Collaborative Finance: Credit clearing for collectively doing more with less capital
For this episode I spoke to Ethen Buchman (@buchmanster) and Tomaž Fleischman (@T_Fleischman) in person while at the Commons Hub in Austria from May 22nd to 28th for the Collaborative Finance event with the Crypto Commons Association, one of the projects part of the Breadchain Cooperative. Ethan is one of the co-founders of Cosmos and works at Informal Systems, a workers cooperative that focuses on building Cosmos infrastructure with Tomaž. A big theme of the Collaborative Finance eve...
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Alright. Hello, everyone. You're listening to the Blockchain Socialist Podcast. I'm Josh, and I'm here in person at, the Crypto Commons no. Sorry. The Commons Hub, the Crypto Commons Association in Austria, in Reichenau, Andorax in in the middle of the mountains, and I'm in person here with Ethan Buckman and Thomas Fleischmann, both from Informal Systems. Ethan Buckman, you may remember. I've had him on before. He is one of the cofounders of Cosmos, and we talked a lot last time about some of his writings and about informal systems itself, which is a worker cooperative, that focuses a lot on Cosmos infrastructure. Alright. But I think to start off, I thought it'd be really interesting if, Ethan, you want to give a reintroduction to yourself and maybe explain what collaborative finance is since this entire event is sort of, I think, named after the idea or this concept that you've kind of memed into existence.
Maybe we can start with that. Cool. Thanks, Josh. Yeah. It's good good to be back on the show here and and be able to do this in person. Yeah. So we're at this, this COFI event, the inaugural COFI, event here, Collaborative Finance. And, so I'm I'm Ethan. I mean, you can you can hear me on the on the previous episode. I'm cofounder of of Cosmos, CEO of Informal Systems, and, we've been building a lot of stuff in the Cosmos ecosystem. We also do, security audits and formal verification. And more recently, we have kicked off this Cofai project. Right? And, when when we think about Cofai or collaborative finance, this is an an approach to money and finance that puts the network structure of money and finance, front and center. Right? So so much of of monetary theory and and and finance and economics is built around these assumptions of rational, competitive, self interested game theoretic agents and, you know, models of of supply and demand and really reasoning about the perspective of the individual sort of subjective marginalist value theory, which, you know, has its, has its benefits, but also misses a lot of the picture. And the idea is that by by putting the network structure front and center, you can surface a lot more opportunities and a lot more potential for value that is not accessible when you just think about, individual rational agents. Right? And so it turns out there is a lot of structure in the network. There's there are a lot of patterns in the network that can you that you can directly take advantage of, that that can benefit all the participants. And we call it collaborative finance because actually seeing the network and discovering what's in there requires a bit more of a collaborative process. Right? It requires agents to come together and actually share the the their obligations, the existence of their obligations so that you can discover the structure of the network itself. The only reason in terms of an individual, then you only see the relationships that any individual has. But if individuals collaborate to discover the network structure of their obligations, well, suddenly, they can do a lot more with that information as we'll get into. One of the really, exciting things they can do is is what we call credit clearing or more technically multilateral trade credit set off. But, you know, we'll let, we'll let Tamash get into some of the details of of all of that. So really collaborative finance is about, you know, this network view of, of money and and of finance.
Right. So it's, I wanna get into this a bit later, but to me, it's, I think you've kind of, juxtaposed it as, like,
game theory versus network theory as, like, a threat. There's the one thing I should have said that I did it. That is about moving moving us from, you know, a game theoretical model to a a network theory model. Right? So rather than the the most important sort of structuring of the theory being game theory and these sort of, you know, competitive individual rational agents, it's network theory and flow algorithms and, you know, what you can do with the structure of the graph that you don't get from just thinking in terms of game theory. So we wanna shift the whole narrative from game theory to network theory and and graph theory. Yeah. Right. So it's, yeah, an expansion of also just, like, thinking about finance in general that I think is is really interesting as not just being this, like, hyper competitive space of just, like, I don't know, economic violence between corporations or something like that.
Yeah. Thomas, do you wanna give an introduction to yourself and what brought you to Informal?
Yeah. Thank you very much. So happy to be on the show. So my background is computer science and, I ventured into management consulting. That was basically most of my career. And at certain point, I started to ask myself, okay, Tomasz, what can you do? Are there other things that are important in the world? And I I started to study, one very particular system that we use in Slovenia. So we use this multilateral trade credit set of our credit clearing as a way to help, firms to, to combat the late payment problem. And this solution we use in Slovenia, it's very, very local. So I couldn't find it anywhere else, but it took my attention. I was also happy to to work with, the original inventors of this system in Slovenia. I listened many stories, how they tried to sell it to other governments. And, this gave me an, gave me an intuition that, maybe I shouldn't look at at governments. Maybe we should look elsewhere. I started to study alternative monetary systems. In this research, I stumbled upon, Giuseppe from Sardex. He hooked me up with Paolo. We agreed that this is a great idea to use credit clearing and that, mutual credit that they built in SARDEX, would benefit. We wrote an article. Article was not successful at SARDEX, which was the original intent to move the SARDEX management toward the system. But everyone else was mega excited. So basically, the the the the article exploded and this is how Ethan, basically got to know about us and he invited us to collaborate. And so here we are.
