Bitcoin Paves The Way For A fresh Era Of Free marketplace Banking

Authorized by Nick Giambruno via InternationalMan.com,

Hal Finney was a vertical computer scientist, cryptographer, and prominent Cypherpunk who played a cruel function in the early improvement of Bitcoin.

He was 1 of the first supporters, contributors, and adopters of Bitcoin.

In short, Finney was a visionary who understood Bitcoin’s possible before always everyone else.

In December 2010, Finney Gates:

“There is simply a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for Bitcoins.

Bitcoin itself cannot scale to have all single financial transaction in the planet be broadcast to everyone and included in the blockchain.

There needs to be a secondary level of payment systems which is lighter weight and more effective. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for average to large value purchases.

Bitcoin backed banks will solv these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, any more aggressive, any more conservative. any would be fractional reserve while others may be 100% Bitcoin backed. Interesting rates may vary. Cash from any banks may trade at a discount to that from others.

I believe this will be the eventual destiny of Bitcoin, to be the ‘high-powered money’ that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will happen between banks, it is simply a seat net transfers.

Bitcoin transactions by private individuals will be as uncommon as... well, as Bitcoin based purchases are today.”

Bitcoin banking takes the “free banking” concept and makes enthusiastic improvements.

The free banking era in the US Lasted from the 1830s to the early 1860s. Minimal regulations and the absence of a central bank characterized it.

Banks were permitted to issue their own currency, known as banknotes, that circulated as money. These banknotes were supported to be redeemable on request for the gold or silver reserves they represented.

The value of these banknotes fluctuated based on the perceived solvency of the issuing bank and the distance from the bank itself, as people were little willing to accept notes from distance or unknown banks.

Simulary, Bitcoin banks hold BTC as a reserve asset and issue digital eCash notes redeemable for Bitcoin (either onchain or on the Lightning Network) anytime on demand. These eCash notes are like digital versions of the gold-backed banknotes during the free banking era, but with respective crucial improvements.

The best way to think of Bitcoin banking is as a massive upgrade to the existing custodial banking models.

Below are a fewer benefits.

• Private transactions

• Fungibility between different eCash notes

• Low barrier to entry

• Minimizing trust

• Low switching cost

• Convenient and easy to use

• Redeemable at any time

• Backup and recovery of funds

First, we gotta realize the basic structure of how a Bitcoin bank could work.

Bitcoin banks are likely to take the form of a federation.

This model reduces trust by distributing control over a group of people or entities. This Federated group issues, verifies, transfers, and administrators the digital eCash notes—but only if there is consensus among the federation members to take these actions.

The main thought of a federation is that you are reducing the amount of trust needed to run a strategy by distributing control.

The federation holds its Bitcoin reserves in a multisig wallet, a peculiar kind of wallet that requires multiple people’s authorization to spend the funds. Think of it as a safe that requires multiple keys to open.

There will likely be a wide variety of Bitcoin banking federations. any will be tiny and focused on local communities, while others will be large and given goods providing commercial-scale operations.

Naturally, there are risks with any strategy that grants on trust or 3rd parts.

Bitcoin banks have risks, too, but the main point is that they importantly reduce these risks combined to centralized systems. Specificly, you gotta trust that the members of the federation will not form a majority quorum to bargain the Bitcoin helmet in the multisig wall that backs client deposits or depot their eCash notes. I’ll discuss these and another risks later.

Here’s how it works.

Someone who wants to get eCash notes will first download the software to interact with the federaled Bitcoin bank. Then, you will send Bitcoin (onchain or Lightning) to the federaled Bitcoin bank and receive eCash notes in return.

With a federaled Bitcoin bank, you can besides sale something and receive eCash notes in your wallet. You could besides gain eCash notes from your employer as they deposit your wage into your wallet, just like they do with your conventional bank account today.

Bitcoin banking federations are means to be operational with the Lightning Network—an open, peer-to-peer network build on Bitcoin that allows for close instantaneous transactions and even zero feeds. You can usage eCash notes anywhere that Lightning is accepted.

With Bitcoin banking federations, you can retreat to another federation or your own Bitcoin wallet (onchain or Lightning) anytime on demand.

Unlike self-customy wallets, Bitcoin banking federations can aid users recover their funds if they lose access to their wallets.

