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Offline bytemaster

Is Fractional Reserve Banking a Ponzi Scheme? [BLOG POST]
« on: January 16, 2015, 01:47:45 AM »

http://bytemaster.bitshares.org/article/2015/01/15/Is-Fractional-Reserve-Banking-a-Ponzi-Scheme/

I worked a full day coding prior to writing this article.  I find blog writing uses different mental energy than coding.   The light wallet is coming along nicely.   In the mean time I have a new article out about fractional reserves and ponzi schemes.   
« Last Edit: January 16, 2015, 02:04:54 AM by bytemaster »
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Offline Ander

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Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #1 on: January 16, 2015, 01:55:07 AM »
Saying that NuBits is like fractional reserve banking is a much better comparison than calling it a Ponzi. :)
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Offline bytemaster

Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #2 on: January 16, 2015, 01:58:22 AM »
Saying that NuBits is like fractional reserve banking is a much better comparison than calling it a Ponzi. :)

Yes... and it opened the door for me to call Fractional Reserve Banking a Ponzi ;)
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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline roadscape

Re: Is Fractional Reserve Banking a Ponzi Scheme? [BLOG POST]
« Reply #3 on: January 16, 2015, 02:13:38 AM »
Great writeup, looking forward to plagiarizing it ;)
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Offline JordanLee

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Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #4 on: January 16, 2015, 02:50:59 AM »
Saying that NuBits is like fractional reserve banking is a much better comparison than calling it a Ponzi. :)

I created a detailed post examining whether the notion of fractional reserve has any meaning within the Nu network eight hours ago. In short, because Nu is designed for zero counterparty risk and zero reserves, there can be no fractional reserve. There is, however, the related notion of a ratio of assets to liabilities:

https://discuss.nubits.com/t/regarding-reserves-and-fractional-reserve/1126

I hope you don't think it is inappropriate to post a link to our forum here, but where you are interested in fractional reserve in the context of NuBits right now, and where I just wrote about that, it seems appropriate to bring it to your attention.

Offline bytemaster

Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #5 on: January 16, 2015, 03:08:52 AM »
Saying that NuBits is like fractional reserve banking is a much better comparison than calling it a Ponzi. :)

I created a detailed post examining whether the notion of fractional reserve has any meaning within the Nu network eight hours ago. In short, because Nu is designed for zero counterparty risk and zero reserves, there can be no fractional reserve. There is, however, the related notion of a ratio of assets to liabilities:

https://discuss.nubits.com/t/regarding-reserves-and-fractional-reserve/1126

I hope you don't think it is inappropriate to post a link to our forum here, but where you are interested in fractional reserve in the context of NuBits right now, and where I just wrote about that, it seems appropriate to bring it to your attention.

Thank you for posting your thoughts and for engaging in discussion.  I think it will be beneficial for all.

I understand the principle that technically NuBits are not a liability of any single individual, but to remain valued at $1 means that there must be someone, somewhere, with $1 worth of assets ready to accept an ask of $0.999 for every NuBit in circulation.   If those assets do not exist then the system as a whole is insolvent. 

There are two ways to get those assets:  NuShareholders and their elected custodians can be *TRUSTED* to bring the bids  AND general market participants that believe in the system.   
The general market participants cannot be relied upon "long term" because their trust may waiver. 

This means that the only thing that matters is Assets at the disposal of NuShareholders.   These assets are BTC, USD, etc held by individuals that could be confiscated or stolen  AND the NuShares themselves which may be diluted as necessary.     

Obviously you cannot use the market cap of NuShares as a basis of solvency because it is based on the spot price where there is relatively little depth.   If you attempted to dump $2 million worth of NuShares to buy back the NuBits in circulation I suspect you would be hard pressed to find buyers.  Obviously your system as a whole has a range of assets and probably holds a large number of NuBits itself and thus the total liability of your system is likely much less than the 2 million stated on coin market cap. 

I would be very interested to know how many NuBits are held by parties other than your market making custodians or NuShare insiders ready to support the peg?

So while technically you say there are no "reserves" that is only true legally but not true practically. 




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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline fuzzy

Re: Is Fractional Reserve Banking a Ponzi Scheme? [BLOG POST]
« Reply #6 on: January 16, 2015, 03:37:31 AM »
Is it safe to say by this point that we could have a hangout with Jordan and Bytemaster to have a grown up, rational conversation about this?