Yeah. Alright. It's a it's a funny story that and do you wanna maybe, like, very quickly explain what SARDEX is and what, kind of, like, what this system is doing? Yeah. SARDEX is a
mutual credit system. It was set up by, Josep Litteras. At least he's one of the cofounders. And it was made, from the necessity, basically, the poverty in Sardinia, the the the the firms there needed alternative finance sources, for for very basic reasons. And It was a it was a response to the two thousand eight crisis. It was a response to the crisis, basically. And and, it provided the necessary, the necessary finance, for local firms at Sardinia, to survive. And, basically, Sarex is an important part of of the economy at Sardinia. But, unfortunately, it is now taken over by venture capitalists. So Giuseppe is mega unfortunate about this sad fact. So, let's say the the support for social goals, is is kind of decreasing, but, they are developing further as as an alternative payment systems. Yeah. Yeah. So from what I understand, it's
a a payment system that, of course, allows for companies to give credit to each other rather than solely relying on, like, whether or not a company has the money to make a payment for something and not having to rely maybe on, like, supply chain finance where you would have to take a take out a loan, etcetera, etcetera. It allows for business to happen more smoothly in places where there is a lack of cash.
Your analysis is spot on. So this this is the point of a mutual credit system. Basically, this is taking the the credit, creation from banks, to to the back to the firm. So the credit is created basically within the firms, but it's not made on a bilateral basis, but it is made on a multilateral basis. So, basically, you are taking credit against the the community of users. So this is this is the point. This is why it is called mutual credit because there is this mutuality in in the community.
Right. I kind of understand. I I like to think of mutual credit as, like, giving the power to create money to everybody and just recognizing money as, like, the social relationship
of kind of promises a bit. In in a basis, you are right. But, with great powers come greater responsibilities. So, the key for the successful, mutual credit system, which Sardeq is, is a really good, credit management. So there are strict rules and checks, for the community members, how much credit they can have. And there there is also a huge, effort to manage the credit levels. So to help those who are, heavily in minus position to create new business opportunities to get out and vice versa for those with positive positions to create the new opportunities to spend their credit. Mhmm.
Yeah.
May maybe just to add a bit, to make it a bit more concrete. So people think of mutual credit as a form of complimentary currency. There's different forms of complimentary currency. One of the more common forms, but that maybe hasn't been as successful is what you might call a reserve backed or a custodial complimentary currency, where the goal is really just to, to have a a currency that only circulates locally. Right? So you show up, you put a $100 in, a $100 of, you know, nation state money, you get a $100 to the local currency, and you can only spend it at local businesses who sign up. Right? And and and kinda obviously, these these systems aren't as scalable because it requires that there's actually a reserve and that, you know, know, somewhere somewhere along the line, someone can cash out in. Maybe they can only cash out at a discount, and there's, you know, a bit of of social good that that goes in, and it's like, yeah. We're gonna use this currency, and it helps, you know, keep the money sort of local rather than than being extracted. The idea with mutual currents with, with mutual credit is that rather than have it be backed by a reserve of cash, you actually, you actually allow issuance to happen where you're really increasing the money supply locally with a new currency that is accepted at par with the nation state currency. So it is a form of a credit that's being extended within a group of businesses, typically in the form of a cooperative or or or something like that. And businesses can sign up. They can they get access to a credit line, and the requirement is that they are willing to accept the currency for some multiple of the credit they take out. Right? So if so the credit they can take out is a is a fraction of their annual turnover, so it might be some percent. Right? That that sets their credit line. And then if they take out, say, a thousand dollars worth of credit, they, are promising to accept, say, $5,000 worth of that currency for payment of their own goods and services. Right? So you could say that it's collateralized by their own future productivity. Right? And and you start reasoning through this as a very powerful system because it allows allows businesses to get together and say, hey. We're gonna allow each other to take out credit, not just on a bilateral basis where I say, okay. You know, I'll extend you a credit line. You can pay me later. Businesses do that all over the world. That's just trade credit. Right? I should be goods today. You pay me later tomorrow. But this allows a group of businesses to get together and say, okay. We'll let any anyone in here take out credit in effectively a currency, a new currency that we're all gonna promise to accept. And so it, you know, it allows businesses to go into sort of a negative balance. And then as they get paid, as they accept the currency back, it brings their balance up towards zero. And there's all kinds of mechanisms to try to ensure that no one has too much negative or too much positive balance and the or and the whole thing sort of balances out, over time.
Right. That's a way to kind of increase the complexity and scalability of what normally would just be like IOUs
or something like that. But It so one way that that Tamash would typically puts it is that it's a way of turning sort of bilateral relations into multilateral relations. Right? So rather than just having, you know, bilateral credit between two businesses, you can actually form multilateral, credit where all the businesses sort of get together to to issue a currency that they're all willing to accept. Right. So this also in some ways could you say, like, it could in certain, circumstances
subvert kind of, like, the power relation between, like, producers and, like, the monetary system.