Supply you want to spend your eCash with a Merchant with a different Bitcoin banking federation. This is where the Lightning Gateways Come in. They are marketplace makers who supply liquidity between Bitcoin (onchain and Lightning) and various eCash notes issued by different banking federations for a tiny fee.

When you send an eCash payment to a merchant at a different banking federation, you will send the eCash to a Lightning Gateway, which will then send the correct eCash to the Merchant. Or supply the Lightning Gateway doessn’t have liquidity in the Merchant’s eCash notes. In that case, it will find another Lightning Gateway that does, send that Lightning Gateway a Lightning payment, and then the second Lightning Gateway will forward the payment to the Merchant in its eCash note.

In short, Lightning Gateways will supply liquidity that increases the fungiability between numeric eCash notes issued by different Bitcoin banking federations.

It’s like seasonally sending a payment from PayPal to a user on Cash App, Venmo, or another platform.

If this seems complicated, don’t worry. This just exploits how a Bitcoin banking application on your telephone would work under the hood. It does all of this in the background without your input. For the user, it will be a seamless experience of simply scanning a QR code and authorizing a payment on a telephone application.

Most net users do not know how TCP/IP or SSL works, but they usage it regular in the background as they browse the web. I anticipate a akin dynamic with Bitcoin, the Lightning Network, federaled Bitcoin banks, and various Bitcoin-backed eCash notes.

The graphic below does an excellent occupation illustrating how transactions with different eCash notes from different affiliated Bitcoin banks would work. It’s from Eric Yakes, author of The 7th Property: Bitcoin and the Monetary Revolution, which I consider the best resource for knowing the mind-bending possible of Bitcoin banking.

Source: Eric Yakes

Bitcoin Banking and Privacy

Financial privacy is 1 of the biggest benefits funded Bitcoin banks will offer over conventional customers.

Chaumian eCash is what will enable it.

The name is simply a motion to cryptographer and Cypherpunk David Chaum, who created a way to supply safety and anonymous online transactions, much like utilizing cash in the physical world.

With Chaumian eCash, users can spend money online without revealing their identity or transaction details to anyone, including the recipient or the federaled Bitcoin banks and Lightning Gateways active in the transaction.

One of the key features of Chaumian eCash is its usage of blind signatures, a cryptographic method that allows a fed Bitcoin bank to sign and validate eCash notes without actually seeing the transaction details.

In another words, a feded Bitcoin bank knows a valid eCash note has been issued and spent, but it does’t know who spent it or on what. Further, they will not be able to know individual account balances nor the identity of these who redeem an eCash note for Bitcoin.

These moving a federaled Bitcoin bank will only be able to know the full amount of BTC held in reserves in the federation’s multisig wallet and the full amount of eCash notes outside for editing.

This is simply a revolutionary improvement in financial privacy over existing custodial solutions, which offers no privacy whatsoever.

The strong privacy protections that Chaumian eCash offers enable another critical benefit: centreship resistance.

With PayPal, Venmo, conventional bank accounts, and another conventional custodial financial services, they can block a payment or cancel your account erstwhile they want under any pretext they find convenient.

With Federated Bitcoin banks, they are incapable to censor or block transactions. Thanks to the strong privacy protections from Chaumian eCash, they can’t know the details of each transaction, so they can’t block or prevent them.

In short, with Federated Bitcoin banks and Chaumian eCash, we have, for the first time, a convenient custodial solution that is restored to pricership.

Fedimint

Perhaps the most promising implementation of Federated Bitcoin banks is Fedimint.

Fedimint is an open-source protocol that allows anyone to make a federaled Bitcoin bank with a fewer clicks.

Using Fedimint to set up a Federated Bitcoin bank costs nothing. No licenses or approval is needed.

In short, Fedimint could do to the banking cartels what Uber did to the taxi cartels.

Rug Pull Risk

Like all Layer 2 solutions, Federated Bitcoin banks are a trade-off. They are little safe than self-customy but offer more convenience, release of use, and privacy, among another benefits.

Specificly, you gotta trust that the members of the federation will not collect to form a majority quorum to bargain the Bitcoin helmet in the multisig wallet that backs client deposits.

The size of that quorum will vary between different federations. The Larry the quorum, the more distributed the risk.

It could be as tiny as a 2-of-3 setup, meaning there are 3 authorized users, and 2 are needed to spend the Bitcoin reserves in the federation’s multisig wallet, or as large as a 99-of-100 and anything in between.

