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25 May, 2024

Mutual Credit

[ Moo-choo-al kre-dit lain]

Mutual credit is a network of multiple exchange participants where money is created internally and used as a medium of exchange.

Michael Healy
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Michael Healy
Michael Healy Michael Healy Expert Author
Michael, an entrepreneur, and co-founder of Unit, is a full-stack, mobile, and blockchain developer with extensive experience in the crypto and blockchain industry since 2010. A leading token builder, Unit powers the token economy using the Polkadot-powered Unit Network blockchain. Michael has built a diverse portfolio with multiple successful exits, including encrypted P2P video conferencing,...
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Mutual credit is a form of value exchange based on peer-to-peer crediting.

It is essentially a system where people can transact using favors instead of cash. These favors are represented by credits and are tracked on a central ledger.

How Does Mutual Credit Work?

Mutual credit works by allowing people to exchange their skills and time directly instead of through the medium of currency. 

Communities that use mutual crediting systems can establish ledgers to track the availability and exchange of goods and services, set rates, and enforce credit limits.

They can even make their own fiat currencies if necessary, although that can sometimes be an abstraction that undermines the system’s core benefits by creating market dynamics similar to those of debt-based economies. 

What these communities typically do is establish a unit of credit, which can be anything from an hour of work to a kilowatt-hour.

“In a mutual credit system, units of currency are issued when a participant extends credit to another user in a standard spending transaction.”

Brock, A., & Harris-Braun, E., 2016

What Are the Benefits of Mutual Credit?

Mutual credit has two main benefits for those who choose to participate.

Economic Resilience

Mutual credit provides local economic resilience in the face of global economic difficulties by essentially siloing off the communities that use it, promoting the retention of talent, goods, and services. 

This model isn’t as optimized for growth as traditional debt-based economies of global scales, but it is highly flexible and relies on human trust and interconnection — features larger models have difficulties adopting. 

Social and Ideological Benefits

For some, mutual crediting is more than just a system of value exchange. It’s a way to bring communities tighter together. Historically humans have survived by banding together and tackling challenges as a team. This process can be incredibly rewarding for some people as it speaks to their inherent human desire to connect and be part of something bigger than themselves. 

What Is Mutual Credit On a Blockchain Network?

Mutual credit on the blockchain is similar to what happens in “real life” — a self-sovereign value exchange system based on peer-to-peer exchange.

One of the main challenges of mutual crediting is that it requires careful tracking of credit-debit balances by a trusted, impartial, unbiased third party. This is where blockchains can be particularly useful.

Blockchains are essentially giant ledgers of account balances and transaction details. Money moves through a blockchain directly from one address to another without centralized intermediaries. Because blockchains are trustless, distributed, and globally available, they hold the power to extend access to mutual crediting systems all over the world.

Purpose-built smart contracts can be developed to automate the tracking and managing of accounts. At the same time, Decentralized Autonomous Organizations (DAOs) can be created to act as “town halls” where all participants in the system can democratically vote on future developments. 

How Does Mutual Credit Contribute to The Development Of Blockchain Networks?

How Does Blockchain Work?
How Does Blockchain Work? | Source: BusinessStudent.com 

Most of the popular blockchain networks today are built to be decentralized and self-sovereign. However, development costs money, and this creates a direct connection to legacy financial systems. 

Mutual crediting is one form of payment scheme that is being adopted by blockchain communities in an attempt to escape the influence of foreign entities like governments and regulators and become truly self-reliant.

“A mutual credit–based stable asset would be the first native form of “internet money,” independent from national currencies while achieving stability by virtue of its own internal dynamics.”

Resource Network., n.d.

Conclusion

Mutual credit is a fascinating topic and its crosssection with the blockchain world is poised to yield interesting and innovative solutions to problems of centralization, development, and value retention in decentralized economies.

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Michael Healy
Written by

Michael, an entrepreneur, and co-founder of Unit, is a full-stack, mobile, and blockchain developer with extensive experience in the crypto and blockchain industry since 2010. A leading token builder, Unit powers the token economy using the Polkadot-powered Unit Network blockchain.

Michael has built a diverse portfolio with multiple successful exits, including encrypted P2P video conferencing, a large UK student social network, and the Wikileaks Android app. He has experience working with top organizations like Wellington Partners, Founders Forum, Google, KPMG, and Saatchi & Saatchi.

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