331 sats \ 21 replies \ @lightcoin 18 Apr 2023 \ parent \ on: Bitcoin Loan VS Bitcoin-backed Loans: Pros & Cons bitcoin
BTC backed loans generally need to be overcollateralized which is not fractional reserve, it is even better than "full reserve".
Full (unverifiable) reserve of Bitcoin, but not of dollars.
Leverage increases the prices of things until you pay off that leverage which brings the price back down. On a macro level, that means a depression unless you violate the social trust that made that work as money in the first place and increase the supply of money (which arguably the debt did in the first place) to bail out the lenders.
I'm simplifying a lot because I've gone over this again and again, but that's the gist.
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Maybe the CeFi lenders are unverifiable (hopefully more adopt Proof of Reserve and Proof of Liability) but those are not the only options. Here's a smart contract where you can see the full reserve, run a full node and verify yourself: https://explorer.rsk.co/address/0xf294ea272d6f8fedc08acf8e93ff50fe99e1f7e8
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You have addressed half of sentence 1 (failed to address fractional reserve of dollars) and did nothing about paragraph 2
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There's nothing really substantial to reply to. It's a narrative that is divorced from the actual mechanics of a BTC-backed loan.
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"Systems theory is the interdisciplinary study of systems, i.e. cohesive groups of interrelated, interdependent components that can be natural or human-made. Every system has causal boundaries, is influenced by its context, defined by its structure, function and role, and expressed through its relations with other systems. A system is 'more than the sum of its parts' by expressing synergy or emergent behavior."
As such the system which acts as a heating element is not divorced from the system of a water boiler, it is part of the system.
The economic impacts of debt is not divorced from the mechanics of a Bitcoin backed loan. They work and operate in the same system.
You're being intellectually dishonest.
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I am not being intellectually dishonest. Your narrative is divorced from reality.
Leverage increases the prices of things until you pay off that leverage which brings the price back down.
Price is a function of supply and demand. Debt may increase demand for a particular good (giving people the ability to afford it who previously could not) but supply can react to keep prices down. There's no inherent reason to believe credit causes an imbalance that necessitates a dramatic price increase leading to recession after credit dries up. That said, suppliers don't have to blindly follow demand either, they can inquire about where demand is coming from, sense a debt bubble, and plan accordingly.
Credit is a perfectly normal part of the economy that supply chains can adjust to according to shifting consumer demands. Yes there is some "degen" speculative activity but it can be isolated, constrained by hard limits imposed by minimum collateral ratios, with failures managed through orderly liquidation and bankruptcy processes.
Where credit becomes really systemically problematic is when its price is artificially manipulated (for example due to govt subsidies or interest rate intervention), which sends all kinds of wrong signals to the market and leads to distortions such as malinvestment and oversupply or undersupply of goods and services.
On a macro level, that means a depression unless you violate the social trust that made that work as money in the first place and increase the supply of money (which arguably the debt did in the first place) to bail out the lenders.
If the loans are over-collateralized then there's no need to bail out lenders. If borrowers aren't maintaining sufficient margin, the collateral gets liquidated before it goes underwater, and lenders get their money back.
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"How the economic machine works" by Ray Dalio explains how credit increases prices
A read of Ludwig Von Mises "Human Action" or "Money and Credit" could do you good.
Maybe this might be a quicker read to do you good: https://mises.org/library/securitization-and-fractional-reserve-banking
Generally speaking though, if an exchange of Bitcoin for dollars is an economic agreement from the start, then that should happen, but the lender of a Bitcoin backed loan does not want or hope to obtain Bitcoin and would actually be disappointed if the loan liquidated causing the lender to sell it off for what they actually want (fiat).
This is essentially the same problem that the asset backed security known as a mortgage ran into in 2008. Sure if people don't pay their mortgage, the bank gets the house, but the bank doesn't want the house, they want dollars and so have to sell it on the open market for dollars driving down the price of housing.
At the same time, before the bust, people securitizing the asset are not selling it, causing the asset to maintain or even increase in value against what's being lent against.
