Things you got wrong about Bitcoin, an occasional series.


"Bitcoin was supposed to replace banks".

No. The genesis block newspaper headline is not a critique of the idea of a bank. It's a critique (assuming it's not just a random chance/joke) of the *interaction of central banking with the financial system*. Bitcoin is a digital currency and a bearer asset. It might improve or alter the mechanisms of debt and trust between counterparties, but it doesn't remove them.

This is why "Be your own bank" was always to my mind an emphatically bad slogan for Bitcoin. It was thought up at the same time as "free transactions", another dreadfully bad marketing attempt.

People who get this: Szabo, for example. People who don't: most Core devs I've talked to, surprisingly!

The point of disagreement is more about the nature of banks than the nature of Bitcoin - in my view banks are principally about arranging credits/debts; they have a security role, but limited.

At this point you might say, not interesting, banks as safe deposit boxes is fine even if they do other stuff - so I'm wrong to argue about it.

But no - the problem is, most people cannot and will not secure their funds, specifically their life savings. They don't have the tech expertise to do it themselves, and just as important, the $5 wrench attack exists.

Hence like it or not, there will be *some kind of compromise* on centralized trust - if Bitcoin becomes a repository for savings. (3/n)

So we see that partially this is a generic problem going back into history with gold - the ordinary man cannot secure wealth, so it centralizes, hence banks.

And we see also, partially, that there are nuances and differences - Bitcoin provides an auditing function and a properly secure multisig function (a vastly underestimated innovation, this, I suspect).

So *if* Bitcoin succeeds, there will be something like banks, although they may change their character.
"BYOB" will be for the few. (4/4)

Sorry for duplicates, I messed up the threading.

@waxwing I agree, if anything Bitcoin will allow new models of banking to exist (though I suppose the most hardcore bitociners would argue that the old models will thus fail!)

Storing bitcoins very securely is a challenge, most people probably won't want that responsibility. So 'bitcoin banks' of various forms will probably come to exist, but I think its important that *the option* to "be your own bank" (in the sense of owning keys and self-validating the chain) still exists, should you want it

@waxwing I also believe there is a herd immunity that comes from people having the ability to BYOB - even if not everyone exercises it.

Any sort of rumor that wealth might be seized would lead people to rapidly move to self-custody.

The friction for moving your bitcoin to self-custody is lower than, say, moving your gold. And with multi-sig seizing a bank account becomes more pointless.


Yes but the optionality feature is not unique to Bitcoin.

You have it with gold or fiat - until the bank, or more likely the government, restricts your ability to withdraw. This could also happen with Bitcoin if banks are sufficiently centralized.

The extent you can counter-argue that scenario depends crucially on *how* a Bitcoin bank would differ from existing ones, I think.

@waxwing Good point. Is that where the addition of multisig features comes in?

When Xapo distributes keys across vaults on different continents that also helps with jurisdictional arbitrage.

I believe Casa has something like a 3 of 5 solution.


Yeah. Sorry if I just glided over your point about friction, but the thing is, the more I think about that the more it doesn't quite work; consider, if your Bitcoin bank had instant withdrawals of unlimited size, how much would you deposit there? The reason for delays is not only govt control. Even cowboy exchanges today often limit withdrawals. One bug/process failure and you lost everything, otherwise.
It's the nature of the *function* of a bank that causes friction, not just tech


In fact, I'll go further: fiat based banks are going to be lower friction than bitcoin or gold, always, because they have reversibility, meaning that they can at least sometimes operate optimistically - "pay" out, immediately, and only reverse later (of course no "finality" but good enough).

@waxwing what is the fundamental difference between a Bitcoin bank and, say, a Bitcoin hardware wallet? Although you cite the $5 wrench attack as a threat, doesn't that threat work just as well for getting you to empty your Coinbase account as your Trezor? AFAICT, the historical function of banks has been more about generating interest and fast/secure long-distance transmission of funds than it has been about securely storing funds (hiding gold is simple and pretty effective security).


Re: getting to empty Coinbase account.

Yes, that's why I said somewhere else in thread, "... consider, if your Bitcoin bank had instant withdrawals of unlimited size, how much would you deposit there? The reason for delays is not only govt control. Even cowboy exchanges today often limit withdrawals. One bug/process failure and you lost everything, otherwise.
It's the nature of the *function* of a bank that causes friction, not just tech". Even in security, there is a crucial (1/2)

... *functional* difference - who takes responsibility. That could manifest as delays/limits on withdrawals much more aggressive than with fiat.

I'm with you that "bank = security deposit box" is not right, but I was hoping to address even the argument that that function alone can be replaced by Bitcoin. It can, but it won't for the vast majority, is my contention.
Your other point is also valid, banks have other functions.

@waxwing I think you're comparing the functioning of a bank (which includes loss protections) to the functioning of Bitcoin without factoring for the different costs of the two systems. Banks generally fund the cost of their systems through costs hidden to the consumer; Bitcoin has explicit costs, but they could hypothetically be much lower for the same level of service and show up as user discounts or increased revenues, attracting users to Bitcoin if all other things are reasonably equal.

@waxwing Well, Szabo also says, on a regular basis, "trusted 3rd parties are security holes".
Imo that is a strong argument against the use of banks.

