Good Day ZmnSCPxj,
Thanks for sharing the idea! I read through the doc and have some concerns
that might be off the topic or outside the scope. Please bear with me.
The traditional banking system provides more than custodial holding of
funds in terms of lending & borrowing. One important function is to match
long term investments with short or variable term deposits. Alice might be
willing to make investments at time 0, but some emergency occurs and she
may need (part of) her bitcoins back at time 1 before the loan due date.
Also, in the banking system, there are usually sophisticated risk analysis
systems covering formulas, due diligence, and funds for loan defaults.
Banks can reinvest partial of what they namely have and obtain profits to
cover possible losses when borrowers cannot pay back 100%. In this way,
they are more resilient to defaults & change of collaterals' value, and
borrowers might be able to leverage 1 unit worth of collateral to get 3
units fund instead of 1.
Thank you,
Hilda
On Mon, 20 Jul 2020 at 23:40, ZmnSCPxj via bitcoin-dev <
bitcoin-dev@lists.linuxfoundation.org> wrote:
> Introduction
>
>
> In a capitalist economic system, it is allowed for an entity to lend money
> out to another entity, as long as both agree upon the conditions of the
> loan: how long, how much interest, any collateral, etc.
> This is a simple extension of basic capitalist economic thinking: that the
> owner of funds or other capital, is the one who should decide how to
> utilize (or not utilize) that capital, including the decision to lend (or
> not lend).
>
> It has been observed as well that groups of people may have relatively
> small savings that they can afford to put into investment (i.e. loaning out
> for an interest rate), but as the technological capabilities of our shared
> civilization have expanded, the required capital to create new businesses
> or expand existing ones have grown much larger than most single individuals
> can invest in.
>
> Thus, coordinators that aggregate the savings of multiple individuals, and
> then lend them out for interest to new or expanding businesses, have also
> arisen, in order to take advantage of the larger return-on-investment of
> more capital-intensive but high-technology businesses, capturing the long
> tail of small investors.
> Traditionally, we call these coordinators "banks".
>
> However, this typically involves delegating the work of judging whether a
> business proposal is likely to give a return on investment, or not, to the
> coordinator itself.
> Further, the coordinator typically acts as a custodian of the funds, thus
> adding the risk of custodial default to the small-time investors in
> addition to loan default.
> (In this view-point, central banks that provide fiscal insurance in case
> of loan default by printing new money, are no different from custodial
> default, as they degrade the monetary base in doing so.)
>
> This writeup proposes the use of features that we expect to deploy at some
> point in the future, to allow for a non-custodial coordinator of multiple
> small investors.
>
> This is not a decentralized system, as there is a coordinator; however, as
> the coordinator is non-custodial, and takes on the risk of default as well,
> the risk is reduced relative to a centralized custodial solution.
>
> Note that custodiality is probably a much bigger risk than centralization,
> and a centralized non-custodial probably has fewer risks than a
> decentralized custodial setup.
> In particular, a decentralized custodial setup can be emulated by a
> centralized custodial setup using sockpuppets, and without any decent sybil
> protection (which can be too expensive and price out investments by the
> long tail of small investors, thus leading to centralization amongst a few
> large investors anyway), is likely no better than a centralized custodial
> setup.
> Focusing on non-custodiality rather than decentralization may be a better
> option in general.
>
> A group of small investors may very well elect a coordinator, and since
> each investor remains in control of its funds until it is transferred to
> the lendee, the coordinator has no special power beyond what it has as one
> of the small investors anyway, thus keeping decentralization in spirit if
> not in form.
>
> Non-custodial Investment Aggregation
>
>
> In principle, if a small investor finds a potentially-lucrative business
> that needs capital to start or expand its operation, and promises to return
> the loaned capital with interest later, then that small investor need not
> store its money with anyone else: it could just deal with the business
> itself directly.
>
> However, the small investor still needs to determine, for itself, whether
> the business is expected to be lucrative, and that the expected return on
> investment is positive (i.e. the probability of non-default times (1 plus
> interest rate) is greater than 1, and the
