Date: Sat, 10 Jul 2021 01:26:14 +0000
To: "eric@voskuil.org" <eric@voskuil.org>
From: ZmnSCPxj <ZmnSCPxj@protonmail.com>
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Cc: 'Bitcoin Protocol Discussion' <bitcoin-dev@lists.linuxfoundation.org>,
 'Billy Tetrud' <billy.tetrud@gmail.com>
Subject: Re: [bitcoin-dev] Proof of reserves - recording
Precedence: list

Good morning e,

Okay, it seems to me that what you are saying is something like this:

> Proof-of-reserves would (partially) work for a "pure" warehousing service=
 (i.e. user pays some fee, service keeps money and provides proofs that mon=
ey is kept).
> However, "pure" warehousing is not what a typical exchange does (else the=
 explicit fees in their exchanges would be higher), as it takes on risk due=
 to having to deal with non-Bitcoin monopoly money (by definition, since th=
ey are *exchanges*).
> Further, with Bitcoin you can be your own warehouse (including Green-like=
 multisig schemes where you own your own keys that are part of the scheme),=
 which is an alternative choice to hiring a "pure warehouse" (i.e. Safe Dep=
osit).

Would that be a fair (if somewhat rough and undetailed) restatement?

Regards,
ZmnSCPxj

> > Good morning e,
>
> Good afternoon Z.
>
> > >     Any expectation of interest implies borrowing, in other words, a =
loan to
> > >
> >
> > the bank.
> > Perhaps this is the key point of contention?
>
> I'm not sure, but from my observations it's long been a point of confusio=
n in Bitcoiner understanding of banking.
>
> To put a finer point on it, Rothbard's criteria is a vague in a couple wa=
ys. Earnings that offset fees are also "interest" in the economic context -=
 in which he writes. So even a zero-interest account (or negative up to the=
 full cost of maintaining the account) qualifies under this criterion. Yet =
he is careful to say "implies". The arrangement may of course be explicit, =
in which case one no longer relies on implied contract, one relies on expli=
cit contract. Finally, one may "expect" no interest, and even pay fees, but=
 it may nonetheless be a loan. This is what contracts are for.
>
> If one contracts for warehousing service, such Safe Deposit, as opposed t=
o a time deposit, such as Certificate of Deposit, Savings Account, or Check=
ing Account, then one gets a warehousing service - full fees and a contract=
ual obligation to maintain 100% of the deposit. There are also money transm=
ission services that move money around for a fee. The inability to distingu=
ish money from credit (including money substitutes) and warehousing from in=
vestment (including "banking") leads directly to false conclusions regardin=
g money and banking. Unfortunately a good number of self-described "Austria=
ns" perpetuate these errors.
>
> > In cases where Bitcoin is given over to an exchange, there is no expect=
ation
> > of interest, at least in the sense that there is no expectation that th=
e number
> > of Bitcoins deposited in the exchange increase over time.
> > (There may be an expectation of an increase in the number of green-ink
> > historical commemoration papers it can buy, but the point is that the n=
umber
> > of Bitcoins held in behalf of the user is not expected to change)
> > The expectation is that exchanges earn money from the difference betwee=
n
> > buy-price and sell-price, and the money-warehousing service they provid=
e is
> > simply provided for free to facilitate their main business (i.e. broker=
s for
> > exchange).
> > Thus, the expectation is that the exchange provides a warehouse service=
,
> > not a bank service, and this service is provided for free since it enab=
les their
> > real business of earning from bid-ask spreads.
>
> I'm not aware of what are people's expectations, nor would I judge what q=
ualifies as someone's "real" business, but a warehouse that facilitates tra=
des for a fee is of course a possible business model. PayPal's intended (re=
al?) business model was to earn from the float. That didn't pan out, becaus=
e people didn't retain money in their transmitter service.
>
> Exchanges that deal in monopoly money must move this through traditional =
finance. This incurs all manner of risk. When someone sends them monopoly m=
oney, there is no crypto-surety possible. This is part of their "reserve" j=
ust as is the other side of trades.
>
> What matters is what people contract for - agree to, voluntarily.
>
> > On the other hand, not your keys not your coins, so anyone who uses suc=
h a
> > warehouse has whatever happens to the funds coming for them...
>
> One of the essential benefits of Bitcoin being that you can be your own w=
arehouse, and be your own money transmitter.
>
> But all production requires investment, which inherently entails letting =
go of your money, producing something with it, and selling it to people for=
 other money. All investment is from someone's "reserve". Full reserve inve=
stment (including banking) is an oxymoron. So whether through exchanges or =
otherwise, there will be production, risk, loss and earnings. Otherwise the=
re will be nothing at all to buy, and all money will be worthless. This ide=
a of assuring that money is fully reserved applies only to that which one d=
oes not invest (one's hoard); it does not apply to banks, or the capital of=
 any other companies. If it can help people feel better about their Safe De=
posit (warehousing), I'm all for it. But if one wants a 20% bitcoin reserve=
, one can certainly place 20% into cold storage.
>
> > 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.
>
> If they did not earn money as a bank, the explicit cost of their services=
 would be that much higher. Which people prefer is of course entirely up to=
 them. I don't know which is more likely.
>
> > Indeed, money warehousing may very well be provided by means other than
> > proof-of-reserves, such as by using multisig the way Green wallet does,=
 with
> > better security.
>
> Right, this is an aspect of using your own wallet.
>
> > Perhaps "pure exchanges" would be more amenable to such a scheme
> > rather than proof-of-reserves.
>
> Or simply pairing traders, which is of course an existing model.
>
> Best,
> e
>
> > Regards,
> > ZmnSCPxj