Now you might say "But the overcollateralization though!" but all that does increase the fuse the bomb, not diffuse the bomb.
I'll warn you now, that I am staunchly against credit creation in spite of its normalization in the modern economy. My reasoning for running to Bitcoin is to escape the fucked up system of usury.
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My reasoning for running to Bitcoin is to escape the fucked up system of usury.
THIS
"How the economic machine works" by Ray Dalio explains how credit increases prices
In the most relevant part of the video, Dalio says: "When the amount of spending and incomes grow faster than the production of goods, prices rise. When prices rise, this is called 'inflation.'"
However, he doesn't mention that in a free market economy, rising prices sends a signal to suppliers to produce more, which generally brings prices down. The real cause of long term inflation is govt printing of money, which artificially increases the supply of money causing its devaluation. Dalio does talk about this in the video, which was well explained but I begin to take issue with the analysis with regards to how it relates to BTC-backed loans. Dalio is describing a debt based economy that is "juiced up" on fake money printed by the govt. This has little relation to a BTC based economy with fully collateralized credit.
Dalio also says: "Debt is bad when it finances overconsumption that can't be paid back. However it is good when it efficiently allocates resources and produces income."
On this, I agree!
A read of Ludwig Von Mises "Human Action" or "Money and Credit" could do you good.
I have read both!
but the lender of a Bitcoin backed loan does not want or hope to obtain Bitcoin and would actually be disappointed if the loan liquidated causing the lender to sell it off for what they actually want (fiat).
With smart contracts the collateral is automatically sold off and the lender automatically receives whatever asset the debt was denominated in (usually a stablecoin of some sort).
This is essentially the same problem that the asset backed security known as a mortgage ran into in 2008. Sure if people don't pay their mortgage, the bank gets the house, but the bank doesn't want the house, they want dollars and so have to sell it on the open market for dollars driving down the price of housing.
What happened in 2008 was a correction, and corrections are generally healthy (bringing overly zealous speculators back to reality). The main problems with this correction were that first, the bubble was created by loose monetary policy set by govt and govt intervention in the housing market, and second, the govt stifled the correction through its bailouts and QE infinity which pumped the bubble right back up and set us up for another disaster that we're still living through today.
I'll warn you now, that I am staunchly against credit creation in spite of its normalization in the modern economy. My reasoning for running to Bitcoin is to escape the fucked up system of usury.
Ok. We'll have to agree to disagree. I use and promote BTC to escape fiat and starve the State. I have no problem with free market credit. It is a useful tool in my own toolbelt, and I see other people clearly benefiting from its responsible use as well.
Why would I put my BTC as collateral to get shitcions?
I just save BTC until I have enough to buy what I need.
If I do not have it, so be it, I don't buy it.
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Why would I put my BTC as collateral to get shitcions?
You could borrow BTC or gold if you want, the medium of exchange matters less than the unit of account for denominating the debt.
That's a nice austere lifestyle you live, I'm close to debt free as well. But being able to leverage assets to cover short term unexpected expenses without having to sell those assets, or to multiply wealth through smart investments without having to sell existing assets, are real benefits that lots of people use collateralized debt for.
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You'll put your bitcoin as collateral at 0%/12 month just to help others doing business or improve their life?
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No. No collateral.
Putting yourself in debt is not "improving your life", it is literally slavery.
Live with what you have, can produce and sell. This is life.
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Yes true, and I fully agree... what about no collateral? just direct lending of BTC for good?
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No.
I will never lend my BTC nor borrow from somebody else other money using my BTC as collateral.
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Just curious now. How do you see poverty ending in the future? Which tools, apart to financial education, you see useful to remove slavery and have a bitcoin circular economy?
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Free market. End of all governments. Use Bitcoin only as money
Done.
Bitcoin economy is an economy of hard working people not lazy communists living off govs subsidies.
You do not end poverty by putting those poor people into more debt... but by educating them in a free market.
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I truly believe the end of all governments will arrive when every human will have no more need and use their services.
How do you put those poor people to use Bitcoin then, if they cannot even access internet, nor have a way to access Bitcoin?