I want all cryptos to uplift humanity and we are all walking this path together, learning and evolving in hopes of trying to make the world a better place overall for those here now and those in the future.  In light of this I think it would be valuable for all of us to consider having a hangout specifically on this topic where both viewpoints can be clearly and fairly represented. 

I would personally love to see this next hangout be one wherein Jordan visits our mumble server and brings any and all community members who would like to participate in an open discussion.  There is no reason why Nubits/NuShares couldn't find a way to fix these problems if in fact we come to a consensus that they are valid.

Please consider it.
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Offline Stan

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Re: Is Fractional Reserve Banking a Ponzi Scheme? [BLOG POST]
« Reply #7 on: January 16, 2015, 03:52:10 AM »
I tried to start a similar new discussion on this article over at bitcointalk.

https://bitcointalk.org/index.php?topic=913075.msg10171481#msg10171481

If you visit, please do so with the intention of making friends.

 :)
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Offline JordanLee

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Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #8 on: January 16, 2015, 04:21:08 AM »
Obviously you cannot use the market cap of NuShares as a basis of solvency because it is based on the spot price where there is relatively little depth.

As I understand it, Nu and Bitshares are quite similar in this regard. In Bitshares, if a margin call is not met, it causes a liquidation, I presume, which due to limited liquidity would reduce the value of all collateral.

I would be very interested to know how many NuBits are held by parties other than your market making custodians or NuShare insiders ready to support the peg?

We are developing automated reporting to make this figure publicly available in real time. While I don't have access to real time figures, there are almost certainly between 500,000 and 1,000,000 NuBits out in the wild right now.

So while technically you say there are no "reserves" that is only true legally but not true practically.

There are some reserves right now. My point is that because reserves equate to counterparty risk and are not necessarily useful in backing NuBits, we are aiming for 0% reserves,  not 100%.

I have an unrelated question about how Bitshares operates, if you will indulge my ignorance for a moment.  Let us suppose I purchase BitUSD, and then the value of BTS drops such that the party that went long BTS to create my BitUSD receives a margin call. The issuer does not meet the margin call, which I presume causes a liquidation. What happens to my BitUSD at that point?

Offline bytemaster

Re: Is Fractional Reserve Banking a Ponzi Scheme? [BLOG POST]
« Reply #9 on: January 16, 2015, 04:29:19 AM »

Obviously you cannot use the market cap of NuShares as a basis of solvency because it is based on the spot price where there is relatively little depth.

As I understand it, Nu and Bitshares are quite similar in this regard. In Bitshares, if a margin call is not met, it causes a liquidation, I presume, which due to limited liquidity would reduce the value of all collateral.

I would be very interested to know how many NuBits are held by parties other than your market making custodians or NuShare insiders ready to support the peg?

We are developing automated reporting to make this figure publicly available in real time. While I don't have access to real time figures, there are almost certainly between 500,000 and 1,000,000 NuBits out in the wild right now.

So while technically you say there are no "reserves" that is only true legally but not true practically.

There are some reserves right now. My point is that because reserves equate to counterparty risk and are not necessarily useful in backing NuBits, we are aiming for 0% reserves,  not 100%.

I have an unrelated question about how Bitshares operates, if you will indulge my ignorance for a moment.  Let us suppose I purchase BitUSD, and then the value of BTS drops such that the party that went long BTS to create my BitUSD receives a margin call. The issuer does not meet the margin call, which I presume causes a liquidation. What happens to my BitUSD at that point?

Your bitusd is untouched.  It is fully liquid and fungible.    In fact chances are you bought your usd from some else and not a short.   The collateral just has to buy any bit usd.  Could be bit usd from a new short or someone else looking to sell. 

It looks like we both have about the same real circulation.   
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Anything said on these forums does not constitute an intent to create a legal obligation or contract between myself and anyone else.   These are merely my opinions and I reserve the right to change them at any time.

Offline btswildpig

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Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #10 on: January 16, 2015, 04:29:56 AM »
Obviously you cannot use the market cap of NuShares as a basis of solvency because it is based on the spot price where there is relatively little depth.