That's right. Yes. It it it allows producers to get together and form a a a cooperative that allows them to issue money, right, which is typically only the prerogative of banks. But, you know, it's like, like Minsky said, it's easy to issue money. The hard problem is getting people to accept it. But if you get a group of businesses together and say, okay. We're gonna issue money, and we're gonna promise to accept it as well, you know, then you're you're most of the way there. So, SARDEX has been has been quite successful in in Sardinia. There's another project in Switzerland called the Vier Bank that started in the thirties after the depression. That's also a mutual credit system that's been very successful. There's the Grassroots Economics mutual credit system in in in Kenya, the Sarafu, currency that's also been quite successful there. So we've seen a lot of success of these, of these mutual credit systems, and and hopefully, we'll see many more of them. Yeah. Yeah. Is this like I remember last time we spoke. I think you you described your your ideology as, like, was it sustainability existentialist and, like, monetary localist? That's right. It's a philosophy of sustainability existentialism, which leads to a politics of monetary localism, and and mutual credit is definitely a, you know, an element of a realization of that of that sort of politics of monetary localism.
So, like, did you so was it like you came to this conclusion and that led to, like, your interest in mutual credit? And that's is that kinda why you've been, like, pursuing this now, we call it credit clearing system?
Yeah. It's it's it's a bit of a mix. So, you know, my my background in biophysics and trying to understand what makes a sustainable system, thinking about organisms as sustainable systems, and understanding that, organisms and sustainable systems, exist because of their ability to cycle energy in loops. Right. So so everything these are these are driven non equilibrium systems that are harnessing energy from outside them and ultimately dissipating it. But what makes them interesting is is the work they're able to do with the energy while it's running internally within their system. And the way they do interesting things is by channeling energy into closed loops that can do interesting things. Right? So this this vision of closed loops has has always sort of been with me. And thinking about these mutual credit systems, you realize, hey. These things really work if there are closed loops in the system. Right? Right. And so if businesses form ultimately form loops with each other and spend money and what you know, my output is your input and so on in loops, then mutual credit systems will sort of be be able to be effective. But many of these mutual credit system or or pretty much all of them, I guess, they don't really try to make the loops explicit. Right? It's just sort of understood that there ought to be loops and that they can work together to, you know, make sure that that the trade sort of balances out so that no one has a positive or a negative balance for too long. But but they don't they're not really about discovering the network structure and where the loops are. And this is what sort of blew my mind about about this paper that, Tomas and and Pepe and Paolo wrote because it was, hey. Let's go find the loops explicitly, and let's see where they are and what we can do with them. And and and, you know, Tomasz can talk in a moment about that. And then we can bolt mutual credit systems on top and and really expand the power of of these sort of systems. And so, you know, I saw that, and, it just it just really lit things up for me. So, like, this is what's been missing, you know, from you know, for a while, I've been trying to think about how to stitch mutual credit systems together or or how to how to make them. You know, I felt that money is the killer app of blockchains, and we need to push for these local currencies and and so on, but there are limits to their scalability and, you know, how do you make mutual credit systems work together and and expand? And then this paper seemed to really have the answer in a way that I had never seen before. And, yeah. So Dale Green, who's who's someone else here, he wrote a a blog post about that paper called someone just turned the lights on, which is how the whole local currency, you know, world felt about about this paper, and that that spawned, you know, collaborative finance and sort of brought this conference together and yeah. No. And so I I yeah. The the
the, yeah, the concept of, like, thinking about it in loops is really interesting. Yeah. I guess for me, like, the if you think about it, like, the globalized economy kind of has, like, a very large loop that I guess misses a lot of people in the middle that, like, if if you're not in that loop, then you kind of, like, lose out on on on the wealth, I guess. Or a lot of wealth gets lost out of local communities because the loop is in, like, bigger institutions that are in, like, I don't know, major cities or financial capitals of of the world. That's an interesting way of looking at it. But, yeah, Tomasz, do you want to maybe explain what exactly is credit clearing and, multilateral trade credit set offs?
Yeah. Ethan tells a lot about it. And, what what is missing for fuller understanding is this, approach transactional approach and the bird eyes view approach. So what happens when you look, from the transaction point of view so basically, you are looking just at your immediate neighborhood. So to who do you sell or from whom you buy, and you're making decisions and and actions on the on this level. And, what happens is that by by looking locally, you're you're missing the global picture and the the cycles, the the loops that are kind of obvious that that have to happen in in the economy do not happen do not realize themselves in the most efficient way. And the differences are extreme. Like, not like 10% less or something. It's like a third of you you achieve just a quarter of efficiency that are there that should be fulfilled, but are not because people look, just on on this strictly transactional view. So forcing everyone to to wait, to share everything, doesn't really make sense. So but to complement the existing system, with some kind of systemic approach. Okay. Let's let's have groups of, of firms or individuals that that are interested into making the most of the limited resources they have. If they band together and if if they look periodically at their relationship in a systemic view, then can then they can squeeze much more out of the existing liquidity in the system than with, than they could with, just transacting transacting with with each other. And this is this is basically explained in the paper. We we have also shown empirically on the real data what the difference is, and difference is significant and important. And, this is why we are trying to bring it to life.
