#finance #bitcoin

Hey Nostr,

GM.

Did you know that every currency is made up of 3 different types of money? A bit like Bitcoin has on-chain, lightning, and custodial, but the difference is that the fiat currencies aren't bound like on-chain and lightning, they're linked like on-chain and on-exchange.

Worse still, there isn't a single source of truth where we can see the total amount of currency, not even the central bank/fed. There is an arbitrary amount of all three currencies, each with specific properties making them useful for their part in the economic system, and all that matters is that there is enough of each to keep each other liquid.

There is cash: there must be enough for no one to be wanting but realising that there isn't enough cash in circulation. But cash demand is decreasing and there is certainly not enough to go around if everyone suddenly wanted to use it exclusively.

There is bank deposits: this is where the most currency is. These deposits are like ecash, only useful within the mint, can be sent between users of the mint, but of course, it's not private. There needs to be a glue to let people send payments between banks.

Enter reserves: a bit like units on the Lightning Network. Every mint has a finite amount. Unlike hopefully-honest full reserve ecash mints, banks are under no illusion or obligation to hold one to one reserves to deposit. They don't settle instantly, they settle periodically and they only need to process the difference of a batch of payments each time. Naturally, there is usually less reserves than there are deposits.

Cash and reserves makes up the total of your central bank's issued money.

Deposits make up the most of the money in the economy, but most of it is offset by debt in the book balances. Of course, debt can default, it can have a long term and the kicker is that if it can be securitized and sold to investors, then banks can use debt to issue more debt.

Debt can be paid of with debt, so that money is as good as permanent.

If a bank can't settle a payment with a bank using its reserves, it can lend reserves from another bank. The system is just built to not let anything limit anything.

Yes there are rules and regulations to make sure everything stays somewhat on track, but this is just so the central bank knows who is ussuing currency on their behalf so they can give it legitimacy.

If the economy relied exclusively on cash tomorrow, it would collapse and the money supply would shrink so hard.

If people relied on on-chain bitcoin only tomorrow, the economy might still crash as it isn't as liquid as lightning, but the money supply would stay the same.