Credit Seeking In Crypto Land


HaLin is a fan of Fermi Problems, inverting intractable issues, and conjuring up humorous solutions.

This Radical Proposal is a humorous missive on a serious topic. How credit would look like in a crypto world.

 

Crypto Earth Bank

One of the successes of paper-based monetary systems is the ability to let citizens ‘own’ other people’s money. The fractional banking system, through the multiplicative effect of credit, enables consumers and businesses to have access to capital that they do not own. This system, despite periodic boom-bust cycles, has succeeded in delivering economic ‘growth’. Cash + credit = ‘wealth’. Throw in more credit and voila! more wealth is created.

Earth Bank Crypto (EBC) currency could be created by converting the stash of current notes and coins in circulation in the world (around $ 5 trillion) and distributing it equally to the world’s 7.6 billion people. Each of us would get around $ 658 equivalent of EBC in our decentralised Earth Bank accounts. This is all the cash that each of us would start with. (This would have the happy consequence of silencing wealth inequality activists. Everyone would be equalised by a stroke of computing power).

No central bank, or governments, would be needed to play Class Teacher to keep errant students in check. Or so the idea would be, in theory.

True to our innate nature, though, several would aspire for more wealth. To satisfy our economic needs and unsubtle aspirations at wealth enhancement, we would urgently need access to cash that we did not own.

 

The Greedy Lend To The Needy

Unused crypto balances of holders could be lent out to those in need of money. Transactions could be recorded on the blockchain, so the trail identified borrowers at all times. To repay, with interest, the borrower would need more crypto. For instance, A borrowing EBC 100, would have to repay EBC 105 at year-end. The borrower would be able to repay with interest only if they managed to garner new cryptos from the existing pile. Borrowers that consume EBCs away with no thought of repayment would be in a bind to repay their crypto debts.

Some enterprising savers, meanwhile, would take to making markets themselves. They would ask for an interest as compensation for their troubles and to protect against defaults. The interest rate they would desire would vary as per varying urgency demands of borrowers. With time, demand for EBC credit would outgrow the rate of growth of EBC itself, leading to interesting outcomes.

The demand would cause the price of EBC and the borrowing rate to go up.

The insatiable growth for EBC credit, and subsequent lack of easy access to new sources of funds, would lead to a wave of defaults. Borrowers and other affected parties would blame usurious crypto lenders. They would urge the Earth Bank to print new crypto. Or let them tap into more unused cryptos, if EBC had a finite limit like Bitcoin. New EBC, or unused cryptos, would have to be passed on borrowers, so they could make whole on their debts.

This would, in all likelihood, lead to a fork. Either the Earth Bank would have to loosen its constraints, and print new EBC to bail out the world. Which would resemble the  present fractional banking system.

Or CreditEBC would come into existence.

With a sole purpose of being used as a transaction medium for EBC credit. Forks, specifically created for credit, could ‘speak’ with other crypto currency through a market observable exchange rate. Rising demand for CreditEBC would cause its price to rise. Unable to access either EBC or CreditEBC, the weakest borrowers would eventually come unhinged. Leading to defaults. And a few suicides.

Earthlings would find that this system was similar to the present system.

The decentralised Earth Bank would be in the same position as commercial banks today. Hoping that not all EBC depositors demand their cryptos back at the same time. And praying that not all borrowers went under.

Cascading defaults would lead to a systemic too-big-to-fail problem. Not unlike the present situation, where banks rely on central bank for bailouts. A consensus would be needed. Finding themselves out of a job, bands of people around the world – who earlier called themselves governments – would try to create a new role for themselves. As overseer of the Earth Bank. They would also aspire to resolve newly created inequalities. Decentralised computing power, overseen by a global band of people, would determine crypto creation. Forks of the inedible kind, built after a consensus was struck, would lead to new crypto currencies.

The blockchain sought to break free of the institutional imperialism of governments and quasi-governmental institutions.

The Earth Bank could take the Earth right back to status quo.

 


4 thoughts on “Credit Seeking In Crypto Land

  1. The more things change, the more they remain the same. But I like your way of thinking. Introduce a new currency and distribute equal amounts to everyone. All wealth differences get eliminated. If a politician was to offer this as his main plank, I wonder what will happen? Will he be swept to victory by the masses, leaving the current populism of politicians looking like amateurish attempts?

    https://polldaddy.com/js/rating/rating.js

    1. It is worth a shot, isn’t it? Would tick many boxes. Pro-masses, pro-equality, pro-technology. The here and now would look very appealing indeed. And when the bust comes around rail against the corrupt!

  2. Nice post. But I was thinking
    1) How do you get EBC if you are born after the First Great Distribution?
    2) Who gets your EBC when you pass away alone?
    3) How does Earth Bank handle EBC distribution when more people are born than those who pass away?
    4) What would happen if there is a periodic redistribution of EBC after say 70 years (average human life expectancy)?

    https://polldaddy.com/js/rating/rating.js

    1. 1) the limit could be set to, say $ 1000 per person. Or a population limit of 10 billion. This will ensure the currency is scarce. Supporting prices. Forks will inevitably develop as time passes. Tis line of thought tells you why it is so difficult to just live with a hard limit on currency. Inflation is surer than death and taxes.

      2) Will. Inheritance. All the existing legal humdrum continues.

      3) Births > Deaths. Those that die without a will will have their wallets turned into potential sources of credit. This clause will be stated upfront so the onus on writing a will rests on the user.

      4) Politics. Redistribution or forks will likely be inevitable. The pitch would tick all boxes. Pro-equality, pro-distribution pro-technology. When borrowers default blame corrupt capitalists. Rinse and repeat.

      Thanks for the interesting questions. Was hoping to latch on to fun discussion threads on this topic.

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