Mhmm. And so yeah. So this is the the whole system for understand. Ethan, you were kind of explaining the story that this is something that banks banks already do, but it's just something that we don't have access or we don't have the tools to kind of do that amongst ourselves. And so we are then, maybe I'm extrapolating a little bit, but, like, we are then dependent on getting, like, injections of liquidity from banks or from other institutions in order to do transactions in which if we were to have a more network view of our economics, we wouldn't we would be able to, like, not be dependent on these institutions.
Yeah. That's that's the goal. And but but that's right that, you know, banks, they coordinate amongst themselves to save liquidity. Right? And they do they form typically clearing houses, which are, you know, institutions that they set up, that they become members of, that allow them to net out the flows between themselves so that they can only transfer, you know, the the difference at the end of the day to actually settle their balances. Right? But the way the banks do it is so they'll set up a, they'll set up a clearing house, and they'll they'll say, okay. Well, you know, they'll net out all their flows to all the other banks. And then at the end of the day, they'll say, well, I either owe the clearing house or the clearing house owes me. And that way, you know, it's only a small amount that has to be transferred, and it only gets transferred to the clearing house or from the clearing house. Right? So you could imagine setting up a clearinghouse for all the businesses in in the world or or in a community or do something similar, but that requires setting up a new, a new institution that you imbue with trust and and actually, you know, introducing basically a financial intermediary there. Right? And what's what's interesting about, MTCS, about this credit clearing idea, is that you actually don't have to change the structure of the graph at all. You don't have to introduce any financial intermediaries. Right? All you have to do is be able to visualize the network of obligations. Right? So if I owe you $10 and you owe Tomasz $6 and Tomasz owes me $4, normally, each of us is only aware of our bilateral relationships. I'm normally only aware that I owe you and and that I owe Tomasz. I'm not aware of the fact that you might owe Tamash. Right? Yeah. And so if we can become if we can take that bird's eye view and and and visualize, you know, a larger aspect of the network, then we can see the cycles and we could say, hey. Wait a minute. There's a closed loop here, so I don't need to make all these payments. We can clear some amount off of how much we owe. Right? And so in this case, we could clear 4 off of everything. And so now I only owe you 6 and you only owe Tomasz two and Tomasz owes me nothing. Right? And so we were able to clear basically, you know, $12 worth of debt without any money at all. Right? And we didn't have to set up a clearing house. We didn't need any, you know, central counterparty that we trusted. We didn't change the web of relationships. It's still it's still the same people that that are involved. It's just the amounts owed have decreased, right, which is which is kinda magical. Now it turns out in the, you know, sixteenth century and and and earlier, banks were doing you know, early banks or or bankers, were doing this as well at the at the trade fairs or or payment fairs every quarter. They would get together, and they would run a process of basically trying to find the loops between them so that they could net out all their debts. And and they were extremely effective at this and could basically, clear, you know, most of the trade credit, if not almost all of the trade credit in Europe with with almost no money at all. Right? It was expensive for them to carry coins around. It's dangerous, you know, to travel with, with with real physical cash. And so they would do this this netting procedure where they were basically running this MTCS algorithm. We we can get into the algorithm a little bit, but they would run this in a in a sort of physical form over the span of, you know, a few days where they'd literally find each other and try to map out the loops. Right? So we we built a little game so that we can simulate doing this with real people, and, you know, we played that earlier earlier this week. But so they used to do it, but that system kinda collapsed for various reasons at the end of the sixteenth century and would come to be replaced almost immediately by the system of central banks with which rose up in the seventeenth century and which sort of started to take over this function, and and and the whole sort of global monetary and financial system moved from a world of liquidity saving where where the fundamental concern was, you know, saving the amount of liquidity needed to discharge debt towards liquidity provisioning, where suddenly everyone was concerned with making sure they have reserves and that, you know, and now everyone is obsessed with, oh, how many reserves the central banks created and what's the right amount of reserves to have. And we developed a whole quantity theory of money, and we lost what might have been called maybe a quality theory of money. Right? We were concerned with the quality of the network structure of of balancing the graph of of making sure there are closed groups loops rather than just obsessing over how much money there is in the ecosystem. Right? Because what we wanna do is be able to reduce is to discharge the most debt with the least amount of money. That should be the goal. And the way to do that is by balancing the graph. Right? Bringing out this sort of quality structure rather than just focusing on on the quantity.
