Brunswick on Nostr: In a recent discussion between Saifedean Ammous and Michael Saylor about lending ...

In a recent discussion between Saifedean Ammous and Michael Saylor about lending Bitcoin, the core of the argument, in my view, was overlooked. Both Ammous and Saylor presented valid perspectives but missed a fundamental point about the nature of lending. Lending, at its heart, is the art of selling risk. Banks function like insurance companies for depositors by promising to generate more interest than they lose through defaults. By spreading risk across many depositors, banks can offer a yield, and this principle applies whether the asset is fiat or Bitcoin.

Ammous’s position seems to be that lending Bitcoin is too risky, partly due to the absence of government enforcement in a purely anarcho-capitalist system. In such a world, without a state to enforce contracts, the risk of default increases significantly. Without enforcement, the security of repayment in Bitcoin would be uncertain, especially for lenders. His stance might reflect the belief that, over time, as societies become more civilized and contract enforcement strengthens, default rates naturally decrease, lowering interest rates. Historically, default rates tend to settle around 1.5% to 2%, but this can vary depending on the level of enforcement.

Saylor, on the other hand, argues that the existence of a state and an appetite for risk means that a credit system built on Bitcoin is not only possible but inevitable. In his view, people will always seek ways to earn money on risk, and lending Bitcoin offers such an opportunity. However, Ammous counters this by suggesting that without strong enforcement, such as in a decentralized system, the risk outweighs the potential rewards, making it too dangerous to lend Bitcoin.

This distinction between risk and enforcement touches on a key historical development: the role of fiat money and fractional reserve banking. The innovation of fiat currency allowed banks to lend out more money than they held in reserves, tolerating more defaults by offloading risk onto the currency itself. Governments, through legal frameworks that mandate the use of fiat for all debts, effectively suppressed the most extreme consequences of default—historically, slavery. With the fiat system, governments enabled the elimination of slavery while creating a mechanism for themselves to continually take on debt without fear of collapse. The government can borrow indefinitely, spending into the economy without fully paying off debts, a process that is disconnected from hard commodities.

In conclusion, the core argument between Ammous and Saylor is about risk tolerance. Ammous contends that lending Bitcoin is too risky without state enforcement, while Saylor sees the potential for a credit system within the current state-enforced framework. Ultimately, both are debating the role of risk in a decentralized versus state-supported financial system. Lending, whether in Bitcoin or fiat, is an exercise in managing risk, and the existence or absence of enforcement mechanisms is crucial in determining the viability and profitability of lending.