As I understand it, Nu and Bitshares are quite similar in this regard. In Bitshares, if a margin call is not met, it causes a liquidation, I presume, which due to limited liquidity would reduce the value of all collateral.

I would be very interested to know how many NuBits are held by parties other than your market making custodians or NuShare insiders ready to support the peg?

We are developing automated reporting to make this figure publicly available in real time. While I don't have access to real time figures, there are almost certainly between 500,000 and 1,000,000 NuBits out in the wild right now.

So while technically you say there are no "reserves" that is only true legally but not true practically.

There are some reserves right now. My point is that because reserves equate to counterparty risk and are not necessarily useful in backing NuBits, we are aiming for 0% reserves,  not 100%.

I have an unrelated question about how Bitshares operates, if you will indulge my ignorance for a moment.  Let us suppose I purchase BitUSD, and then the value of BTS drops such that the party that went long BTS to create my BitUSD receives a margin call. The issuer does not meet the margin call, which I presume causes a liquidation. What happens to my BitUSD at that point?

Your BitUSD stays intact .
The market will force the short order to cover , sell the BTS in exchange for BitUSD from other players on the sell order  .
So , all this time , ordinary people who purchased BitUSD , will not even know there is a cover (no matter force or not) happened on the short order that created the BitUSD he bought in the first place .
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Offline starspirit

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Re: Is Fractional Reserve Banking a Ponzi Scheme? [BLOG POST]
« Reply #11 on: January 16, 2015, 05:31:27 AM »
I do like this blog post, nice one. +5%

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Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #12 on: January 16, 2015, 05:33:31 AM »

I want all cryptos to uplift humanity and we are all walking this path together, learning and evolving in hopes of trying to make the Is it safe to say by this point that we could have a hangout with Jordan and Bytemaster to have a grown up, rational conversation about this?
world a better place overall for those here now and those in the future.  In light of this I think it would be valuable for all of us to consider having a hangout specifically on this topic where both viewpoints can be clearly and fairly represented. 

I would personally love to see this next hangout be one wherein Jordan visits our mumble server and brings any and all community members who would like to participate in an open discussion.  There is no reason why Nubits/NuShares couldn't find a way to fix these problems if in fact we come to a consensus that they are valid.

Please consider it.

NO!!! Absolutely not!

There is no point in BM arguing about a tone of nonsense every time some knucklehead comes around with his stupid ideas...

Hell, I can do a good enough job of arguing it Jordan... if you let me do so of course... I mean, if you decide that I am no longer the only person speaking on mumble worth cutting each time I open my mouth....


Saying that NuBits is like fractional reserve banking is a much better comparison than calling it a Ponzi. :)

I created a detailed post examining whether the notion of fractional reserve has any meaning within the Nu network eight hours ago. In short, because Nu is designed for zero counterparty risk and zero reserves, there can be no fractional reserve. There is, however, the related notion of a ratio of assets to liabilities:

https://discuss.nubits.com/t/regarding-reserves-and-fractional-reserve/1126

I hope you don't think it is inappropriate to post a link to our forum here, but where you are interested in fractional reserve in the context of NuBits right now, and where I just wrote about that, it seems appropriate to bring it to your attention.

Fist off I screamed for 1/2 hour before starting to write this...

You and all the rest must realize that if 20% reserves is 80% Ponzi, your system with 0% reserves  is 100% Ponzi...
Nu is designed for zero counterparty risk - Yes, there is 0% counterparty risk  :)...as the buyer has assumed 100% of the risk buying something backed by 0% value...
NuBits is not Ponzi...Nubits is a self appointed federal reserve that issues non-interest bearing bonds of a self appointed organization

In short if fractional reserve banking is 75-80-90% insolvent, the fed is 100% insolvent... but they at least have some power to claim themselves worth it... It is 'no-interest bearing bond/obligation of the government'...Nubits on the other hand is also 100% insolvent/100% no value backing it and only have the words of the totally lost and clueless  'JordanLee' to  collateralize Nubits value... And by definition:

' A NuBit is no obligation bearing instrument [no interest including], aka promise for nothing by nobody and/or ???[JordanLee???]'


