Nostr

Fractional reserve banking backs the non-reserve fraction with loan assets. Running a mint with deficient reserves, without backing the deficiency with assets, is theft.

When you deposit money in a bank account, you are lending money to the bank to earn interest on. Theoretically, they give you banking services and a nominal interest rate in exchange. The bank lends this out, and if those funds wind up back in their own bank, they can lend against this again. If there is a business cycle, everyone loses their jobs and can't pay on the loans, those loans are "forgiven" after the collatoral is liquidated. What is left over is where "natural" inflation comes from. This is the slippery slope of fractional reserve banking, and why they are required to limit their "money printing" with a minimum reserve amount set by regulators (the Fed).

When you deposit bitcoin in a fedimint, you are trusting the federation to custody your sats for you, not as a loan, not with promise of paying interest, not with expectation the sats will be invested. The agreement is one of bailment, not banking. If the mint removes the sats from the vault without redeeming fedi tokens, they are breaking the agreement. This is theft. To enforce this agreement in court would be difficult because there is no explicit mechanism to pay a fee to the mint operators for this service, and there is no written contract for services. This is a goodwill agreement, which requires an enormous amount of trust and this may work fine in many situations.

Learn what fractional reserve banking means (not you Jack) before equating what a bank does with what Uncle Jim does.

Brunswick 1y ago

The type of agreement where the bailee is required to maintain a 100% reserve of the fungible goods is known as a "custodial agreement." In this arrangement, the bailee is responsible for keeping the exact amount of the fungible goods in reserve, without using or consuming them, ensuring that the full quantity is always available to the bailor upon demand. This is often used in scenarios involving valuable or sensitive assets that need to be preserved and protected in their entirety.

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Discussion

Marks 1y ago

Yeah. I confused the two concepts because they share similar symptoms of bank run potential.

It appears I unknowingly jumped into the middle of a bigger discussion/argument and tried to contribute without knowing the full background. :)

Thanks for keeping my terminology in check. I’m a big fan of Fedimints and am continually trying to play out their vulnerabilities and attack vectors so we can find ways to solve them or at least make people fully aware.