Precisely the failure of crypto is thinking that people will follow "fundamental crypto values" and underestimating the power of convenience and ignorance. "Traditional financial institutions" are inevitable in crypto.
But at least in crypto I have the OPTION of storing it myself.
Also, if I do decide to use a custodial provider, I can choose to use a provider that publishes proof of reserves [0], giving me more confidence in the provider.
> But at least in crypto I have the OPTION of storing it myself.
You have the option with Fiat too - you can get paper currency and store it yourself in a secure location. $10,000 can be stored in $100 bills in as little as c0.03 meters^3.
Using a bank is much more convenient to store Fiat though if you want to buy/sell things, much like using an exchange to store Crypto is much more convenient if you want to trade crypto (because let's be honest, not that many people are using Crypto to buy pizzas!).
Storing a 12/13 word string in your head for a cold wallet puts it into territory a lot closer to a bank account, and in the US normally words in your head can't be seized via court order (there are some exceptional circumstances, but they're far more limited than freezing bank accounts).
I think it's closer to hiding a pile of money personally.
The security is based on you remembering a 12 word string or geolocation, and the string/geolocation can't be siezed via court order (other than exceptional circumstances, or by finding the location/keys).
The 'storage' in both instances is decentralised. If you forget your 12 word string or geolocation, you lose your money.
Banks on the other hand:
* Provide convenient and safe access
* Will invest your money (in exchange for interest).
* Allow you to reset your credentials if they are forgotten (by proving identity)
Clearly the advantages and disadvantages have both overlapping and mutually exclusive elements. For this reason It makes sense to me that some may choose to diversify their holdings by taking advantage of both. To me relying fully on the bank doesn't seem safe at all, as the IRS and other agencies have been known to arbitrarily seize accounts based on absurd claims of 'structuring' even for sub 10k deposits [0]. Crypto is volatile, and you can forget your seed string, but nearly impossible to seize if appropriate precautions taken. Local value like land/durable goods retain value largely as long as you can defend them by force, but are poor choices when fleeing.
As time moves on it's clear to me all these assets are becoming important members of the financial landscape. If crypto were merely a degraded version of the dollar, then I don't think so many people would use.
> You have the option with Fiat too - you can get paper currency and store it yourself in a secure location. $10,000 can be stored in $100 bills in as little as c0.03 meters^3.
That's really not the same though. With crypto I can store on a hardware wallet that requires a pin to unlock (and resets after 3 attempts) with a backup seed stored elsewhere (potentially split up in n of m shares). How do I backup my cash? How do I lock up my cash in a similar way?
In addition, I can setup "smart" wallets that require an approval from another person to initiate the transfer. Or forces a cooldown period on transfers. None of this is possible with cash.
You buy a vault or a safe, which you can access with a 'pin-code' (in the fiat world this is called a combination lock). Safes come with two keys, which allows you to keep a backup of your 'secret' elsewhere, and you can also insure the cash inside if you want to pay for a full 'backup'.
In addition, "smart" safes and dual lock safes are available which have two keys, mean you need approval from another person to initiate the transfer.
It's not an exact 1:1, but you can hardly say that you don't have the option of storing Fiat by yourself.
crypto has a lot of traits of a bank without the bank. Fast transactions (as opposed to carrying money to different locations), secure storage (as compared to having guards for your hoard of gold), it does not rot/burn (if you backup keys adequately) and many others.
All of those are more convenient than storing dollar bills or gold bars. So, yes, fiat has options, crypto is another kind of option and probably the most convenient for self custody, hence a very good one to avoid trusting institutions.
The problem with fiat is a completely unknown monetary supply function. Gold makes a lot more sense IMO in your scenario as there's a finite amount in and on the earth, and it would take a scientific breakthrough to economically create more than that.
That's nice, but it's unrelated to the issue I'm talking about. If we care about crypto widespread usage, we have to look at what most people will do, and most people will choose convenience and won't have enough knowledge/interest/time to make informed decisions. Relying on "but you have the OPTION to do it properly" just leaves all those people behind and vulnerable to scams and situations like this. And ultimately, as the parent comment says, crypto will just speedrun financial history and find out why regulations exist.
