Hal Finney Bitcointalk Forum December 30th, 2010<\/em><\/p>\n <\/p>\n Key Takeaways:<\/strong><\/p>\n <\/p>\n There has been much debate over what the best use case of Bitcoin is. Some see it as a censorship-resistant currency ideal for countries with sovereign currencies that have inflation spiraling out of control.<\/p>\n Likely the most popular use case seen is as a digital store of value. It offers an alternative to storing value in fiat currency which will lose its value to inflation over time.<\/p>\n <\/p>\n One of the original use cases is as a widely used peer-to-peer currency<\/a>. However, the scalability limitations Bitcoin stands directly opposed to this use case.<\/p>\n <\/p>\n We have seen all kinds of propositions to tackle these scalability limitations which we covered in detail here<\/a>. One approach has been to increase the block size which has led to the controversial hard fork of Bitcoin Cash.<\/p>\n <\/p>\n A\u00a0 blog post by renowned crypto analyst Nic Carter revisited an old idea which has been around since the beginning years of Bitcoin. The idea was originally proposed by Hal Finney and is based on a full reserve or fractional reserve system developing whereby institutions hold bitcoin and issue receipts to their customers.<\/p>\n <\/p>\n Such a system would allow payments to be made free and almost instantaneously. It would apply a more efficient use of the blockchain network as a settlement layer.<\/p>\n <\/p>\n However, the idea has much opposition and has received intense backlash from some who feel the vision vastly deviates from Bitcoin\u2019s true value proposition. We explore the idea of institutions reserving bitcoin on a wide scale and explore both the potential benefits and drawbacks.<\/p>\n <\/p>\n Before delving deeper into the idea of institutions reserving bitcoin, let\u2019s explore the leading scaling solutions currently being implemented. Already mentioned is the controversial decision of implementing protocol upgrades to increase the block space.<\/p>\n <\/p>\n Many analysts including Nic Carter are convinced that this model simply does not work. The issue is that the value proposition of the Bitcoin network<\/a> requires network users to easily be able to obtain a full version of the ledger and larger block sizes result in fewer entities being capable of doing this.<\/p>\n <\/p>\n Bitcoin Cash ABC and Bitcoin Cash SV are the most salient examples of protocols that have emphasized block size increases. The chances of the Bitcoin Cash SV protocol continuing to survive has recently been brought into question amid significant drops in hash power and widespread exchange delistings.<\/p>\n \u00a0<\/strong><\/p>\n Another method being experimented with to tackle scalability is building on top of the protocol as opposed to upgrading the protocol itself. The most popular implementation built on top of the Bitcoin protocol is the Lightning network.<\/p>\n The Lightning network facilitates bi-directional payment channels to be created which use Bitcoin\u2019s blockchain as a settlement layer for opening and closing the transaction. The commonality with all solutions to scale Bitcoin is that they involve tradeoffs with what the Bitcoin protocol offers by itself.<\/p>\n <\/p>\n For example, increasing the block size results in a more centralized group of entities procuring the network. The Lightning network brings some caveats such as deferring settlement.<\/p>\n \u00a0 The idea of institutions reserving bitcoin and issuing receipts to customers, effectively bitcoin banks, has a number of interesting upsides. Bitcoin receipts could be used for payment almost instantaneously and effectively at no cost.<\/p>\n <\/p>\n It would also result in more efficient use of the blockchain as a settlement layer. There is evidence that the criss-cross of transactions between major institutions operating with bitcoin is highly inefficient.<\/p>\n \u00a0<\/em><\/p>\n But what about the elephant in the room ?<\/a>? What if the institutions do not hold the bitcoin that they claim they do?<\/p>\n \u00a0<\/em><\/strong><\/p>\n Carter (@<\/strong><\/a>nic__carter<\/a>) has demonstrated in the article a number of technological approaches institutions can apply to communicate to their customers that they hold their funds. Such practices have already been implemented by top cryptocurrency exchanges in the past<\/a>.<\/p>\n <\/p>\n While not fool-proof, they serve to provide strong assurances as to whether an institution holds or does not hold the funds that it claims. But it does not necessarily mean that bitcoin cannot be used in a fractional reserve system with these bitcoins.<\/p>\n <\/p>\n It would be likely that different institutions would hold different degrees of reserves. Some institutions would be full-reserve while others would be fractional reserve and facilitate the development of credit markets.<\/p>\n <\/p>\n \u201cA free market for reserve\/capital ratios could even develop, as depositors would be able to select <\/em>banks<\/em> with varying levels of reserves to suit their risk preference.\u201d<\/em><\/p>\n Nic Carter<\/em><\/p>\n \u00a0<\/em><\/p>\n The natural evolution of businesses is expected to apply whereby weaker, undercapitalized, and negligent businesses are pushed out of the market.<\/p>\n <\/p>\n\n
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<\/p>\nThe Mainstream Scaling Solutions<\/strong>
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Institutional Fractional Reserve<\/strong><\/h2>\n
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