Right. So just to for the listener to explain, I I played I played the game as well, while at Calabrio Finance. And essentially, we were given, like, the sheets where each of us were one sort of different Mediterranean merchants, basically, I guess. And we all we knew on our sheet was, like, who we who owed us and what we owed to other people, in this network of there are five of us. And so then we had to come together, all five of us, and map out each of our transactions, and then we could go through the process of finding the loops to clear off the debt so that we could know that we don't have to basically make any transactions. Turns out in the end, I mean, I think you designed it to where, we didn't have to spend anything actually because everyone owed each other the exact amount. It kinda reminded me as well as, like, I don't know if you've used apps like Tricounts or, like, one of those ones if you, like, go, you know, do do a trip with your friends. You just put in your expenses. Splitwise. Yeah. Yeah. Yeah. I'm just it was, like, it's kind of like that. It's like that. Yeah. It's similar to that. That's right. So, yeah, if you've used that, then you've used multilateral, very good. Not quite. There are small technical differences. We don't have to go into Do you want to go into maybe like some of the, yeah, the things that you talked about in the paper and those,
the basics are absolutely right. So it is about finding cycles. So what is interesting in the graph theory is that this decomposition of networks in to cycles and chains is a known problem. There is a theorem that every network can be decomposed in, cycles and chains. But, the interesting point about this is that this can be done on infinite many ways. So the the solution is not unique. And, what is special about the algorithm is that, we take a we take great care about the maximum. So we want to, to find a solution where the where we find the maximum amount, hidden in in the cycles. So this is one thing. And, what we are doing now, basically, we have set up the algorithm in a way that will allow us now to introduce governance into this algorithm. Because you can imagine if there are many solutions, then maybe in one solution one is missing out and the other is not. And, we don't want to leave this to a chance. So because one of the solution is a lottery, basically, a a random assignment to who gets, who doesn't. We want to introduce, the governance so that, communities using this can basically employ this to support whatever goals this the community have.
So then so, like, you're saying that in a world where everyone is using a kind of credit clearing system for their money, like, it's not always going to end up like in the game where it ends up that where everybody knows doesn't owe anything, but that there are there's going to have to be choices in which, you have to decide who in the network gets priority for getting their debts cleared.
You are spot on. So, in in all, instances of this game where there is not enough liquidity, there will be choices. Who will be left out? So this is it's basically about the distributions. And distribution the problem with distribution is that, okay. First, it is a technical problem, mathematical. But then on the other side, this is a political problem. Yeah. So who will get left out? So this is why it is important to take great care about distributions, to study it carefully, and to implement solutions in a way that allow, communities to to properly manage this problem.
Hey, everyone. If you're enjoying this episode so far, be sure to subscribe, leave a review, share with a friend, and join the crypto leftist communities on Discord or Reddit, which you can find links to in the show notes. If you're enjoying the episode of Find the Content I Make Important, you can pitch into my efforts starting at $3 a month on patreon.com/theblockchainsocialist to help me out and join the newest patron like zero x luo, which really helps since making this stuff isn't free in terms of money or time. As a patron, you'll get a shout out on episode like I just did and access bonus content, like the recent episode that I did reacting to a recent interview on the Deepgram with Hassan Piker and how it relates to crypto and DAOs. Of course, I'll still be making free content like this interview to help spread the message that blockchain doesn't need to be used to further entrench capitalist exploitation if we put our efforts into it. So if that message resonates with you, I hope you'll consider helping out. One of the thing one of the interesting presentations that we had earlier at at Calabrio Finance was that it was like Julio Linares had presented on basically showing that, like, math is political, like, how we think about math and, like, this is also another, like, instance where yeah. What depending on which algorithm you use, certain people in the network could benefit more or less. So, like, I guess the the then the question is, yeah, how do we govern a monetary system?
Those who control clearing algorithms now, they know this. And, I can I think you can guess who is missing out?
Is it me? It's all of us. Yeah.
All of us are busy. I mean, this is this is a tough question. Right? There isn't a a singular answer. Sure. And but to be able to actually expose the problem in the first place so that, you know, political structures can emerge and and so that it can actually be known that there is a problem here and that and that it can be addressed. And there are various different solutions. I mean, you could use randomness. You could use direct governance. You could you could, use a prioritization system where you say, oh, the nonprofits, you know, will get cleared first or, you know, people doing more of their business locally will get cleared first or maybe if you've already benefited from clearing, then you'll get cleared, you know, last or something like that. So so there are many different, many different approaches, but but the point is to make this available to everyone in the first place. And one of the ways I like to compare sort of what's going on and the difference between sort of bankers, blockchains, and what Ko Fi is offering, which is, you know, being built with with blockchains in in many cases. The banker said, look. We're gonna offer we're gonna do clearing between ourselves, so we'll benefit from all this liquidity saving. But everyone else will everyone else will only have access to settlement, right, where they they have to make transfers to actually pay off their debts. They won't get to do clearing because, you know, we're gonna hide the network from them, and they're gonna use our payment rails to do the settlements. Right? So we'll benefit from clearing. We'll have these back end systems, these little clubs or clearing houses. Where we do the clearing. Everyone else just gets to do settlement, and they'll use our rails and, you know, victory for us. And then blockchains come along and say, well, wait a minute. You know, this clearing stuff, all this credit stuff, you know, this seems like a big problem. The banks are doing all this all this crazy stuff behind the scenes we don't really know about. Let's get rid of all of that. Let's just do settlement, but let's make it available for everyone. So now everyone can do settlement on open financial infrastructure, and and that's great. But, you know, this trust stuff, this credit stuff, that's too dangerous. You know, we we can't do any of that. Right? But blockchains have, you know, I think in in in in a big way failed to really have the impact on the world that they've been promising probably to a large extent because they're ignoring this whole world of trade and credit that actually drives money and finance in a very fundamental way. I mean, you can't do trade without credit pretty much at all. Right? And so Kofi is coming along and saying, okay. Well well, wait a minute. Let's let's understand what the banks are doing. Let's take what the blockchains are doing, this open settlement for all, and let's just add clearing. So it's open clearing and settlement for everyone, and let's try to make that fully available and sort of bring credit on chain in a more material way so that we can we can visualize and view the whole network. We can collaborate to make the to make the network structure explicit, not just hidden, you know, behind the, the bank balance sheets, but actually exposed. We can do it in a privacy preserving way. We have the tools for that now, and we can offer the benefits to everyone who participates that they can get their debts cleared and that we can collaboratively
