>Okay, so I could buy BTC from coinbase without making a single blockchain transaction?

You need A transaction at some point on the blockchain to start with, but then as long as you can build a network between any channels you have open, and the person you are trying to transact with, you never need to open another.

The metaphor that helped me a bit was that Lightning makes the blockchain act like a "trial" in the legal system. Just because you enter into a contract with someone, doesn't mean you need to go to court every time you speak to them. You only go to court when there is a problem. Lightning and the blockchain work like that. Once you have a transaction which gets you onto the network, you don't ever need to go back to the blockchain unless someone tries to cheat you (the way it works is if you broadcast something other than the latest transaction between us, I can broadcast a counter transaction that instead forces you to give me all the money in the contract for both sides, and sends it into the blockchain once and for all).

>First step is for Coinbase and their customers to realize...

I don't think it will ever get to the point of a traditional credit system, but will instead start with "sidechains" where coinbase can loan out money, but have it be transparent and somewhat enforceable via smart contracts of some sort. I just don't see the bitcoin crowd ever wanting to go back to fractional reserves without any mathematical checks and balances built into it.

>And if we have artificial limits on how to set the interest rate, we are going to have welfare losses. So we for sure would need to be able to set negative interest rates.

I think it only works that way because society is okay with waiting until inflation comes back. If you know that in 5 years there's a good chance you'll be able to get a cheaper interest rate, you won't buy a house now if you can avoid it. But if you know that in 5 years there is very very little chance that interest rates will go down, then the incentive to wait is lost.

Now bitcoin was designed in a way that this could have been avoided. Currently bitcoin is still inflationary, 12.5 BTC is being generated from mining every 10 minutes or so. But over time this will halve, and halve again, and halve many more times until it's fully deflationary. That slows the transition from an inflationary system to a deflationary system that won't ever become inflationary again (assuming everyone doesn't change the rules of bitcoin at some point). That gives time for the world to adapt and change, and lessens the impact. Although as you point out, it could be a rocky ride getting to that point.

>Well, my understanding from the history of money is quite clear that deflationary monies are bad for society. (sorry, should have sources here).

I don't have any sources either, but I don't think a deflationary currency has ever really been done on purpose at scale before. We have a bunch of examples of it happening by accident, and obviously it hurts, but it's never been committed to. So I think bitcoin and (some) other cryptocurrencies are a first here, and I personally believe it's worth a shot.

The whole argument for deflation vs inflation strikes me as similar to the whole idea of "tax holidays" in some countries. It's a game of chicken where companies will hold money out of the country, and will only bring it in during special periods where the government decides to lower the tax rate for something like "one day only". If companies knew the government would never do it again, they would just pay the taxes and be done with it, but because they have happened before, it's likely they will happen again, so they would rather just wait and lobby for it.

Bitcoin turns that around. Society won't stop consuming and start waiting for the next inflationary "kickstart" to the economy, because there won't be one. And they won't be able to get one, because as you said, it's extremely difficult to change the "rules" of bitcoin if everyone isn't onboard.

>That's the power of democracy. You can run over minorities if needed.

And in bitcoin, you still can in some ways, although it's less ideal. The play between "users", "miners" and "developers" can cause a stalemate, but if 2 of them gang up on the 3rd group they can often be overpowered (which is what happened with the Segwit activation earlier this year).