Date: Fri, 09 Jul 2021 23:50:45 +0000
To: Eric Voskuil <eric@voskuil.org>,
 Bitcoin Protocol Discussion <bitcoin-dev@lists.linuxfoundation.org>
From: ZmnSCPxj <ZmnSCPxj@protonmail.com>
Reply-To: ZmnSCPxj <ZmnSCPxj@protonmail.com>
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Cc: 'Billy Tetrud' <billy.tetrud@gmail.com>
Subject: Re: [bitcoin-dev] Proof of reserves - recording
Precedence: list

Good morning e,


>     Any expectation of interest implies borrowing, in other words, a loan=
 to the bank.

Perhaps this is the key point of contention?

In cases where Bitcoin is given over to an exchange, there is no expectatio=
n of interest, at least in the sense that there is no expectation that the =
number of Bitcoins deposited in the exchange *increase* over time.
(There may be an expectation of an increase in the number of green-ink hist=
orical commemoration papers it can buy, but the point is that the number of=
 Bitcoins held in behalf of the user is not expected to change)

The expectation is that exchanges earn money from the difference between bu=
y-price and sell-price, and the money-warehousing service they provide is s=
imply provided for free to facilitate their *main* business (i.e. brokers f=
or *exchange*).
Thus, the expectation is that the exchange provides a warehouse service, no=
t a bank service, and this service is provided for free since it enables th=
eir *real* business of earning from bid-ask spreads.

On the other hand, not your keys not your coins, so anyone who uses such a =
warehouse has whatever happens to the funds coming for them...

And of course exchanges need not earn money *just* from bid-ask spreads *in=
 practice*, so they are unlikely to provide proof-of-reserves either.

Indeed, money warehousing may very well be provided by means other than pro=
of-of-reserves, such as by using multisig the way Green wallet does, with b=
etter security.
Perhaps "pure exchanges" would be more amenable to such a scheme rather tha=
n proof-of-reserves.