BYOB may be too complicated for most people. For now at least. But so is multisig.

@CryptoPietje Valid counterpoint.

The points I'm raising were intended to be controversial; thought about it many times over the years.

I think auditability is the main differentiator, in the realm of storage of bitcoin (not forgetting of course it has vast differences in: issuance, and non-censorship, and usage cases). Multisig also, although that one's more complicated.

BYOB for a large range of people is where I seem to differ with many.

@waxwing What do you mean with 'auditability'?

How I interpreted your statements is that fiat would just be replaced with bitcoin, but pretty much everything else stays the same.
So you'd still have the ask the bank "can you pretty please sent X amount to Wikileaks?" (answer: no)
Or when they once again gamble with your money and lose, they just steal your money. Again.

For me, bitcoin is about open access, uncensorable, programmable money (basically Antopolous' list)

@CryptoPietje Auditability here would refer to the ability to check the bank's holdings (and it can be done with good privacy properties with certain crypto techniques).

Re: everything stays the same, well that's the discussion. Every person would have the right to not participate, but at cost, just as today you can opt out of banks, but you lose some convenience, and you have to take responsibility too.

It's like 19th century gold backed banks but with auditability and guaranteed supply.


But going back to the start of the thread, there's plenty of good reasons to say that bitcoin's tech will mean the nature of such a "bitcoin bank" wouldn't be the same as a 19th century gold backed bank, and not only because of auditability. It's a "history rhymes but doesn't repeat" thing I think.


@mrauchs would be amused reading this, we had this exact discussion in Bogota last year :)

@waxwing @mrauchs Was that in person or can that be viewed online somewhere?
(so I won't waste your time doing the exact same convos over and over again)

@CryptoPietje @mrauchs

No, in person. But seriously, it would be nothing new, we covered basically the exact same points :)

@waxwing @CryptoPietje It‘s certainly worth reviewing these points on a regular basis 😉

@waxwing I like selective auditability, like monero's viewkey concept, but I consider bitcoin's current state (everything is viewable for everyone) as undesirable (privacy/security).

Banks were needed because of physical security, needed because of gold's physical characteristics (weight/size). I can walk around with $1b in my pocket (or head) in digital gold without anyone noticing. The physical aspect made banks a necessity, but not needed with bitcoin and that allows to do things radically

Right - that's the exact point I'm trying to challenge (with @PaulTroon we talked about 'friction' but it's a very related point) - the perception that because bitcoin has no physical restrictions we can remove the need for bank-as-security, I think is *in practice* wrong for *most people*. Because it's a bearer bond, you have the $5 wrench attack problem and the take-responsibility-for-very-high-tech process, which ordinary people can't do.

@waxwing @CryptoPietje

The high level concern is that institutional holders are easy targets for government fungibility attacks.

Grayscale has custody of 1% of total BTC supply and would certainly be vulnerable to requests to respect government blacklists.

@PaulTroon @waxwing
I agree and that's one of the reasons I'm not at all excited about ETFs and all that other institutional money/holders coming in.
But all the bitcoin experts seem to massively ejaculate on that thought, so I guess I'm wrong. To me it seems like "let's trade in fundamental characteristics of bitcoin for a higher fiat price"

But I'm (mostly) missing the connection between that and the earlier discussion.

@waxwing @PaulTroon
I think that's a UX problem, which is solvable. With multisig you can battle the $5 wrench attack by requiring sigs from friends/family you choose yourself. Let's call that trusted 2nd party.

I also think that assuming banks are good at digital security because they were good at physical security is weird. It's completely different and there are various cases where they screwed that up badly. With fiat they can easily revert that, but not with bitcoin.

@CryptoPietje @PaulTroon

There's no assumption that banks are particularly good at any type of security. They will be able to devote more resources to it, but more to the point: the current, typical bank, no, I wouldn't trust them with more than pennies in bitcoin, but we're talking about how things will evolve, and not about current banks. More a hypothetical future "bitcoin bank", whatever that looks like.

@CryptoPietje @PaulTroon

On multisig, I agree about it being crucial (think I said something like that in the OPs), except I remain highly pessimistic about ordinary users ability to do it right. And more complex solutions are more fragile to user failure.

@waxwing @PaulTroon

Could be.
But then I wonder what value proposition there is left for bitcoin as all the things that got me excited seem to get abandoned or (considered) impossible.

Then again, I considered the 21m limit an added bonus, so I have to conclude I really have no clue about bitcoin :-/

@CryptoPietje @PaulTroon

Auditability, and the related hard cap. The fact that transfer of it cannot be censored will not be so relevant to *most* people, but super-relevant to a few, and that bleeds through.

Pre the LN paper I always saw it as like, well, maybe everyone uses some Coinbase like entity, so most txs off chain, but the fact that you can get around any limitations still changes everything.

Also: don't think about consumers/ordinary people so much. The world is more than that.

@waxwing different.

Concentration of power (money=power) leads to corruption.
Because of physical aspects we were 'forced' to, but not any longer.
Digital security does have its own challenges though

@waxwing Banks mix different "utilities". I never used the credit utility but unfortunately have to use the transfer utility. I think most have similar experience and thats why "Be your own bank" resonates with them. I want to send money without the f**king banks! I never take a credit as far I can because I think it's a bad and dangerous idea to live on credit.

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