Federated E-Cash as a Bitcoin Scaling Technology
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If I send some bitcoin to it, what guarantees that I will get a valid ‘IOU’ back, in an atomic way? If I cash in an IOU, what guarantees that I will receive the expected bitcoin deposit? Do I have to trust that this new entity won’t just run off with my money?
I thought it was kind of like Free Banking. And just as warning, in US history, Free Banking has a different unrelated meaning. So do not confuse the concept of Free Banking with the historical Free Banking, the 'Free' referees to different aspects. In US what is referred to is the 'freedom' to open banks at all. Before that, in the US, each bank required a voucher from the state legislature.
What I am talking about is the freedom of issue, sometimes called 'Joint-stock banking'. Meaning a bank can issue bank notes (IOUs) without any restriction on how to back that IOU. This is relevant because historically quite often the state (and later federal) government would enforce a strict connection between outstanding notes and government debt. This is rather clear why governments would want that. This leads to a number of problems, historically most important that defaulting states would destroy its banking system at the same time. Other problems are that government with low or decreasing debt might not have enough debt to cover outstanding notes leading to a deflationary effect.
Broadly how this works is, you have a Gold standard and then you have a set of 'banks' issue IOU on top of that. These come in form of private bank notes (typical a standard of note amount emerged as well). You can think of a outstanding bank notes, the same way as money the bank has in a checking account. The important difference being that the bank gets the interest, and not the holder of the note. And the profit derived from this is what makes the bank want to do this in the first place.
The amount of IOU any individual bank can issue is limited by the consistence demand for clearance from other IOUs accumulated by banks. So I go to Walmart pay with an note. Walmart can check of course if the issuer is acceptable to them and then they hand that over to their bank to put in into their checking account. The bank then will bring those notes to the issuing bank, and demand reserves (ie gold) and transfer it to its own 'vaults'.
Once you have more then 2 bank pretty quickly 'clearing houses' develop. These would be sort of membership clubs where after each day/week/month you would do a clearing of everybody against everybody and figure out who has to pay how much and who gets how much. These clearing houses were often separate private institution.
The clever part about this is that this serves as a good indicator of who is abusing the system. So if you end up issuing to many notes, the reserve drain will be observed by other banks and they will kick you out of the clearing house as a default risk.
The other interesting aspect of this sort of system is that it has an implicit regulation of currency demand and supply. In modern economics sometimes considered as 'velocity'. So each bank has a minim reserve and how much reserve they have depends on how many notes they need to cover the clearing house demands. If demand to hold currency is high, and therefore less demand on reserves, the bank can safely expand the amount of notes it issues. However in the opposite situation, if people drop their requirements to hold currency, the banks has to pull notes from circulation. Typically in historical system the notes would be backed by a wide range of liquid commercial stocks and government bonds.
In a more standard economic way of saying this is that those banking system were adjusting the monetary base (M) in accordance of the monetary velocity (V) and this results in a relatively long run stable MV and therefore a stable PQ (Price level * real expenditures).
What this means is that once reserve stop growing, you would expect Price level to drop or rise depending on Productivity. So if the economy is growing and things become cheaper the average price level would drop accordingly (just like price of consumer electronics drops). Attempting to enact such a policy is sometimes called 'Productivity Norm'. Another way of saying it, it would approximate a stable NGDP. This is not the type of demand deflation that caused the Great Depression. What this means is that workers would not have to fight for adjusted wages every year along with inflation. You get slightly higher wages every year automatically.
Historically the most easy way to observe this is currency in circulation depending on harvest. During harvest there was a huge amount of currency outstanding, as everybody was paying workers, making deals and so on. When it turns winter, and there is far less economic activity going on, people much rather have more money at the bank so it can earn interest. Therefore what we should observe is the outstanding base of money being response to that requirement and we can actually see this in historical data from systems that were organized like that.
