Collaborative Finance: Credit clearing for collectively doing more with less capital
Jun 18, 2023
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Ethen Buchman, co-founder of Cosmos, and Tomaž Fleischman, co-founder of Breadchain Cooperative, discuss credit clearing for collaborative finance. Topics include the political implications of giving credit clearing to everyone, implementing this system in Cosmos, and the limitations of blockchain technology in finance.
Collaborative finance focuses on the network structure of money and finance, offering credit clearing and a more holistic approach to financial transactions and governance.
Mutual credit systems like Sardex enable businesses to extend credit to each other, fostering local economies by keeping money circulating within the community and providing an efficient way to combat late payments.
Deep dives
Collaborative finance: A network view of money and finance
Collaborative finance, also known as Kofi, is an approach to money and finance that prioritizes the network structure of money and finance. It challenges the traditional economic model based on rational, competitive agents and instead focuses on discovering the network structure of obligations. By visualizing the network and understanding the patterns and loops within it, participants can unlock more opportunities and value. One powerful application is credit clearing, where participants can offset their debts within the network without the need for additional money. This network view of money and finance offers a more holistic and collaborative approach to financial transactions and governance.
Mutual credit systems: Empowering local economies
Mutual credit systems, such as Sardex in Italy, offer an alternative to traditional banking systems by allowing businesses to extend credit to each other. These systems are built on the principle of multilateral trade credit set-off, where businesses can create credit within the system and make payments using that credit. By leveraging the community of users, mutual credit systems enable businesses to access liquidity locally, rather than relying solely on cash reserves or traditional loans. This approach supports local economies by keeping money circulating within the community and providing an efficient, targeted way to combat the late payment problem. Through the use of credit clearing and collaborative finance, mutual credit systems offer valuable tools for fostering sustainable and equitable economic growth.
Bringing blockchain technology to collaborative finance
Cosmos, a blockchain technology, is seen as an ideal platform for building collaborative finance systems due to its interoperability and ability to empower sovereign communities. Blockchain technology, combined with credit clearing, offers scalability and efficient liquidity management. By leveraging the network structure of financial transactions and visualizing the graph of obligations, participants can optimize the allocation of liquidity and enhance economic resilience. This approach aims to shift from a focus on the quantity of money to the quality of the network structure. By incorporating blockchain technology into collaborative finance, it becomes possible to build inclusive, decentralized financial systems that empower local communities and improve the usability of cryptocurrencies.
Towards a more balanced and equitable monetary system
The current monetary system, heavily reliant on central banks' quantitative easing and interest rate policies, lacks precision in deploying liquidity where it is most needed. Collaborative finance offers an alternative approach by using network theory to balance the payments graph and manage liquidity injection more effectively. By visualizing the flows and cycles within the network, liquidity can be targeted to specific areas and communities, replacing the current blunt instruments. This approach helps address the problems of imbalanced flows, fosters local economies, and holds the potential to transform the global monetary system. In practicing collaborative finance, communities can aim to balance their interconnected loops, leading to a more sustainable and resilient economic ecosystem.
For this episode I spoke to Ethen Buchman (@buchmanster) and Tomaž Fleischman (@T_Fleischman) in person while at the Commons Hubin Austria from May 22nd to 28th for the Collaborative Financeevent 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 event was about the paper Tomaž co-wrote while working with Sardex about multilateral trade clearing setoffs, or giving the ability of credit clearing to everyone rather than it being just something banks get to do. During the interview we spoke about what happened at the event, the political implications of giving credit clearing to everyone, and how this type of system could be implemented in Cosmos.
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