Imagine being able to access a credit line that, just like any other credit line, allows you to spend money you previously didn’t have; only that with this credit line, no creditor is involved. No one has lent you this money, it seemingly appeared out of thin air, and there’s no one profiting from your debt.
This may sound like sorcery, but it is, in fact, a well tested way of doing business called “Mutual Credit” and, in conjunction with recent developments in the DeFi space, might just be the future of money. Bear with us.
A Mutual Credit system is a trading network, an accounting device, and a self-regulating monetary system, all wrapped up in one simple modus operandi. In a Mutual Credit network, no one is ever short of money. If you are able to provide value to anyone, you’ll be able to do so directly and immediately. Shortage of funds never inhibits trade.
The way this works is by money being “spent into existence” when two parties within a Mutual Credit network agree on an exchange. When such an exchange occurs, the selling party receives a newly minted deposit — “out of thin air”, which simultaneously corresponds to a newly created deficit, hence a debt, on the buying side’s account. The buying side, being indebted to the network, will now have to sell a good or a service to a third party to redeem their debt. This third party will then have to do the same, and so on and so forth, until all mutual debts have been paid in kind.
This way money is created as a result of the exchange of value, contrary to the “normal” way we’re used to — in which money is a requisite for the exchange of value. As a result, members of a mutual credit network can access credit, without anyone in specific having to lend them money. This, obviously, removes a lot of power from the hands of entities that make their living from renting out money, and emancipates all those engaged in the production and trade of goods and services.
As powerful as this idea might be, mutual credit is not a new invention and has already bootstrapped entire economies, especially in times of hardship. One notable example is the Swiss WIR cooperative, which allowed hundreds of businesses to flourish while the country was starved of currency during the Great Depression, and nowadays counts over 60,000 members from all industries.
What is new however, and our mission here at ReSource, is the coupling of this tested idea with the most innovative trends in the DeFi space to create an entirely new liquidity system for the blockchain-powered e-commerce age.
Mutual credit initiatives such as WIR are normally closed systems, with rigid membership structures, operating under tight central control. This naturally limits the scope of these networks and the utility of the currencies arising from their activity. It also delegates an enormous amount of control to the operators of these systems, which over time and with expanding ambits, tend to develop the same behaviours as traditional banks.
These shortcomings are ideally addressed by recent developments in stablecoin design, algorithmic underwriting, distributed risk management, and reputation-based governance, which allow to expand mutual credit above and beyond the scope of a single closed network, venture, project, or startup.
Blockchain technology allows not only to disintermediate mutual credit networks, but also to generalize their logic to serve as the foundation of a new mutual and decentralized monetary system. The time is indeed ripe to develop mutual credit as a universally accessible protocol layer, which will provide liquidity, a medium of exchange, and a store of value, native to the internet itself, independent of state-run or corporate entities.
In a series of following posts we will dive deeper into the nitty gritties of the ReSource Protocol, and explain how our endogenous stablecoin works, how we manage risk in a distributed manner, and how a global, decentralized network can enforce obligations and collect uncollateralized debt.
So stay tuned,
The ReSource Team.