reduce the most amount of debt with the least amount of money. And that's really that's really the goal. Right. To like, so it's very funny that with the blockchain, you now have the network available to everyone, but the blockchain people pioneers in the beginning, I guess I don't know. My impression is is that they had such a commodity, like, based theory of money or it's, like, model about thinking about money and their cryptocurrency, which is why they lost out on this entire thing even though they created, like, effect of, like, magnificent, like, substrates to to see the network. And, like, that's what I think. I don't know. Like, sometimes I feel that, like, the the people who started with blockchain building blockchains, like, didn't know what they built in a lot of ways. Yeah. And it's only, like, now after a little over a decade that we're like, oh, shit.
Maybe we should've done it this way. Yeah. Yeah. I mean, the way we've been putting this is that, you know and it's a laudable goal what blockchains have been aiming at, and and it was needed. But the way we frame it is that they focused overly focused on the store of value function of money and the settlement function of finance. And what we're trying to bring to the table now is the clearing sorry, is the medium of exchange function of money and the clearing function of finance, right, which which sort of go together and complement the store of value and and the settlement function. Right? And and we can use blockchains to bring that about. But, you know, you need to be willing to to acknowledge that trust and credit are real things and and and matter and drive the real economy and provide a vehicle for them to be brought on chain and to to leverage the benefits of blockchain
to, improve the medium exchange function and and the clearing function of finance. Yeah. No. And I also just wanted to add, I think, because what what is interesting to me is that, like, having access to this type of system and this network is fairly is fairly powerful from, like, I mean, we've already said, like, certain people, lose out on the current system and could potentially gain a lot from switching to a kind of credit clearing system. Like, at the moment, to me, it it feels that, like, if if you are at the top, if you are if you are a part of, like, the big loop that, that you're not that, if if you're part of that big loop, you can use, like, that power to, like, essentially perform, like, capital strikes or to, like you get to choose where liquidity goes because people are dependent on that liquidity. But if people at a smaller level are not dependent on the liquidity then they can like discover the liquidity that already exists between us. There are already liquidity pools between people. It's just that people can't, recognize it or can't realize that for various reasons. That's right. Yeah. But going back to to blockchains, how does this relate to, like, for example, Cosmos? I guess the the first thing that comes to mind for me is that it, credit clearing seems like a scalability solution or, like, one, like, kind of scalability
solution, but I'm curious how you're thinking about it at the moment. Yeah. Well, we see the Cosmos technology as the ideal, you know, future proof payments technology to build this stuff with. And the way we actually got in touch, you know, I was I had found their paper, and I was, okay. I need to get in touch with these people. And at the same time, they had found Cosmos. We're like, well, this is the technology we need to use to build this thing, and we're trying to get in touch with me. And so, you know, it was just a It worked out. Sort of perfect match. Yeah. But but that's exactly it. I mean, you know, Cosmos was designed to enable sovereign communities to build arbitrary systems that, you know, that that serve them and, and and to build monetary systems that serve them and to be interoperable, right, with with the other sovereign communities building their own monetary systems. And, so that technology is very general purpose and is very, very useful for building these kinds of things. And so we're looking to use it to actually build, you know, a a permissionless, credit clearing system, but that that can also, support injections of liquidity. So something we haven't really talked about is what do you do with the what do you do with the credit that's not in loops. Right? Or once you clear stuff that's in loops, you have chains left over and and you have all these chains. Well, you then you start to need to introduce sources of liquidity to discharge the rest of the debt. Right? And it turns out and this is a very interesting research Dimash has been doing, you know, again, on on the sort of network science side, you can use the same algorithms you're using to find those loops and to and to clear them to inject liquidity and to inject it in an optimal way. So that, again, the least amount of liquidity is needed to clear the most amount of debt. Right? And so by by using the Cosmos tech and and IBC and the interoperability layers to access many different sources of liquidity and to integrate with other systems that that can provide liquidity and even DeFi protocols, which might wanna lend in into the sort of real economy, you can allow these many different sources of liquidity to be used to clear debts even if they're denominated in US dollars or euro or or whatever it might be. Right? And so you get this sort of, this, the system of of intents, essentially, of of obligations that people have to each other, of their willingness to make payments in certain currencies or accept payment in certain currencies. And so, you know, if I'm willing to to pay in Bitcoin and you're willing to accept in Bitcoin, but we're connected through someone else who's not willing to pay or or accept in Bitcoin, we can still benefit from that. Right? And and so, again, by looking at the network structure, you can take advantage of of the patterns in there to, to benefit people's preferences or to realize people's preferences in in more advanced ways than if you were just stuck to sort of bilateral relations. Right? If I wanna pay in Bitcoin and IOU and you're not willing to accept Bitcoin, there's sort of nothing we can do. Right? But if but if we look at the network structure and there are other people in the network that we might be connected to or through that are willing to accept Bitcoin, right, I guess I should be talking about atoms here rather than rather than Bitcoin or or staked atoms. But anyway, you know, you get the point is that you can use different currencies to settle, to settle these obligations by taking advantage of the network structure again. And that that can be tremendously powerful and can really offer ways for cryptocurrencies to be used more meaningfully in the real world. Right? And that's, that we think, will really extend the the functionality and the usability of cryptocurrencies in general.
