Thank you, it is interesting.
> But then you are just using fiat currency with an extra step
That is for me and my counterparty to decide separately, the actual transaciton is still made with bitcoin. You can also argue that as long as you use fiat to determine the value of the transaction (10 USD for a pizza converted to whatever is current exchange rate instead of 0.0xxxx bitcoin) you still are using fiat in the transaction, even if only in a secondary role.
> That's the secret, you wouldn't need a "proper bitcoin transaction". You'd open a channel with someone like coinbase, and then use that forever.
It seems I have missed now something. I open a channel and allocate a certain amount of bitcoin there for me to spend. After a while, I have bought loads of pizza, and my channel has no more "credit". How do I top up my channel if there is no single blockchain transaction to be used?
> You can use a custodial service if you want (AKA a bank which will insure your money in the event of a hack or fraud),
Interesting. How much does such bank charge for these services and what are the "banks" allowed to do with the coins thay have under custody? Can they e.g. lend them or use them in any other way? Who does insure these "banks"?
> volatility will begin to level out.
Unfortunately not. There really is no mechanism to do that. You can have a look at a historical price charts of gold [1], and you see that once there have been no central bank enforcing nominal gold price stability, the volatility has been massive (compared to what I would like to have with my savings). And gold has had much more time (and much more "market cap") for the price to stabilize. And it has not.
As a side note, I actually think that we would need additional currencies/monies (sorry, as a non-native english speaker I have never quite grasped the distinction) to the "official" ones. But the main source of my scepticism towards current cryptocurrencies is that as a proper currency, they are really bad. And almost antithetical to what I think a good alternative currency should be. (I am thinking mostly from macroeconomic perspective here) I am thinking that modern money is credit and postoned consumption (I will buy you a pizza today instrad of buying a beer and you promise to buy me a pizza tomorrow, that one pizza tomorrow is basically money that I can use when I agree with someone that actually, buy me a beer, you are going to buy a pizza to that someone instead of me. That's credit (i.e. trust). But bitcoin does not have that. Nobody is guaranteed to buy me a pizza tomorrow if I have a bitcoin. I only can hope that I find tomorrow someone that will buy my bitcoin. Another thing is that this postponed consupmtion needs to have a price (i.e. interest rate). And the biggest fault with the current monetary system is that the price has a(n approximately) zero floor due to cash. We would need to be able to set the interest rate below zero in certain circumstances to facilitate consumption to keep the economy running. But negative interest rates are as close to heresy as there is for a typical cryptocoiner - as far as I understand. And there is no way to do this, anyway, in bitcoin. And adjusting the interest rate would require the ability to adust the money supply, which, again, is antithetical to bitcoin. (Somehow it would be cool if money could be created by anyone that needs it, but I have no good ideas how that kind of money would have any value. After all, it is a bit of stupid restriction that we can't make a real world value creating transaction just because one of us does not have money)
[1]http://www.macrotrends.net/1333/historical-gold-prices-100-y...
I believe this works via the routing system. So even though you don't have any more BTC in your initial allocation, you can get some from someone else still in the lightning network. So if you have a channel open with me, and I have one with coinbase, you can pay coinbase $20 USD and have them route you $20 in BTC (through me or someone else), which you can then give to me, and as long as we are all happy, nobody needs to close the channel and add anything to the blockchain.
>Interesting. How much does such bank charge for these services and what are the "banks" allowed to do with the coins thay have under custody? Can they e.g. lend them or use them in any other way? Who does insure these "banks"?
Coinbase is the biggest one. Currently there aren't many enforced regulations in this space (and I personally welcome some that aren't just "stop using cryptocurrencies"). Currently coinbase does not "loan" out any money you deposit with them (at least they claim they don't, I haven't verified it myself, and I haven't read of anyone even attempting to do so. I'm not trying to imply something here, just trying to point out that i'm taking them for their word here), but there is no reason they couldn't. And I'm assuming that custodial services like Coinbase will eventually follow the same path as banks as bitcoin grows. As for the insurance, Coinbase insures all USD in your account under the US FDIC, and all cryptocurrency is privately insured through them. My wish is a government backed (or at least enforced) FDIC-like insurance for cryptocurrencies one day that ensures people storing their cryptocurrency with a custodial service don't need to put their faith in a single company.
>You can have a look at a historical price charts of gold [1]
That is really eye-opening. I've never looked at such a historical record of it.
> I am thinking that modern money is credit and postoned consumption...
Now this is where my understanding begins to break down. I'm not an economist, and I don't truly understand all of the factors at play here. The rest of my response here is mostly my own poor understanding of things, and should be treated as if I have no idea what I'm talking about, because I really don't...
