Bitcoin will co-exist with many billions of tokens that will represent self-issued credit

in #bitcoin4 years ago

  • Bitcoin maximalists argue that the best token will win as it attracts more and more users due to the network effect, liquidity, security, immutability, community, developers etc…
  • Multi coiners advocate for many coins world where MariaCoin will compete with JoeCoin and there will be a few global coins and many local coins each having its own use.
  • I tend to agree with the viewpoint of Bitcoin maximalists that there will be only Bitcoin while the value of the rest will go to zero as no one will use other coins as Store of Value unless adequately compensated for the additional risk.
  • The idea is known as “Self-issued credit”. In the past, in markets, where gold supply was limited, people would issue a Credit Note to substitute for the gold. In such a note the person/company will write a credit note which can be exchanged for a specified good or service. For example: “I, John Smith, promise to work for 8 hours on 15th September 2018 in exchange for this note.” In this way, people who value John will buy such a note in advance with some discount and then use at the specified date to pay him for his work.
  • Due to the nature of such credit, such a system is trust based. In such a system bitcoin is used as Store of Value and as the ultimate measure base. It is also used for transactions where trust does not exist. However, for credit issuance and most day-to-day transactions, people use the credit notes issued by the relevant businesses. The system is similar to coupons where anyone is able to issue a coupon with a certain expiration date. Those coupons can be traded on the markets, but the coupon value is specified in Bitcoins.
  • However, one would ask — why should we complicate the matters? Why not just use Bitcoins for everything? What problem do we solve with self-issued credit? The answer is two-fold.
  • First, Bitcoin is cash and doesn’t provide any solution for credit issuance. One can imagine a bank issuing its own notes fractionally backed by Bitcoin reserves instead. However, such notes will not be backed by anything physical but only bank promises. But if holding the banknote is riskier than holding Bitcoin, one should be compensated for the risk. Now, how the bank can compensate for the risk? Can it pay interest? Not really as the bank cannot create Bitcoins out of the air. This leads us to the next issue.
  • What happens is — any credit that bears interest in the same coin is potentially unpayable. For the credit to be payable, the creditor should buy goods and services from the borrower. Then the borrower can use the profits to repay the debt with interest. However, if the debtor does not use the proceeds from interest payments to buy goods and services but instead re-invests it — loans can never be repaid as the goods producer will not be able to obtain the money to repay. In such a case the goods/services producer goes bankrupt and defaults on the loan which in turn sends shockwaves across the economy as one's obligation is someone’s else asset.
  • Let’s look at this situation where the producer uses self-issued credit instead of taking a loan from the bank based on fractionally reserved banknotes. The producer instead goes to the local bank and offers to sell say 120 Joe credit notes in exchange for 100 Bitcoins. The bank proceeds with investigating Joe’s credit history as well as his business revenues and arrives at the conclusion that such compensation is adequate. The two sides close the deal. Joe receives 100 Bitcoins which he can use finance the business operations. The bank receives 120 Joe credit notes which he sells to Joe’s customers with some profit margin. Joe customers buy the credit notes with some discount — say 95 cents on the dollar and use those to pay back Joe for goods and services he provides at 100 cents on the dollar.
  • Let’s imagine that Joe’s business has issues and Joe still has close. In such a case his credit notes will not be honored 100 cents on the dollars and Joe’s reputation will get a serious hit. However, since the credit notes cannot be used for re-investment and other loans and bear credit — no shock waves were created. No money was destroyed. Also, more importantly — it is totally clear who holds the bag — those who hold the Joes credit notes.
  • To summarize — I am Bitcoin maximalist but I do think that there will be many coins issued as credit notes. However, those coins will be backed by real goods/services and require trust.

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