Yeah. So one of the, I think, ideas that you talked about, Thomas, at one point was, like, targeted liquidity injection, which to me was really interesting if you think about, like, right now, the kind of, like I mean, for some people, at least in, like, 2008, the recession, like, the kind of way to resolve the issues happening then was just quantitative easing, was just, like, mass liquidity injection, which has its own, like, side effects and had its own unintended consequences. But do you wanna talk a little bit about about that?
Yeah. Sure. The liquidity injection problem is, is really interesting, not just for for crypto community, but for general finance community. Basically, the problem the problem with the current methods that are used to to manage the the financial system, so using this quantity easing, quantity tightening, and setting up the interest rates. These instruments are basically blunt. So you you cannot precisely deploy the the liquidity where it is most needed. With this more precise network view, it is possible to implement financial policies to to to steer the financial flows, in in the area where where the policies get realized. So this really depends on what you want to do. So in this way, this is interesting for for small communities that have small, smaller resources that need to be really careful about how the resources are deployed. And on the other spectrum for nation states, central banks, how can we improve, the, our toolset, the instruments that we use, to, to do whatever market interventions we feel are are necessary. So, basically, the interest for this kind of instruments is very is very high, and the mathematics and methods are already already described in in our mathematical paper, but we are developing these methods further to benefit the communities.
Nice. I kind of blanked.
Is there anything else you wanna ask? Well, I I could just jump in, you know, to talk more quantitative easing. Kinda generally, everyone looks at it and thinks about it as this kind of money printing. Oh, the central banks are printing money. You know, they're increasing their reserves, whatever. Right. So, again, this is this focus on the sort of quantity of money without really thinking about where and how that money is flowing. Right? What is the quality of of that money? And the quality is defined by the flow, not just the stock. Everyone just wants to think in terms of simple stocks, economic you know, someone said, I think, economics is a science of of confusing stocks with flows or something like that. Right? Everyone's just obsessed with the the quantity amount and just look at the central bank balance. You know, it's quantitative easing. There's a quantity of money. And if we just create that amount, then all our problems will be solved, and everything will be eased. And, you know, obviously, they have to keep adding more, and so it's it's not very quantitative. And and and and is it even e easing? There's there's a real very important question. Are central bank reserves, these things they create, are they even money? Arguably, they're not because no one can use them. The only thing they can be used for is banks paying each other, settling between each other or settling, you know, with themselves and and, in the sort of treasury account with the government. Right? So they're not really money for most of us. And when to the central bank is creating these things on their balance sheet, they don't actually get into the real economy. Right? Maybe okay. They they might be used to buy some, bonds off of a bank and that might create, you know, bank deposits somewhere that that that will be used, but those will typically just go stay in the financial economy. It doesn't actually make it into the real economy. So these liquidity injections like, Tomas was saying, a, they're not even meaningful liquidity. They're not money for most of us, and they're not entering in any material way. They're they're they're focusing entirely on the quantity and not at all on the quality of the flow, that emerges from them. And and, you know, as, I think many people have pointed out, you know, the velocity of money seems to be falling all around the world, and, you know, people have all kinds of explanations for why is money sort of stagnating, and it's be it's being hoarded, and and it's not it's not really flowing the way it used to. And and quantitative easing, it might have helped, you know, banks and and larger institutions that have access, you know, sort of more directly to the club, but it hasn't helped at all the real economy. And, you know, many real economy actors have been suffering very significantly since 2008. Liquidity is sort of drying up in the real economy in in in sort of fundamental ways. And then, you know, bank regulations come in and and makes it all worse. And and what we're proposing is to use, you know, not that complicated tools. It's just a little bit of network theory and and and science and the technology that that blockchains make available to enable liquidity to be managed much more competently in a more bottom up fashion. Right? So central banks are supposed to be these, like, you know, grand arbiters of of liquidity and masters of liquidity injection. They don't seem to know anything about what they're doing. They've got economics all, you know, all wrong. They've basically turned to become, you know, practically a religion. It's like a divination call. You know, you you you cut open the pig, and you look at its intestines and decide whether to increase interest rates and and by how much. There isn't really any any material science or or theory there. If there is, it's all pretty clearly wrong. Right? Yeah. And so and and so what we're offering is a way to sort of try to correct this, try to put monetary economics on a more solid footing by starting from from network theory and and a quality theory of money. You know, the looking for the flows, looking for the cycles, trying to encourage the growth of further cycles because we really believe cycles is where are where sustainability is. Right? It's really about, once again, balancing the payments graph and finding a way to sort of go bottom up, to do that by offering credit clearing as as a primitive that anyone can start to use and and adopt and and really benefit from, kinda directly. So yeah. Yep. It's saying the problem isn't that we need more money. It's that we need