> We would need to be able to set the interest rate below zero in certain circumstances to facilitate consumption to keep the economy running.
I personally disagree. People will always need to buy things, and people will always want. I don't buy a house on credit because the interest rate is low, I buy a house on credit because I need a house. Consumption won't stop because there is no inflation, it might slow down, but I really truly don't believe that is a bad thing in the long run.
In a deflationary system, interest rates would be significantly higher than they are now, mostly because if I'm going to give you a loan, you need to pay me more value back than my money would make just sitting around. But the key part is that if you also use that same deflationary asset, then your money will also be worth more over time at the same rate as theirs. If you truly live on the asset, then it doesn't really matter what it's value is for external transactions as long as you stay within the system. If I get paid 1 bitcoin per year, I get paid 1 bitcoin per year, regardless of whether it's worth $1000 USD or $100,000 USD. And if you give me a .1 bitcoin loan for 6% interest, I'm going to pay back .1 bitcoin + 6% interest in bitcoin.
Obviously this breaks down at the edges, but I think there will be a way around this, and if there isn't, bitcoin can conceivably adapt. The only reason bitcoin is deflationary is because the code says it has a maximum cap. If it ends up that a deflationary asset just won't work in the future, and a consensus is achieved between the majority of bitcoin users, that cap can be extended, or entirely removed. As you said, most "cryptocoiners" (i like that term!) currently treat the deflationary nature of Bitcoin as a large benefit, but if it was found to be hurting most or all involved, that tune would change quickly. I personally see it as a "necessary evil" (bitcoin needed some speculation to get off the ground, and a promise of deflation one day, combined with the "halving" of rewards for mining encouraged investment in the beginning), but not one which is core to the currency, and certainly not a value of it that is unchangeable in the far-ish future.
And that is probably my favorite feature of cryptocurrencies. Bitcoin is a democratic, trustless, adaptable currency. It can change, it can improve, it can adapt over time, and it requires a consensus from both the miners, users, and developers to make any changes. All of which distrust one another.
Okay, so I could buy BTC from coinbase without making a single blockchain transaction? I still don't quite follow how this would happen within the trustless network, though. Now, if you get your salary paid in lightning, then of course you just wait for your next paycheck, but otherwise you need to pay fiat to someone in the lightning network or make a transaction in blockchain?
> Currently coinbase does not "loan" out any money you deposit with them, but there is no reason they couldn't. And I'm assuming that custodial services like Coinbase will eventually follow the same path as banks as bitcoin grows
That is about to open an extremely interesting rabbit hole just there:) First step is for Coinbase and their customers to realize that the custodian services can be much cheaper if coinbase is allowed (very prudently) to lend the coins forward. So much cheaper, actually, that Coinbase will pay you if you use their custodian services with letting Coinbase to lend your coins forward. Second step is for Coinbase and their customers to realize that as Coinbase is very prudent, a coin at their "custody" is actually as valid token for payment as a coin in a custody of their customer. Bang. You are in fractional reserve banking, and there suddenly is no more only 21 million bitcoin denominated payment tokens, but Coinbase is able to create more of them. (And trust me, there are some really good reasons why fractional reserve banking is very tightly regulated business). The last step is, of course, to realize that it actually is burdensome to have Coinbase to link the credit creation to physical bitcoin, as they are practically a distraction in the process, so we can move to full fiat currency.
> Now this is where my understanding begins to break down. I'm not an economist,
Frankly, I doubt anyone understands money properly. It is one of the most complex and fascinating concepts I have stumbled upon (and I am no economist either). My working hypothesis is that any simple statement about money is somehow false.
> People will always need to buy things, and people will always want. I don't buy a house on credit because the interest rate is low,
But if interest rate is lower, people do buy more stuff. The companies invest more to machinery if the interest rate is low than when it is high. That is a very fundamental thing in how economy works. Further, we need to keep people buying stuff to keep those people (i.e. most of us) employed who are selling the stuff. Also people save more (which equals to buying less stuff today) if the interest rate is high. So we can adjust the aggregate demand in an economy by adjusting the interest rate. And if we have artificial limits on how to set the interest rate, we are going to have welfare losses. So we for sure would need to be able to set negative interest rates.
> If I'm going to give you a loan, you need to pay me more value back than my money would make just sitting around.