Rug pull hazard will naturally vary between different banking federations.

Local Bitcoin banking federations could mythate this hazard due to the fact that known community members would operate them. They would like to offer seriously legal, reputational, and physical consequences for stealing their neighbourbors’ money.

With large commercial Bitcoin banking federations, depositors could mitigate this hazard with private insurance, rating agents, and another marketplace solutions.

In any case, ongoing due diligence of affiliated Bitcoin banks will be important. Depositors will gotta do this or find individual to do it.

Centralization Risk

Trusted 3rd parts are centralized vulgarities. Governments can capture and coerce them.

This is precise how government uses the gold standard to bootstrap the fiat currency strategy into existence.

First, people utilized physical gold as money. Then, to scale, they necessarily turned to 3rd parties, like banks, that stored gold and issued gold IOUs to facilitate trade. Governments captured those 3rd parties and then graduated the gold backing from the IOUs until they were nothing more than confetti. In short, that is how the fiat currency strategy was born.

Could something akin occcur with Bitcoin?

Bitcoin has a large chance of avoiding this destiny due to its utmost portability and decentralization.

In the past, government agents could simply show up at a bank and request they hand over their physical gold reserves to a centralized depositors.

Let’s presume government agents would even be able to identify individual moving a federaled Bitcoin bank.

What could they do?

If the federalised Bitcoin bank had been set up with successful geographical and political differentiation, there’s not much they could have done. They could, at the bridge, detain the 1 individual in their jurisdiction moving the federaled Bitcoin bank.

Let’s say there was a quorum of 7-of-10, and the another 9 federation members were located in different political jurisdictions. The Bitcoin reserves would be safe due to the fact that the 1 individual the government agents detained could not scope a quorum to spend them. The another 9 federation members could then take another defensive measurement to guarantee the safety of the federation’s BTC.

In short, it would be exponentially more challenging for governments to capture, coerce, and centralize feded Bitcoin banks than it was for them to do the same with banks under the gold standard.

Hal Finney noted that there will likely be a marketplace for the various eCash notes, and their values will fluctuate lending on how the marketplace evaluates their risk. I anticipate eCash notes with more vulnerability to riskier jurisdictions to trade a discount to their Bitcoin reserves to reflect this risk.

Remember, with the open-source Fedimint protocol, anyone can easy form a federaled Bitcoin bank. This low barrier to enter besides helps mitigate the centralization risk.

With the conventional banking system—and banking under the gold standard—the government needs to control a comparatively tiny number of banks and entities. With federalized Bitcoin banks, anyone could possibly operate one—permission from a centralized banking cartel is not required.

Here’s the bottom line.

If governments are approached to capture, centralize, and coerce affiliated Bitcoin banks, I believe it would be a fruitless game of whack-a-mole.

Debate Risk

There is besides a hazard that the people moving a federaled Bitcoin bank could secretly collect to defase their eCash notes.

Consider the example of the bankrupt exchange FTX, which created many more claims to Bitcoin than the actual BTC hell in reserve. FTX account holders who thought they owned Bitcoin and did not retreat were left holding the bag.

I think respective factors will mythate this hazard with federaled Bitcoin banks.

First, the cost of switching to another federalised Bitcoin bank or withdrawing is low and can happen anytime. The release at which a powerful bank run could happen should put feat in the hearts of these approaching any department scheme.

I anticipate another market-based assets, specified as members in exclusive clubs for Bitcoin banks with the best reputations and another reputation systems, will aid minimize the department risk.

The low barrier to enter to make a federaled Bitcoin bank and low switching costs means there will likely be cut-throat competition. If the marketplace offers a Bitcoin bank is debasing its eCash notes, it will be an excellent chance for a competitor to catch marketplace share.

Likewise, speculators could play an crucial role. They will be there to short the eCash notes of Bitcoin banks suggested of engaging in defense.

Conclusion

Bitcoin is simply a revolutionary innovation for the base monetary layer and provides a foundation for a fresh financial system.

Consider the implications of the trustless Bitcoin base layer in combination with the Lightning Network, the federaled Bitcoin banks issuing Chaumian eCash, and the another trust-minimised Layer 2 solutions for scaling and convenience.

The amount of value they could unlock is astonishing. It could aid in a fresh era of free banking worldwide.

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