The bank borrows 100 BTC to some party for a month for 3 BTC

there is a simple legit way to generate interest on Bitcoin without risk: borrowing it for shorting.

The bank borrows 100 BTC to some party for a month for 3 BTC. It gives 2.5 BTC to the person depositing the BTC and keeps 0.5 BTC as fee.

Sombody wants to short BTC. It borrows 100 BTC, paying 3 BTC for this privilege to the bank. It sells the 100 BTC. One month later it buys the BTC back (hopefully for a lower price) and gives it back to the bank. The profit covers the commission.

The central banks do this with gold for example, earning interest with zero risk. This assumes no counter-party risk, but this is what contracts are for. Of course, in Bitcoin world everything flies, no contracts needed

I keep hearing variations on this theme -- like no contracts or security or regulation is possible with bitcoins. It is, and I imagine many transactions eventually being kept in a regulated and insured bitcoin bank for example or very detailed legally binding contracts written between involved parties. There is nothing about bitcoin that prevents such legally binding contracts from being formed and enforced.

As far as a bitcoin bank, there are a variety of ways such a bank could generate an interest rate. Certainly speculating in other markets could be part of it and there is a possibility that the bank could take a loss. Same with lending bitcoins out at interest but having enough total capital to cover a "bank run". I would not entrust my coins in a bitcoin bank unless it was clear what our legal arrangement would be and what their liability would be in case of loss of my funds and how that would be enforced though.

 

 

You could absolutely run a bank, but I would only put my money in it if it did NOT use fractional reserve practices

I.e. there are two types of accounts at this hypothetical bank, one type that is essentially a checking account, generates no interest and the depositor actually pays a small fee to have it sit there (maybe .2% or 10BTC, whichever is less monthly) - The bank then secures the funds, insures the deposit (if the bank gets robbed, the bank is responsible for replacing deposits since protecting them is its primary job here), and collects the fee for holding the money.  This money is NOT lent out.

The other type of account would be the time-deposit account, as described by someone earlier - Basically by depositing your money for a given legnth of time, you are lending it to the bank who pays you interest for it (This could be as high as 10%, depending on competition for investable BTC vs. number of projects/individuals seeking loans), and then the bank lends it out to one or many participants, again for a length of time no longer than the term of the deposit.  The bank charges a higher percentage than it pays the depositor(s), and at the end of the agreement the debter pays back the bank who pays back the borrower with everyone in the chain getting interest for their involvement.   If the loan(s) go bad, the bank takes the hit because their primary role in this capacity is to investigate and vouch for the lenders they loan money to.   This means you wouldn't be able to just ask for a loan and get one, but rather would need to either provide some collateral or have a very established reputation with the bank and a history of paying back on time.

So many of these problems are solved because it is in everyones best interest to make sure things go smoothly - Nobody gets a free lunch, but everybody benefits in a way that reflects real costs.

 

 

 

 

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