Regards,
ZmnSCPxj

>
>     "Whether saved capital is channeled into investments via stocks or vi=
a loans is unimportant. The only difference is in the legal technicalities.=
 Indeed, even the legal difference between the creditor and the owner is a =
negligible one."
>
> -   Rothbard
>
> > You're using terms in non-standard ways. Putting money into a bank is n=
ot considered "lending" to the bank.
>
> I think it's quite clear that Rothbard considers it lending. I'm not big =
on appeal to authority, but sometimes it helps open minds. Links here:
>
> https://github.com/libbitcoin/libbitcoin-system/wiki/Full-Reserve-Fallacy
>
> > > money markets have had no reserve requirement and have a nearly spotl=
ess record of satisfying their obligations.
>
> > Lol, money markets are so new that they've had no opportunity to show t=
heir true risk.
>
> 1971, 50 years.
> https://en.wikipedia.org/wiki/Money_market_fund
>
> > In the finance world, things work fine for a long time until they fail =
spectacularly, losing more than the gain they made in the first place. This=
 is a regular occurence. Its the reason bitcoin was created.
>
> regular occurrence...
>
> "Buck breaking has rarely happened. Up to the 2008 financial crisis, only=
 three money funds had broken the buck in the 37-year history of money fund=
s... The first money market mutual fund to break the buck was First Multifu=
nd for Daily Income (FMDI) in 1978, liquidating and restating NAV at 94 cen=
ts per share"
>
> An investment loss of 6%.
>
> "The Community Bankers US Government Fund broke the buck in 1994, paying =
investors 96 cents per share."
>
> An investment loss of 4%.
>
> "This was only the second failure in the then 23-year history of money fu=
nds and there were no further failures for 14 years... No further failures =
occurred until September 2008, a month that saw tumultuous events for money=
 funds."
>
> It was a "tumultuous" month for nearly all investments. The feds of cours=
e doled out the pork, and the funds had to take it (as if their competition=
 did and they didn't they would fail due to higher relative capital costs a=
nd thereby lower rates). In the past, absent pork, they had raised money wh=
ere necessary to maintain their NAV (just as banks do, but they go to the t=
axpayer, and just as all business do from time to time).
>
> These are remarkably stable in terms of NAV. And people seem to be satisf=
ied with them:
>
> "At the end of 2011, there were 632 money market funds in operation,[19] =
with total assets of nearly US$2.7 trillion.[19] Of this $2.7 trillion, ret=
ail money market funds had $940 billion in Assets Under Management (AUM). I=
nstitutional funds had $1.75 trillion under management.[19]"
>
> The point being, that this is as close to free market bank-based investin=
g as exists in the white market. In a money market fund, the NAV is reflect=
ed in the share price, so any losses are evenly distributed - no different =
than when all those HODLers take a hit when Elon farts, and the reserve the=
y maintain has been very effective in maintaining their $1/share target des=
pite paying interest on investments. They are merely shifting market return=
s into interest, just like banks. Market returns over short periods aren't =
always positive. No surprise. The larger point being, BANKS ARE INVESTMENT =
FUNDS.
>
> > > Irrelevant.
>
> > It is certainly not irrelevant. People have been lead to believe that t=
hey can withdraw their money from their accounts. People expect this.
>
> Irrelevant, people have minds and free will and can read the contracts th=
ey are actually signing. Contracts are theactual Law associated with non-ag=
gression.
>
> > Banks are doing nothing to educate people on the limitations of that fa=
ct.
>
> Again, irrelevant. And wholly unnecessary given compulsory taxpayer depos=
it insurance.
>
> > PoR would give people the ability to see quite accurately how much rese=
rves there are and can use this knowledge to put pressure on institutions t=
o keep the reserves those people think they should keep.
>
> For all of the reasons I've stated, it's a fairly pointless exercise, but=
 people can do what they want. But if they are doing this with a deeply fla=
wed understanding of banking to start with, they will be disappointed in th=
e outcome.
>
> > > Without 100% =E2=80=9Creserve=E2=80=9D there is no way to cryptograph=
ically demonstrate =E2=80=9Csolvency=E2=80=9D.
>
> > You can show proof that you're 80% solvent, and then claim the other 20=
% is in other assets. This is, again, still useful.
>
> 80% solvent ... 50% pregnant.
>
> > > The schemes don=E2=80=99t preclude hacks, insider or otherwise, bankr=
uptcy, or state seizure, no matter what the reserve
>
> > You're right, but that's irrelevant.
>
> I'll leave that to the reader. The alternative is to use your own wallet.
>
> > But it seems like you're not interested in understanding what I'm sayin=
g or discussing these things honestly.
>
> I'm not interested in allowing flawed concepts to be perpetuated without =
question. This is just a drain on capital that could be put to much better =
use. How many times have I heard the oxymoron "full reserve banking", and h=
ow much capital has been burned on this futile exercise, simply due to a fa=
ilure to understand these concepts.
>
> > So I'm going to end my conversation with you here.
>
> While seemingly off-topic, these are things that need to be aired in this=
 community. Thanks for the discourse.
>
> e
>
> On Fri, Jul 9, 2021 at 11:32 AM Eric Voskuil via bitcoin-dev mailto:bitco=
in-dev@lists.linuxfoundation.org wrote:
>
> > On Jul 9, 2021, at 10:44, Billy Tetrud mailto:billy.tetrud@gmail.com wr=
ote:
> >
> > > there is an unsupportable leap being made here
> >
> > You think that because you're misinterpreting me. I'm in no way claimin=
g that any solvent company can prove it, I'm simply claiming that any compa=
ny can prove that they have bitcoin reserves to cover bitcoins promised as =
account balances.
>
> You can prove that in your own wallet. All other scenarios imply lending =
(which is what is implied by =E2=80=9Creserve=E2=80=9D) and lending cannot =
be 100% reserve.
>
> > > Banks (lending institutions) do not operate under any such pretense
> >
> > You seem to be saying that banks are under no legal obligation to serve=
 cash on demand to customers. While you might be right,
>
> I am, as banks are lending institutions.
>
> > again you're misinterpreting me. Banks do in fact make claims to their =
customers that they'll be able to get cash out of their account on demand.
>
> Up to the insured limit, in 7 days. This is of course true because the ta=
xpayer has insured the bank to that level.
>
> > They're called demand deposit accounts for a reason.
>
> They are time deposits, read your bank agreement. Not that it makes any d=
ifference. How the contract is satisfied is not a term of the contract, jus=
t that it is. And as I pointed out, money markets have had no reserve requi=
rement and have a nearly spotless record of satisfying their obligations.
>
> > And certainly customers expect to be able to withdraw their cash on dem=
and.
>
> Irrelevant.
>
> > > With a 100% of investment cash hoard, there is zero lending and zero =
return
> >
> > I did say "pretend" did I not?
>
> See above.
>
> > > =E2=80=9Crelate to=E2=80=9D is a far cry from 100% =E2=80=9Creserve=
=E2=80=9D
> >
> > Indeed. Again, you seem to be misunderstanding me. You're putting the w=
ords "100% reserve" in my mouth, when I never said any such thing. Proof of=
 80%/50%/20% reserves is still useful if that's the clear expectation for t=
he customer/client.
>
> Without 100% =E2=80=9Creserve=E2=80=9D there is no way to cryptographical=
ly demonstrate =E2=80=9Csolvency=E2=80=9D. And even with that, investors wo=
uld have to accept the promise that there are no other liabilities.
>
> The schemes don=E2=80=99t preclude hacks, insider or otherwise, bankruptc=
y, or state seizure, no matter what the reserve.
>
> It=E2=80=99s information, sure, but it=E2=80=99s not what people seem to =
think. If one wants full reserve banking, use a wallet. If one wants to inv=
est, the money will be spent - that=E2=80=99s why it was raised. There can =
be no covenant placed on it that will ensure it=E2=80=99s return.
>
> e
>
> bitcoin-dev mailing list
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>
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