And that is exactly the problem with current money and bitcoin. You can let money just sit around, which sets the artificial lower limit to the interest rates. But the interest rate is the price for you postponing your consumption and yes, we are very used to the idea that if you agree to not buy 100 pizzas today but lend that money to someone, they are more than willing to promise you more than 100 pizzas in one year's time. But if there is nobody willing to make that promise of more than 100 pizzas, and you still want to eat pizzas in one year's time, what is so wrong with getting only 99 pizzas, if that is what the "consumption postponing market" at the moment offers? (note the distinction between fiat and bitcoin. With fiat, there are organizations, contracts and laws made for the purpose of guaranteeing that your fiat money is approximately worth 100 pizzas plus interest rate in one year's time. With bitcoin you can only hope that there is someone in one year's time willing to pay 100 pizzas for your bitcoin. (Again, same applies currently to gold)
> currently treat the deflationary nature of Bitcoin as a large benefit, but if it was found to be hurting most or all involved, that tune would change quickly.
Well, my understanding from the history of money is quite clear that deflationary monies are bad for society. (sorry, should have sources here).
> it requires a consensus from both the miners, users, and developers to make any changes. All of which distrust one another.
Apologies for being cynical, but to me that reads about "there is no practical way to make important changes in any timely manner". That's the power of democracy. You can run over minorities if needed.
You need A transaction at some point on the blockchain to start with, but then as long as you can build a network between any channels you have open, and the person you are trying to transact with, you never need to open another.
The metaphor that helped me a bit was that Lightning makes the blockchain act like a "trial" in the legal system. Just because you enter into a contract with someone, doesn't mean you need to go to court every time you speak to them. You only go to court when there is a problem. Lightning and the blockchain work like that. Once you have a transaction which gets you onto the network, you don't ever need to go back to the blockchain unless someone tries to cheat you (the way it works is if you broadcast something other than the latest transaction between us, I can broadcast a counter transaction that instead forces you to give me all the money in the contract for both sides, and sends it into the blockchain once and for all).
>First step is for Coinbase and their customers to realize...
I don't think it will ever get to the point of a traditional credit system, but will instead start with "sidechains" where coinbase can loan out money, but have it be transparent and somewhat enforceable via smart contracts of some sort. I just don't see the bitcoin crowd ever wanting to go back to fractional reserves without any mathematical checks and balances built into it.
>And if we have artificial limits on how to set the interest rate, we are going to have welfare losses. So we for sure would need to be able to set negative interest rates.
I think it only works that way because society is okay with waiting until inflation comes back. If you know that in 5 years there's a good chance you'll be able to get a cheaper interest rate, you won't buy a house now if you can avoid it. But if you know that in 5 years there is very very little chance that interest rates will go down, then the incentive to wait is lost.
Now bitcoin was designed in a way that this could have been avoided. Currently bitcoin is still inflationary, 12.5 BTC is being generated from mining every 10 minutes or so. But over time this will halve, and halve again, and halve many more times until it's fully deflationary. That slows the transition from an inflationary system to a deflationary system that won't ever become inflationary again (assuming everyone doesn't change the rules of bitcoin at some point). That gives time for the world to adapt and change, and lessens the impact. Although as you point out, it could be a rocky ride getting to that point.
>Well, my understanding from the history of money is quite clear that deflationary monies are bad for society. (sorry, should have sources here).
I don't have any sources either, but I don't think a deflationary currency has ever really been done on purpose at scale before. We have a bunch of examples of it happening by accident, and obviously it hurts, but it's never been committed to. So I think bitcoin and (some) other cryptocurrencies are a first here, and I personally believe it's worth a shot.
The whole argument for deflation vs inflation strikes me as similar to the whole idea of "tax holidays" in some countries. It's a game of chicken where companies will hold money out of the country, and will only bring it in during special periods where the government decides to lower the tax rate for something like "one day only". If companies knew the government would never do it again, they would just pay the taxes and be done with it, but because they have happened before, it's likely they will happen again, so they would rather just wait and lobby for it.
Bitcoin turns that around. Society won't stop consuming and start waiting for the next inflationary "kickstart" to the economy, because there won't be one. And they won't be able to get one, because as you said, it's extremely difficult to change the "rules" of bitcoin if everyone isn't onboard.
>That's the power of democracy. You can run over minorities if needed.
And in bitcoin, you still can in some ways, although it's less ideal. The play between "users", "miners" and "developers" can cause a stalemate, but if 2 of them gang up on the 3rd group they can often be overpowered (which is what happened with the Segwit activation earlier this year).
That is quite weird concept for me. How can I, as a borrower, use borrowed money in any meaningful way if that money is destined to go back to the lender? Why would anyone accept that as payment? To me, either you have credit (as in trust with risk that someone does not pay back) in the system, or you do not. If you do, you can count on financial engineers to build fractional reserve banking. And maybe it is just lack of my imagination, but I have difficulties seeing a modern society without credit.
Then I can decide as a user if I want to hold my currency in a "bank" that loans out 70% of their assets, or one that loans out 10% of their assets.