I kinda feel weird saying the word efficient, but
kind of It's that we need balance. Right? Yeah. Yeah. So there was a you know, there's been, there's been a few cases in the twentieth century where where this was realized, and the the Europeans under you know, in in a few cases have understood, hey. It's not about increasing the number of reserves. There was some argument in the sixties or seventies about the IMF and and increasing the reserves, and the the Americans are like, oh, we need more IMF reserves. And the Europeans are like, no. What we need to do is balance the the payments graph, balance the trade graph. Right? Because if you have permanent deficits or permanent surplus, then yeah, you're always gonna need more reserves, right? But if you can balance things, and balance doesn't have to be bilateral, it's not like every country has to be in balance with every other country, there are loops, right? And if you can close the loops, then the whole economy can still grow, but it grows together. Right? And the thing that needs to happen is is the graph needs to be balanced.
Maybe a simple, explanation. So money can be seen on the accounts, but money can be felt only when it closes the loop.
So you feel you feel the effect of paying off your debt?
Paying off your debt? Every payment is actually a loop in the system. So this is, as I said, you can see your money on the account as a number, but you only feel the effect of this when you close the loop.
So one of the one of the key takeaways from the game we played that that hopefully you got out of this is that money is only needed to the extent that there are imbalances in the payments graph. Sure. Right? And so the the quantity of money is only necessary so long as the graph isn't balanced. And if you're not balancing it, then, yeah, you're gonna need money to to pay off your debts. But if you can find ways to balance, right, then potentially you don't need money at all. Now that's not to say, you know, money's gonna go away. Everyone it it's not necessarily barter. We're still denominating in a unit of account. It's still a monetary economy, but you can do this offsetting, right? And this is a sort of, the proposal at Bretton Woods from John Maynard Keynes about Bancor, you know, now there's a Bancor project in crypto that was sort of named after this, but it's very different. But the idea there was, hey, we don't need an international reserve currency. We need a global unit of account that we can use to make sure that trade is is balanced on net across all the global countries. Right? And if we can balance the payments graph and encourage everyone not to be too much in the negative or too much in the positive and always sort of come back to balance, right, then that could be an effective global monetary system. We don't have to worry about this reserve sort of problem. And the Americans were like, no, we have all the gold, so we're going to decide. So everyone's going to use the American dollars as a reserve currency, and there's going to be a permanent imbalance. And there's basically been a permanent imbalance roughly since the end of the sixteenth century or so. Right? And the idea is to somehow try to get back to a world of balanced flows. And again, the balancing can come over time, it doesn't have to be all at once, it's not, I know this is a blockchain socialist, it's not like a pure, it's not like everyone is equal necessarily kind of thing, but it's that on net over time, the flows balance out. Now that's, it might be a bit utopian to think that we could actually pull it off, but at least if we can start to visualize the network structure, we can start to work towards balancing in in different communities and sort of work our way up and maybe go bottom up where Keynes was trying to go, top down. And yeah.
No. No. I I imagine over time, just the communities that are able to realize their loops, I guess, will be better off than the ones that are not. Right. Exactly. That's the And I think many communities are already realizing that. I mean, there's a huge, you know,
you know, go local kind of movement. Right? And people are trying to build up local economies and have more local trade and all that sort of stuff. And that really just comes down to closing local loops. Yeah. It is interesting how that kind of, like, reflects the
the supply chain loops of, like, local supply chains Mhmm. And therefore, local money. We're all living in Ethan's world right now. Now. It's it's Tomasz's world too.
We are all interconnected. So the one interesting thing about loops is, they don't stand up separated. They are heavily intertwined. And, through this process, we are all connected. So local is important because it's closer, it's more manageable, it's easier to implement trust. But, at the end, we are all living on on the same earth and on the same planet. We are all interconnected through through the in entangled loops.
Yeah. We're all part of the loops. I think that was, like, a beautiful way to end it maybe unless you have something else to add. No. That's good. I'm happy happy to end it there. Yeah. Alright. Cool. Thanks so much for listening. We're gonna go have dinner now. Yeah.
Thanks, everyone.