There were also banks that had 100% reserves, meaning the amount of notes they issued was always the same as the amount of gold reserves in their vaults, of course at those banks you would not earn interest, but rather had to pay a fee for the services. This sort of 100% backed system is what seem to be proposed here. Historically these sorts of banks were very unpopular, to the point where they basically didn't exist at all unless for some special circumstances.
My biggest issue with Bitcoin when people suggest it could be the backbone of a new economy, is that it does not have this feature. Bitcoin is like if you are trading on pure non-floating gold coins. If there is an increase in the amount of demand for Bitcoin, there is no corresponding increase in supply as to keep prices relatively the same. If you want to have a multi-level deep economy with labor, debt and so on, this is not tenable.
Of course many Bitcoin people I proposed this to were very much against this. Of course the Bitcoin paper starts out with:
> A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
I suggested that you could have different 'banks' cross signing each other and building a network of trust in the same way the clearing houses used to do. Banks and their costumers would only accept currency from trusted parties.
You could run around with your wallet, potentially being filled with a notes from a whole bunch of different 'banks'. Seems to me this would make tracking very difficult. It would allow lighting fast payments and unlimited amount of transactions between parties.
Our discussion often ended with the suggestion that he was not totally convinced but that it would be a great use-case for side-chains. This seems at least partly something like I suggest, just as a 100% reserve only system as I understand it. This might have some uses but for me, doesn't fix the underlying issue with Bitcoin when considering it as the reserve currency for a nation state.
I would love to see a warrant where the IOU are unlimited and backed by some portfolio of other assets. This would allow bitcoin to truly serve as the backbone of a modern economy. Just like gold combined with IOU based banking became backbone of modern economy.
P.S: It highly unlikely that my ramblings from all these years ago influence this project. I don't want to suggest that it did. I just found it interesting.
P.P.S: The person I used to argue this with also suggest I join Etherium crowdfunding and I refused. So clearly I am the idiot here.
I universal currency would probably emerge from market interaction, just as gold emerged. You could still use it for something else, but there would be a day-to-day standard.
If you could then tie this to some sort of stock market that is denominated and actually does its trading in that same currency, it would be great, but for now that seems to be a fantasy.
My original comment is mostly based on "The Theory of Free Banking: Money Supply under Competitive Note Issue" by George Selgin. There is of course a lot more surrounding literature.
I've found that talking about "credit money" explicity is problematic because most people - especially in the crypto world - don't understand what money really is. They believe it is, or should be, some kind of token with "intrinsic" value. But history suggests otherwise becuase the vast majority of monies were credit instruments and the system we have today is a credit based system, it's just heavily centralised around central banks. I believe that one could make a better system by liberalising who can create credit. The problem ultimately boils down to reputation scoring and tracking.
I'm not saying that "intrinsic value" coins such as gold coins were not used. Of course, they were! Particularly in situations where relationships were ephemeral or not long lasting so maintianing a credit ledger wasn't possible. However, now we have the technology to maintain a credit ledger for the whole World so instinsic value tokens/coins are not necessary anymore. In that light, I believe the current iteration of crypto really isn't very useful for anything other than facilitating a big casino.
In the meantime, have a read of this great paper [1] by a British Diplomant called Alfred Mitchell-Innes. He wrote two papers and this is the first one and I think it's the best paper on "what is money". Enjoy!
[1] https://www.community-exchange.org/docs/what%20is%20money.ht...
The "Great Moderation" is the triumph of forced central banking. They've tamed the business cycle. But you can't get something for nothing. Fixed inflation rates have stabilized the economy by protecting decaying firms and suppressing startups. It's even done the same for demographics. From stability came structural stasis, came a decline. With fixed inflation, the equilibrium interest rate is now negative. CBDCs and "degrowth" are coming soon to enable that and protect the establishment at all costs.
The Austrians are always right. We need free banking, we need a business cycle, but it's bitter medicine.
The reason governments these systems abolish these system is actually not really failure but control and making money.
The US in particular has a horrifying history of banking, more so then pretty much any country. The US never had Free Banking as described in my post.