But but both of them are by the definition a fractional reserve bank. And I am (honestly...) not trying to be pejorative here, but it is delusional to think that customers would be better regulators of a fractional reserve bank (or a straight out scam that is just dressed up like a fractional reserve bank...) than separate independent bank regulator.
(It may be time to call quits on this discussion as the HN pending comment algorithm seems to think that this is too dep:) Anyway, thanks, at least I think I have learned a lot (even if I haven't changed my mind on the future of BTC...))
>You can just buy one when you need to transact, and then the receiver can again convert the bitcoin to a stable currency.
But then you are just using fiat currency with an extra step. The bank can still disable your card used to buy bitcoin, the bank can still decide it doesn't like you selling cryptocurrency and freeze your account. The bank still has garbage business hours and poor customer service. The benefits only work when you keep your "spending money" in bitcoin.
> Now, let's assume that an average person would need/want to top up or cash his Lightning wallet once a month with a proper bitcoin blockchain transaction.
That's the secret, you wouldn't need a "proper bitcoin transaction". You'd open a channel with someone like coinbase, and then use that forever. Generally the only time you would ever need to close a channel, is to force payment from a party that is no longer participating for whatever reason. And, it can be even less than that. If you have a channel open with me, and I have a channel open with coinbase, you can buy from coinbase and route the payment through me to you without needing to open a second channel. And the whole system is trustless, so I can't backstab you and try to steal your money, and much like how you can take hundreds of routes between 2 IP addresses, you could take hundreds of different routes between lightning channels.
Combine that with other new possible features in the future like schnorr signatures (which allow, oversimplified, multiple transactions' signatures to be combined into one signature, making most transactions be the minimum size on the blockchain).
Everyone agrees that bitcoin's blocksize will need to scale eventually, but the idea is to have it follow the size of harddrives, and not outpace them. Bitcoin won't have 7.6 billion users tomorrow, or next year, or within the next 5 years. So writing it off because it can't currently run at that scale is pointless when there are plans in place to hopefully one day get there. Whether you or I think those plans will eventually materialize is up to each of us.
>I am a bit curious whereabout in the world you are located and whether you are engaged in some kind of illegal business or is there some other reason you are targeted by financial institutions so often?
I'm in the US, and it often happens when I go out of state, and especially out of the country. If I don't notify my bank that I'm going somewhere ahead of time, they will most likely shut my card off due to fraud alerts. In one case they even shut it off because I used it twice at the same gas station near my house within 5 minutes (the first pump was broken, I pulled forward and tried it again, and like an hour later my card was locked). I'm not doing anything illegal, or even borderline illegal (no online gambling or anything frowned upon by banks), but simply using a credit card in the US in Pennsylvania on monday, and at a gas station in Florida on wednesday is enough to get my account closed and a new card shipped to my house in Pennsylvania (which is the last place I need it when i'm in Florida for another 5 days...)
>Again, where I am, I can call Visa and it is the burden of the vendor to prove that I actually bought the pizza twice. Those really are not worries to me. Especially if I start comparing that to the risk that someone hacks my cmputer/wallet/exchange account/whatever, and I definitely have no recourse on my money.
Where I live, I need to monitor my own card, as the longer I let a charge go without contesting it the less likely it is that my bank will believe me and refund it. Not to mention the amount of time I'd need to spend on the phone contesting the charge, getting mail about the contesting, following up to ensure I won't be re-charged by visa if they side with the other party, and in one case having to file a police report before they would refund my money.
And while the risk of being your own bank is difficult and risky in some ways (hacking, etc...), Bitcoin gives you the choice. You can use a custodial service if you want (AKA a bank which will insure your money in the event of a hack or fraud), or you can be your own bank. Both still let you use bitcoin with all of it's benefits.
It's obviously not for everyone, and Bitcoin is absolutely a risky "asset" to be involved with right now, but as adoption grows that volatility will begin to level out. It already has compared to the early days of bitcoin with 50%+ swings in a single day in many cases. I'm putting what I can afford to lose into it, as I really believe in the technology and what it provides, and I do genuinely think it's a better form of currency than anything else that has widespread use. It's not perfect, but it's ability to change and improve over time means that it will continue to get better, and as new usecases pop up, it can adapt and change to work with them.
If Bitcoin's value halves tomorrow, I'd be upset as a lot of potential value will never materialize for me, but I'd still use and support bitcoin, as would many others, due to the benefits it provides, and not just because of it's valuation. And that right there is why I know that it's not a ponzi scheme. This "pop" already happened once, it went from $1000 to $200 and stayed there for quite a while, but I and many others never stopped using it, and if it happens again I'll continue as well this time.