Fractional reserving is taken as something that is good and wonderful, but before you had the fed who could print money at will, you had banking crashes caused by it on a regular basis.
In a fixed money supply currency, fractional reserve banking should be illegal and banks should instead make money off fees. Venture capital should put their own money at risk to invest in the economy. How will people afford houses though? The housing market booms and busts because of the wildly fluctuating availability of credit caused by the money multiplier rapidly creating and destroying money which is tied to the fractional reserve banking concept. Homes would be drastically cheaper and people would actually be able to save to buy them if it weren't for the huge supply of rapidly created and later contracting credit available to buy them. Things we buy with credit like housing and education have gone up steadily in price, while things bought with cash have not.
The fractional reserve people are so sick of crypto, that ,in one platform, you can buy bitcoin but you can't send it to a crypto address. You have to get your friend on the platform, you can send it to them, and then they can convert it back into fiat. It's ridiculous, you're basically just buying and selling a security that tracks Bitcoin and not Bitcoin itself.
I can't really follow the comment. You seem to start a thesis about
>In a fixed money supply currency, fractional reserve banking should be illegal and banks should instead make money off fees
Which, ok... But then jump to
>The housing market booms and busts because of the wildly fluctuating availability of credit caused by the money multiplier
Which seems to be a thesis about our current world. I can't figure out the connection between them. Are you saying this is evidence of why the first thesis is correct? But USD is not a "fixed money supply currency", which was how we started out.
I understand that easy credit induces demand for housing which has inelastic supply and somewhat sticky prices. This doesn't seem to be a problem of Fractional Reserve banking though. The VCs in your proposed system will still invest in mortgages as a fairly safe bet, because people are highly motivated to have a place to live.
And mortgages are an important tool so people have a place to live _before_ saving for 30 years. Given our current population dynamics and everything else...
I remember when WikiLeaks first decided to accept Bitcoin's for donations. Nakamoto cautioned that Bitcoin was not mature enough fr something like that.
I think that the problem with the Cryptocurrencies movement has been that the use peopel want to give to it has surpassed the technological advances that it provides. At some point, the ETH network will get there, providing "trustless" alternatives for a lot of the stuff that CeFi services are giving. But that is still several years away.
And at the point that the ETH network provides its alternatives, centralized services will have better products, more users, and more features simply because building centralized services is far, far easier and less time consuming than building decentralized ones.
> Well yeah - but they still won't be decentralized.
But people don't care too much about that. If so many crypto users, who we can assume are more informed and care more about decentralization than the average person, massively flock to centralized exchanges, why would the general population use decentralized services if they're worse?
I love this observation, because I think it's the perfect wedge point. Will most people fail at this? Yes.
But -- will every single entity that actually does follow "fundamental crypto values" be destroyed? Almost certainly not. That's where the good (and healthy) action is. Follow THAT, everyone.
Yes, because DeFi never suffers from collapses or hacks. Nobody every drained a DAO with a flash-loan, or used one to cash-out illiquid assets with no intention of paying it back... DeFi is as much of a joke as the rest of the ecosystem.
Those stories about smart contract programming errors leading to money getting permanently frozen are quite scary. Though admittedly in the grand scheme of things they seem to have “only” lost millions of USD, not billions.
Yes, it's a risk. If a contract or protocol is several years old, processing billions per day, and the code is un-upgradeable, you might say the risk is lower.
I'd rather gamble with Uniswap protocol risk than FTX human fraud and greed risk.
Great, you can point to some that haven't been hacked, exploited or just plain collapsed yet.
You said "day traders on FTX are learning first hand the value of DeFi", but DeFi is just as much of a shitshow as the rest and has had just as many collapses.
Also, if I do decide to use a custodial provider, I can choose to use a provider that publishes proof of reserves [0], giving me more confidence in the provider.
[0] https://www.kraken.com/proof-of-reserves