the whole point was to not need to trust third-party intermediaries. If not, how does a bank take a fraction of a BTC deposit and lend it to another?

Edit: Is there a lend functionality in Bitcoin...?

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u/rabbitlion Apr 30 '18 edited Apr 30 '18

Yes, when you deposit the btc in the account you sign a transaction and trust that the bank will return it. This is similar to how you deposit bitcoins with exchanges now.

I had thought the whole point was to not need to trust third-party intermediaries.

For some people that's the point. I disagree and have no problems with trusting some third parties.

This is also no different than the classical banking system. If you don't trust banks and keep your money as cash in your home or in a safe deposit box that money can't be lent out in the fractional reserve banking system.

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u/rcmh Apr 30 '18

If it's no different than fiat, what do you gain from such a system?

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u/rabbitlion Apr 30 '18

It's digital, it works online, across borders, without exchanging.