Fractional reserve banking V bitcoin

Lets try and light up the argument a bit…. anyone with any thoughts?

Money is a medium used for the transfer of goods.

The premise is that fractional reserve banking is an unfair system that benefits banks by allowing them to have control over the issuance of money.

Banks generate money from nothing against a 10% deposit (the fraction) to a central bank.

The credit is given to you and you spend the rest of your life paying it back to the bank + interest through your work.

That money that was generated at no cost to the bank is eventually returned to bank. The bank is now richer by the amount of money it lent you + interest but has done no work at all to gain this money.

The bank actually makes even more money; Say you purchase a house and the seller places your borrowed money into the same bank the bank can then lend out multiple amounts of the same money since only 10% is required as collateral deposit each time.

In a fairer system perhaps you would pay back your loan + interest to the state where, a democratically elected and fair government (not many of those around), would use it for the benefit of its citizens.

One way out of this mess is to take away control of money issuance from the banks. Bitcoin!

You can only achieve this goal if all transactions are done in bitcoin without the use of FIAT money. In this scenario the banks have no control over issuance and the governments no control over the transactions.

How do you finance government? If all transactions are done in bitcoin, due to its anonymity, it becomes impossible to know who has what and therefore impossible to tax. The government would have to tax the anonymous transactions. Taxation would be the same for everyone… Even hookers and drug dealers would pay taxes 🙂

Problems:

You can only do transactions in bitcoin if they are cheap to do; I can’t buy a 12 bucks pizza with bitcoin if transferring the money costs me 14 bucks.

On the other hand you can’t get people to verify/complete transactions (mining) unless there is something in it for them.

Once all bitcoins have been issued (mined) the only thing that is left is the service charge in the transactions that have been hashed.

If you limit the block size you limit the number of transactions that can be bunched up in a record and by inference the number of service charges that can be collected by a miner (the person that completes/verifies the transaction).

So the service charge has to go up -> bitcoin cannot be used for purchasing my pizza -> bitcoin has failed in its primary purpose to take back control of money.

Ways forward: have much larger transaction blocks or some other reward type. Perhaps no hard cap of bitcoin issuance!

The next potential problem is the limited number of bitcoins.

Money is a means of exchange and its required quantity is determined by the number of transactions that go on in an economy. One can envisage a point where there won’t be enough of it to facilitate all the required transactions.

More bitcoins need to be released based on some requirement algorithm. This would also resolve the problem of rewarding the miners which are required to complete the transactions.

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3 Responses to Fractional reserve banking V bitcoin

  1. Oliver Kane says:

    A high fee amount being paid to the miners once all the 21M have been mined isn’t necessary to process transactions. A single computer mining is sufficient to run the whole network. An equilibrium will be met and will be constantly be adjusting between the security of the network (hashpower, or how many cpus are cranking away)

    Limited number of bitcoins isn’t an issue. While a full BTC is the unit most use today, the actual unit on the network is the Satoshi (10^-8 BTC). With a softfork, the network can allow smaller units say 10^-16, and suddenly, we have 10 MILLION times more units to work with.

    The issue with the fees is already being addressed. Check out the Lightning Network, which is a single example of how we can go from ~5.3 transactions per second before fees get crazy, to tens of thousands of transactions per second. Plus, paves the way for atomic swaps between currencies, improves privacy a whole lot more. This isn’t theoretical, the pre-alpha network already has almost a thousand nodes! https://lnmainnet.rompert.com/

    There’s lots and lots of challenges ahead of bitcoin. What’s awesome, is when there’s pain points, anyone, without permission can go in and make improvements. Try doing that with a bank wire.

  2. Olga Plytvenko says:

    “The next potential problem is the limited number of bitcoins.”

    I have heard this argument a 1000 times over the last 9 years. It is as wrong now as it was then.

    Please do your research before giving an opinion.

    One Bitcoin is equal to one hundred million satoshis. This means one Bitcoin can be divided into a 100 million equal parts.

    This means once all 21 million bitcoin are mined, there will be 2100 *trillion* satoshis in circulation.

    Assuming a world population of 100 billion people, that’s 21000 satoshis per human being. Plenty enough I’d say.

    Also, upgrading bitcoin to be even more divisible is a fairly simple affair, technically speaking.

    You argument doesn’t hold much water.

  3. Ulu Ulusen says:

    You don’t have to have only bitcoin. One could earn as wage from their job, along with bitcoin, travelcoin, foodcoin, …coin, like they do with foodstamps today. Every shop could have its “rewards points” and vouchers on the blockchain.
    The problem with interest, which is the only thing banks create, is that it’s a black hole and in a capitalist society more and more people (over time) reach a tipping point where they have to kill eachother for money or starve to death, as the big fish eats the smaller fish

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