[/end rant]
« Last Edit: January 16, 2015, 05:51:46 AM by tonyk2 »

Offline theoretical

Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #13 on: January 16, 2015, 06:42:41 PM »

I have an unrelated question about how Bitshares operates, if you will indulge my ignorance for a moment.  Let us suppose I purchase BitUSD, and then the value of BTS drops such that the party that went long BTS to create my BitUSD receives a margin call. The issuer does not meet the margin call, which I presume causes a liquidation. What happens to my BitUSD at that point?

TLDR:  Liquidation only happens if the collateral can be sold.  If no buyers want to buy the collateral right now, there will be no liquidation until buyers appear!

The margin call causes a "cover order" to be issued on the market, it attempts to buy back the BitUSD at the feed price.  This order is funded by the collateral.  The cover order is created automatically by the blockchain.  When the cover order is matched, the liquidation proceeds:  The BitUSD bought by the cover order is destroyed, and any leftover collateral will be returned to the short issuer, less a 5% fee taken by the blockchain (treated the same as other transaction fees).

In addition, shorts expire after 30 days [1].  The same cover process happens, but in that case there is no 5% fee.

From the long holder's point of view, what does this look like?

If you are just hanging on to your BitUSD, nothing happens. 

If you place a sell order, your sell order will be matched against cover orders.

We require $3 worth of collateral to create $1 worth of BitUSD, and force the cover when its value drops to $2.  So very extreme price movements would be required to break the peg, that no reasonable, legitimate cryptocurrency with decent market cap has ever experienced.

[1] This period was originally one year, but was changed later.  Existing shorts were "grandfathered," otherwise we would have been changing the terms of financial derivative products after people had already bought them!  Since BTS price has been rocky, most of these grandfathered shorts have been margin called, but a few still exist.
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Offline Empirical1.1

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Re: Is Fractional Reserve Banking a Ponzi Scheme?
« Reply #14 on: January 16, 2015, 06:57:39 PM »

I want all cryptos to uplift humanity and we are all walking this path together, learning and evolving in hopes of trying to make the Is it safe to say by this point that we could have a hangout with Jordan and Bytemaster to have a grown up, rational conversation about this?
world a better place overall for those here now and those in the future.  In light of this I think it would be valuable for all of us to consider having a hangout specifically on this topic where both viewpoints can be clearly and fairly represented. 

I would personally love to see this next hangout be one wherein Jordan visits our mumble server and brings any and all community members who would like to participate in an open discussion.  There is no reason why Nubits/NuShares couldn't find a way to fix these problems if in fact we come to a consensus that they are valid.

Please consider it.

NO!!! Absolutely not!

There is no point in BM arguing about a tone of nonsense every time some knucklehead comes around with his stupid ideas...

Hell, I can do a good enough job of arguing it Jordan... if you let me do so of course... I mean, if you decide that I am no longer the only person speaking on mumble worth cutting each time I open my mouth....


Saying that NuBits is like fractional reserve banking is a much better comparison than calling it a Ponzi. :)

I created a detailed post examining whether the notion of fractional reserve has any meaning within the Nu network eight hours ago. In short, because Nu is designed for zero counterparty risk and zero reserves, there can be no fractional reserve. There is, however, the related notion of a ratio of assets to liabilities:

https://discuss.nubits.com/t/regarding-reserves-and-fractional-reserve/1126

I hope you don't think it is inappropriate to post a link to our forum here, but where you are interested in fractional reserve in the context of NuBits right now, and where I just wrote about that, it seems appropriate to bring it to your attention.

Fist off I screamed for 1/2 hour before starting to write this...

You and all the rest must realize that if 20% reserves is 80% Ponzi, your system with 0% reserves  is 100% Ponzi...
Nu is designed for zero counterparty risk - Yes, there is 0% counterparty risk  :)...as the buyer has assumed 100% of the risk buying something backed by 0% value...
NuBits is not Ponzi...Nubits is a self appointed federal reserve that issues non-interest bearing bonds of a self appointed organization

In short if fractional reserve banking is 75-80-90% insolvent, the fed is 100% insolvent... but they at least have some power to claim themselves worth it... It is 'no-interest bearing bond/obligation of the government'...Nubits on the other hand is also 100% insolvent/100% no value backing it and only have the words of the totally lost and clueless  'JordanLee' to  collateralize Nubits value... And by definition:

' A NuBit is no obligation bearing instrument [no interest including], aka promise for nothing by nobody and/or ???[JordanLee???]'


[/end rant]

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