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Another blog post, this time looking at the possibility of a fractional reserve banking system based on Bitcoin:

"We are seeing the rise of one of the first viable internet currencies where nobody is control. The growth in size, payments and goods and services offered are evidence of this. However, the future of Bitcoin may look quite different to its origins as a cypher-punk geek project."

http://www.webisteme.com/blog/?p=192

by yours truly.

"Suspicious of government, and equipped with the technical known how to dodge its influence, these hackers have collaboratively developed bitcoin to the point where it now stands as a viable internet currency."

http://www.webisteme.com/blog/?p=60

Feedback welcome

(ps. this does not constitute investment advice )

One potential obstacle to businesses accepting bitcoin is the variability of value of bitcoin against the fiat currencies those businesses have costs in. This makes it harder for businesses to plan, and would require frequent updating of prices based on latest market movements.

In the long term, as the Bitcoin economy grows, we could expect that the price will stabilise as trading volumes become larger and the price can't be moved around so much by single transactions anymore.

This led me to think that at the moment, bitcoin's most likely area of potential is donations. Bitcoin volatility is less of a problem for donations because most businesses/producers don't depend on them to meet costs. The psychology of a donation is that it is free money, and the corresponding $-value therefore matters less.

So the key for bitcoin to grow in the near future is donations, especially micro-transactions. However, this brings us some challenges:

(1) We want people who know nothing about bitcoin to consider using it to make online donations,
(2) many of these donations will be micro-transactions (pennies in return for blog posts, etc.)

The best way to approach this problem, in my view, is to set up a donation service which would handle micro-transactions outside the bitcoin network. Here's how it would work:

The site is like a "bank" for bitcoins. You can add and remove funds to a bitcoin address on demand.
Newcomers (who may not know about bitcoin or have any) can purchase bitcoins straight into their accounts.
A donation button can be embedded anywhere on the web. Clicking on that button initiates a default micro-payment to the recipient, using a cookie for authentication, or requiring authentication on a separate web page.
All accounts can send and receive transactions in this way.

Such a system would have a chance at bringing bitcoin donations to the mainstream. Keeping donations outside the bitcoin network means that newcomers don't have to download the client. Buying bitcoin straight into your account avoids having to go through the exchanges. Finally, processing transactions outside the network (in a simple database) reduces transaction cost on the network (there are currently delays reported for small transactions, while paying fees on a microtransaction makes it less worthwhile.)

Thoughts?

Welcome and glad to see someone offering real goods and services for BTC.

Great idea. Donations are a more meaningful metric of authority than quantity of posts. The challenge is to get people donating more, by (a) making it easy, (b) allowing subdivision payments.

Perhaps subdivision payments are best handled outside of the bitcoin network by a third-party, like mybitcoin or a dedicated micro-tipping service.

This could be combined with a click-able widget which automatically donated a default amount in the context of the original page.

Seems like an obvious use for bitcoin.

That's a lot of luck.

@sahtor

At 1.5 MHash/s (about twice your speed) I've generated 69 shares in 48 hours.

Fast. 

That's a bit naive - if you were starving to death, I think you would work in my sweatshop for a piece of bread, water and a cell.

If I were a decent person, I would pay you what your work was actually worth, regardless of the fact that you have no choice but to work for with me.

@Kiv

Thanks for the GUI. I've sent 0.5 BTC your way.

I don't understand the need for actual paper. If what you mean by "print paper money" is issue an electronic token representing a bitcoin, I don't think that's difficult to do. It's what mybitcoin.com does now - it is essentially a full-reserve bank with its own "money."


There are no "fake" bitcoins. There are just bank credits, redeemable for bitcoins by the bank on certain terms, or which can be used for payment or sold to third parties.

A bank could create as much credit as it wanted, or its depositors were prepared to tolerate, but it would quickly go bust if it abused this privilege.


True, but that is precisely why successful banks will need to be prudent. The problem with the banking system today is that the risk of failure is mitigated by government support, which creates moral hazard and reckless lending.


It doesn't require that everybody accept the banks' notes, just that there is enough demand for those notes.

They don't have to be "as good as bitcoins" - there's nothing to stop third parties buying up bank notes at a discount to their face value. The risk of the bank collapsing would be priced in.

I agree with you that it's risky - but the market will impose discipline on the banks, to stop them taking excessive risks, remove ones which do, and reward those that don't. Meanwhile depositors will be able to earn interest on their savings, and secure their wallets from theft.

I have a similar graphics card to you (8400 GS) and mining about 0.3 BTC a day at 1.5 MHash/s... so maybe not worth the bother.

Ditto...

Download and update your driver from here: http://www.nvidia.com/Download/index.aspx?lang=en-us

There is nothing inherently wrong with fractional reserve banking, provided the parties who enter into such an agreement understand the agreement, and assume the risk.

The problem is a state-sponsored fractional reserve system where bank notes are enforceable legal tender, deposits are insured by the Government, and banks are not allowed to fail. This creates all kinds of moral hazard, market distortions as well as inflation.

Fractional reserve banking as occurred during the decentralised "Free Banking" era in the US (1837 - 1864) - i.e. subject to proper competition and where the risks are assumed by those entering into contracts with each other, not third parties - is healthy and desirable. During the Free Banking era, bank notes were not enforceable tender, and often traded at a discount against Federal notes the further they traveled from the issuing bank.

One of the major benefits of FRB of this kind is the supply of credit not being limited by the available supply of money. If people are willing to accept a Bitcoin bank's "money" as payment it can also issue credit, which can fuel investment in the bitcoin economy. The important point is that banks which issue credit (e.g. money) improperly by lending to untrustworthy parties, businesses which aren't viable, or into property bubbles, go bust. This imposes discipline on the banks.

If bitcoin is successful this will almost certainly happen, and it will be beneficial for a number of reasons as stated by Hal and others.

What kind of graphics card is in your laptop? You probably need to download an up to date driver for it with OpenCL - assuming one exists.

Blocks which take longer than statistically expected (give current difficulty) cost the operator more if he is paying out fixed pay-per-share (since it would be cheaper to pay proportionally, than by share at said rate.)

So faster than expected blocks benefit the operator, to the extent that he has fixed liabilities based on price-per-share of 45 BTC / current difficulty.

True. I based it on the most recent block. Mostly, I am interested in how pay-per-share is determined. Based on the last block it would seem the operator would have lost out. Then there is the risk of unconfirmed blocks being paid out as well.

Not picking at all by the way, just fascinated by how it works.

If the value of bitcoin falls below the cost of mining, difficulty will fall as mining slows down. As long as there is mining to do, the market will find a difficulty level to make sure it's profitable for someone to do it. (If difficulty falls to 1, someone could just switch on their miner and claim the 50 BTC with no cost at all.)

I agree with casascius that the value creation of the bitcoin economy will back the price of bitcoin. In the long run that's what will drive demand and mining will become less important.


Agreed.