What is required to get to a sustainable banking system for end-users?

The Plaza
#1

Here is another discussion starter on how to get to a decentral bank. Not a white paper, but just some thoughts which may be used as input to a design or whitepaper. Nothing new for the crypto experts. Also loosely inspired by the document from the bank of England. Source: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q3digitalcurrenciesbitcoin2.pdf

History
How would running a decentral bank look like? We don’t want to jump into the system where NuBits/NuNet itself acts like a bank. That would just be the same model as the so called free banks from early last century which tend to over issue IOUs ( http://en.wikipedia.org/wiki/IOU ) for a quick win and eventually end in a fail. But we need a system where lending can be made possible. The answer is to bring it back to Joe Average.

Empower the people
So I think sustainable and right-sized IOUs need to come from the end-user’s their own funds based on their risk appetite and the interest paid on the free market. The IOUs need to be transparent and visible to everyone, just like in the blockchain to ensure trust. It would also provide the information the NuNet might need to either grow or shrink the total money supply.

Marketplace
So basically we need a simple marketplace (e.g. like OpenBazaar) where people can lend NuBits based on the amount of NuBits they have. We would also need a system to build trust in identities. This can be circumvented by using assets already stored in the blockchain (such as counterparty) which can be put forward as a security towards the lender. Shares can also be seen as assets.

Use case
So here is an example which might soon be possible:

Anne needs to buy a new car, but doesn’t have the cash. She does have 5m NuShares though, but is not keen to sell them. Christine has saved some NuBits and doesn’t need them for a while but the interest on NuNet is currently low and she looks how she can obtain some more. Christine offers her 20,000 NuBits on a marketplace for 5% but requests some security. Anne sees Christine’s offer and offers her 5m NuShares as security in exchange for the 20,000 NuBits and pledges to pay it back in 24 months including 5% interest. They ask Monique (3rd Party) to oversee the deal and the contract they both sign). The NuShares are put into a multi-sig address and they can only be released when both Christine and Anne’s sign the transaction when all payments and interests are settled OR by Monique and Christine when Anne didn’t settle her payments as contracted and all or part of the 5m NuShares will be transferred to Christine to settle her claim.

Assets
Instead of NuShares as security for a loan other assets can be used. Have a look at the NXT ( http://www.nxtcommunity.org/nxt-asset-exchange ) or Counterparty ( https://coinist.co/counterparty/counterparty-assets ) markets to get an idea of what kind of assets already exist. Although both unregulated, not user-friendly and relatively immature I think the possibilities are still growing and are eventually endless. As digital assets will become more important it would be great to have established and secure blockchains like Peercoin run such exchanges (check out the discussion here: http://www.peercointalk.org/index.php?topic=3594.0 as initiated by Jordan Lee).

To do
So what’s missing:

  1. A decentralised market, hopefully OpenBazaar will fill that void soon. There are already early betas floating around.

  2. A decent, user friendly, accessible and trusted asset market. Hope Peercoin jumps into this.

  3. Trusted Third Parties (TTP). There will be a market for trusted third parties which oversee the execution of contracts. The more the contracts are automated and standard, the lesser fees are required. Fees can even only be made payable when a TTP need to intervene not when the contract is executed is good order.

  4. A way to safely store contracts. This can already be done with e.g. gists on Github but we really require a secure and distributed blockchain to store them and some user-friendly ‘wallet’ to access or amend them. SunnyKings (and others) data storage side chains come into play to fill this void. The Storj blockchain might provide an interim solution but is missing the tools to manage contracts, it can only store them.

4b) A way to automatically execute smart contracts ( http://en.wikipedia.org/wiki/Smart_contract ). In order to reduce the role of TTPs to oversees contract execution developers are working on Turing complete systems (e.g. Ethereum and recently Counterparty implementing this http://en.wikipedia.org/wiki/Turing_completeness ). This basically creates logic into contracts which can be executed with a pre-set number of parameters. E.g. Only automatically release the security when 100% of the loan is paid back and more than 20 months have passed. More complex rules will be possible.

Future
As you can see a lot of developments happening in the right direction, but we are not there yet. However I think in 2015 we will see quite a few of these developments breaking through enabling a sustainable decentral banking system.

And how NuBits fits into this? Well we are providing the stable currency. Important will be to support and/or being supported on all the above systems and developments.

Just my views, hope that helps to put the pieces of the puzzle together and maybe even in developing a roadmap or the focus of this community. Keen to hear whether I missed something. I tried to provide a short overview of where we at without being comprehensive. There is a lot to tell about each item on itself, however the internet is your friend if you want to know more!

3 Likes
#2

Thanks for the nice explanation. Point 3 and 4 can be done manually by hand. Market inefficiency can be opportunity to make profit.

#3

How would share holders profit from this? and what prevent others to create the same market based on Nubits and Nushares?

#4

Open transaction website talks a lot about smart contract etc, although OT is semi-decentralized.

BTW, what’s the reason why “free banks from early last century which tend to over issue IOUs”?

Was there enough competition between them? Was their operating status crystal clear to the public?

In Hayek’s theory, issue banks(which issues money) compete each other and get themselves supervised by the media and public. Therefore, they will try their best to provide as good money as possible in order not to be discarded by free market.

#5

You are right it can, but requires the trust of those people involved. It also clashes with the user friendliness principle. It complicates things a lot. After all the market of die-hards like us is only a niche.

Profit will be in the selling of NuBits, either with transaction fees or trading fees. The network might also play a role in supporting asset markets or developing and supporting smart contracts. It is like the internet in the early days, it is not the ISP who went rich by providing internet (although there is still some decent money in it), it were and are those able to successfully provide services to the masses.

They were greedy, tried to beat the competition or had to answer demands of shareholders or all three three of them.
I’m afraid the world hasn’t changed that much since.

The supervision by the media and public is the most difficult part. History has proven that we need an enforceable legal framework to ensure people are competing fair (not cheating) and transparent (accountants).

What we are doing with NuBits defies the above logic as we are not fitting in any legal framework. Even if that works, it is likely that there will be increasing pressure and challenges from the establishment to change that. If it is not the establishment the regulated companies competing with us might try to hunt us down in an effort to take out the competition. Small missteps will be enlarged and blown up in an effort to silence us or to reduce our market-share by scaring people off. It is not if that happens, it is when, where and how severe. It is a tough world out there and NuBits is a very interesting experiment. Anyway that’s how I see it.

#6

I think point 3 (Trusted Third Parties) and 4 (store the contract) can be done reasonablly well, for a fee, by anyone who are trusted by both sides and has a few MBs of disk space, because there is little actual work and risk involved. For example since I trust Fuzzybear’s escrow service and I’d trust his TTP service, too. The process of TTP can be automated for those transactions that can be specified in a pre-made template.

It’s not a decentralized solution, but perhaps good enough for many people.

I think the key is your point 2.

#7

Blockchain is crystal clear to the public, I believe the public will trust blockchain based DACs rather than tranditional companies where a lot of scandal can be found.

Mathematics doesn’t lie.