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One simple solution to Bitcoin's transaction-cost problem would be to build a banking system on a bitcoin standard. But then the bank-money transactions would not possess the same security and "pseudonymity" as ones conducted in bitcoin itself.
Indeed, Hal Finney & I proposed this kind of thing, inspired by your and Lawrence White's historical research about free banking. We now have more trust-minimized versions of this "layer 2" technology, e.g. Lightning, which is fully & more securely collateralized than mere IOUs.
Exactly, why would anybody hold BTC IOUs at par when they are riskier than the real thing. BTC credit will exist, but I don’t see it circulating as money, it’s economically irrational. This was only possible with gold because of its greater friction.
Gold's biggest flaw was difficulty of validation. That's why we ended up substituting coins for jewelry, and eventually bank note IOUs for coins. Coins were a semi-reliable way to outsource validation, and when it became too easy to counterfeit coins we switched to bank notes.
Is it the problem of validation or counterfeiting that it creates a lemons problem and therefore increses transaction frictions from information asymmetries or because it changes the supply of money if undetected?
It's mostly about transaction friction.
Link to your and Hal's proposal?
Selgin, White, Finney, Dai, and myself were on the libtech list where we discussed these ideas in mid 1998. It seems to only be implicit in my public bit gold writings, but Hal later expressly proposed it for bitcoin: https://bitcointalk.org/index.php?topic=2500.msg34211#msg34211 …
God damn it Nick. When's the book coming out?
he wrote a 9 pager about 10 years ago that was a pretty good read
Yes. I'm intrigued by LN. In principle, it could co-exist with a legacy "banking" version of layer 2, with market shares depending on the perceived advantages of each and people's preferences. But I suppose that many who prefer Bitcoin over $ would also favor LN over banks.
As banks and interlinked accounting books, LN is a network of interlinked accounting books. The difference is that the authority to move or withdraw funds is retained by the user, rather than the banks accountant.
Meanwhile, @APompliano is dribbling out "Long bitcoin, short the bankers".
..."the settlement role and widespread adoption as free-market base money [may] emerge together. In other words, while emergent base money can be used for daily transactions, that is probably not its ultimate, socially optimal role." From:https://stinsonanalytical.com/2017/12/19/bitcoin-banks-networks-bubbles-regression-theorem-state-action-part-1/ …
Nick I’ve often wondered if you ever visited Hal before he passed?
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