The US has state banks that were allowed to issue notes (the regulation deepened on the states). Most state banks had to hold state bonds. During the Civil War the US created Federal banks and those had to, not surprisingly, buy federal bonds to back all notes. Then a tax was created to make state bank note issue unprofitable and soon only federal banks issued notes.
This was catastrophic because after Civil War the federal government tried to eliminate national debt, and that basically made banks unwilling to issue more currency.
In the US the Great Depression lead to a massive wave of bank failures. The US had a horrible banking system with literally 10000+ mostly tiny banks, this was mostly because the US had banned branching. These banks were also not allow to issue notes as I described above. Literally 1000s of these failed. All these banks were small not very diversified in their assets.
The Canadian economy had a allowed branching and had asset-back note issue I described. In Canada you had a low number of highly diversified banks that controlled their own note issue. Despite the Real GDP of Canada dropping, as US Nr.1 trading partner this was inevitable, non of these banks failed. So while the US had literally 1000s of failing banks, Canada had non.
The Central bank in Canada was really introduced a few years later because modern countries just had to have one. There was no instability.
The other well studied system, Scottish system also didn't collapse in bank runs. In fact bank runs were very uncommon, and usually triggered early because of the clearing system I explained. Bank runs happen usually when banks actually were going insolvent. In such a case, note holders had priory and in most cases got their money back. At that point the stock holders actually were partially liable (something we could reintroduce),
What happened in the Scottish system is that they never actually made note issue illegal. Rather they made it illegal for new banks to issue notes. So basically you had a number of banks that could do it, but nobody else. Over the next 100 years or the numbers would slowly drop as banks merge and so on. Eventually the Scottish system basically absorbed by the English one.
There are other cases we could go threw. The worst ever systematic banking failure of such a system was in Australia. This however was case where Australia was highly depended on English system and the failures started there and spread threw-out the empire.
> The "Great Moderation" is the triumph of forced central banking. They've tamed the business cycle.
You mean the 'Great Moderation' that resulted in the 2008 largest recession since 1930s?
And the Great Moderation is way shorter then the stability of the free systems.
> Fixed inflation rates have stabilized the economy by protecting decaying firms and suppressing startups.
I do not think this is correct. Inflation targeting was better then what they did before, but it has horrible problems. Now they move to a flexible avg inflation target. That is much better.
However, targeting inflation is the wrong demand variable. The right one would be NGDP, because if you do that, you can automatically distinguish between supply and demand shocks rather then having to do it adhoc.
As long as NGDP is predictable, you are gone do pretty well. A free banking system would (depending on the nature of the reserve currency) create exactly that kind of long run predictable NGDP.
> From stability came structural stasis, came a decline.
I disagree. These things have far more to do with other aspects of government regulation and also cultural reason.
> The Austrians are always right. We need free banking, we need a business cycle, but it's bitter medicine.
The Austrians, first of all are not unified on this issue. Some of them support free banking, others think its was created by the devil.
If you have prolonged allocations then yes, some amount of asset deflation is necessary. However, there is ABSOLUTELY NO REASON why you should have a collapsing nominal demand while doing so.
Consider cases like 1987 stock crash. Stocks crashed, but the real GDP was not much impacted.
It is terrible idea to say 'we mis-allocated capital' now lets crash nominal demand so that we throw the complete economy into the trash. This is NEVER the correct thing to do.
Government have the same intensive. Usually banking doesn't really remain a relatively free market for very long.
Projects like XMR and Bitcoin Cash continue to be true cryptoCurrency projects, most others are scams, jokes or controlled opposition.
This model of federated multi-sig wallets is actually a cypherpunk move. Blind signatures disconnect the transaction graph, like XMR.
(Disclaimer: I work for Blockstream)
So the only person I would actually discard to be the real Satoshi is the one person that wants to be Satoshi the most - Craight Wright.
The following video painted quite a compelling story of why Adam Beck is Satoshi: