I was reading this post by Hal and I realized how he was basically talking about what I interpret as additional layers on top of Bitcoin. Was the Lighting Network being described here, or did he talk of something else?
Actually there is 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 every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.
Bitcoin backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin backed. Interest rates may vary. Cash from some banks may trade at a discount to that from others.
George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.
I believe this will be the ultimate fate 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 occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as... well, as Bitcoin based purchases are today.
When he mentions "issuing their own digital cash currency, redeemable for bitcoins". Would this look like in practice as a sidechain?
For instance, Adam Back recently talked about the new CMSTR token, which is a tokenized version of the MSTR shares (MicroStrategy, now known as Strategy), as described here:
Innovation in Trading
CMSTR introduces a novel method for trading MicroStrategy stocks directly against BTC on Liquid, Bitcoin’s financial layer for digital asset issuance.
The unique peer-to-peer tradability of CMSTR, combined with its 24/7/365 trading availability, also opens up new opportunities for out-of-hours price formation strategies for MicroStrategy stock.
So in a way, holders of Bitcoin are being the bank, and CMSTR is the issued digital currency. Would this meet the criteria described by Hal?
And speaking of banks, in this context, Strategy would be the world's biggest bank, since they are the public company with the biggest holdings of Bitcoin. Considering the unknown possibilities of this in the future, the stock may be undervalued the current mNAV premium of under 2x.
I was also considering ETF's serving as banks. BlackRock is filling for in-kind transactions. I would still claim that Strategy would be a better bank. And so those companies would compete with each other and an interest rate would emerge as described by Selgin. In this sense, I was wondering how does the software for all of this look like. I think Strategy should hire people such as Adam Back and others and try to work this angle to monetize their massive Bitcoin stacks. This may be on their plans and right now they are still focused on acquiring more Bitcoin with intelligent leverage through the convertible bonds, ATMs and other methods.
I believe Strategy may play a big role in Bitcoin in the future that is not priced in. It's still seen as a Bitcoin proxy alternative to ETFs. I think Hal Finney described there what they are going for +1 decade ago, but how the sofware will operate is not clear to me, I would like to know if anyone has some ideas for this.