Understanding Blockchain Mutual Credit
Blockchain mutual credit refers to a framework that enables the creation of stable cryptocurrencies through multilateral exchange networks.
In this system, participants form a closed network where they use an internal unit of account to facilitate trade among themselves.
They can access lines of credit denominated in this unit of account, which they use to purchase goods and services from other participants.
Debts are then repaid by accepting the internal unit of account as a means of payment for services provided to other participants within the network.
Blockchain Empowers Mutual Credit Networks
By operating in this manner, the internal unit of account within the network evolves into an independent and stable currency that derives value from the demand generated by outstanding loans.
These trading networks generate their stable money supply, allowing them to optimize capital efficiency and provide interest-free liquidity to participants.
Blockchain-based mutual credit networks leverage distributed ledger technology to automate risk underwriting, currency stabilization, and payment clearing processes.
This automation enables them to grow faster than their predecessors while maintaining an automated and decentralized money supply.
Blockchain mutual credit networks can be designed and implemented in various ways, and due to their anti-fragile nature, they are likely to become a standard model employed for a wide range of purposes.
The Process of Blockchain Mutual Credit
Each mutual credit network can have its unique configuration.
The network operator, a company, a local government, a supply chain, or a cooperative establishes the rules for assigning credit and reputation, governance, and defining defaults.
Once these rules are established, merchants can join the network, obtain credit lines, and begin using the commodity-backed currency for transactions within the network.
Mutual credit networks that wish to exchange with other networks can do so based on their on-chain history, demonstrating the network’s health.
Network reserves can be created to facilitate trading and the clearing of obligations between different mutual credit networks.