Partial Reserve System: Banking Foundations and Its Contrast with Crypto

The banking system we know operates on the principle of "fractional reserve." This means that banks only keep a small portion of customer deposits in cash, while the majority is lent or invested. This mechanism allows banks to create new money (credit), stimulate economic growth, and generate profits. However, this system also carries risks, such as the potential for a "bank run" if too many customers withdraw their money simultaneously, which necessitates the role of the central bank as a guarantor.

In the context of cryptocurrencies like Bitcoin, this concept is very different. Most cryptocurrencies are designed with a limited and transparent supply, operating on a decentralized network (blockchain) without bank intermediaries. Bitcoin, for example, has a capped supply of 21 million coins that is predetermined. There is no single entity that can "create" more Bitcoin beyond that limit or hold some while lending the rest like traditional banks.

Crypto, in many ways, was born from the desire to create a financial system that is more transparent, decentralized, and not reliant on a fractional reserve system that some consider less transparent and vulnerable to manipulation or crises.

Nevertheless, the crypto world also has its own challenges, such as volatility and security risks.

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