Subject: Re: [bitcoin-dev] Proof of reserves - recording

From: ZmnSCPxj <[email-masked]>
Date: Sat, 10 Jul 2021 01:26:14 +0000

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 money 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 they 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 Deposit).

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 confusion in Bitcoiner understanding of banking.
>
> To put a finer point on it, Rothbard's criteria is a vague in a couple ways. 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 explicit 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 to a time deposit, such as Certificate of Deposit, Savings Account, or Checking Account, then one gets a warehousing service - full fees and a contractual obligation to maintain 100% of the deposit. There are also money transmission services that move money around for a fee. The inability to distinguish money from credit (including money substitutes) and warehousing from investment (including "banking") leads directly to false conclusions regarding money and banking. Unfortunately a good number of self-described "Austrians" perpetuate these errors.
>
> > In cases where Bitcoin is given over to an exchange, there is no expectation
> > 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
> > historical 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
> > buy-price and sell-price, and the money-warehousing service they provide is
> > simply provided for free to facilitate their main business (i.e. brokers 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 enables their
> > real business of earning from bid-ask spreads.
>
> I'm not aware of what are people's expectations, nor would I judge what qualifies as someone's "real" business, but a warehouse that facilitates trades for a fee is of course a possible business model. PayPal's intended (real?) business model was to earn from the float. That didn't pan out, because 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 money, there is no crypto-surety possible. This is part of their "reserve" just 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 such 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 warehouse, 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 investment (including banking) is an oxymoron. So whether through exchanges or otherwise, there will be production, risk, loss and earnings. Otherwise there will be nothing at all to buy, and all money will be worthless. This idea of assuring that money is fully reserved applies only to that which one does 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 Deposit (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