3.1.1 Distributed debt collection and obligation enforcement
Within the context of the ReSource protocol, the importance of duly repaid debt stems from concerns relating to monetary stability and moral hazard more than from the need to recover lost capital.
It should be kept in mind that since the ReSource money supply is borrowed into existence when members take on loans, lost accounts do not result in a creditor having lost their investment. Rather, lost accounts create an excess of stablecoin units that need to be absorbed, and an environment in which debtors may choose not to pay their debts in kind, thus contracting the available supply of goods and services within the trading network, and hence reducing spending opportunities for members with positive balances.
The sterilization of excess stablecoin units, and thus monetary equilibrium, is ensured by a fee-payments based insurance model, which guarantees the availability of reserves necessary to reabsorb uncollectible accounts and to reimburse members that could not find reasonable spending opportunities within the trading network.
However, this insurance policy, which will be elucidated in the following chapters, is naturally not sufficient to impose the required levels of debt discipline. To reduce defaults to an absolute minimum, and thus ensure the health of the network, defaulting debtors need to face appropriate penalties, among them legal action and foreclosure. These penalties are ensured by a market for lost accounts, which strongly incentivises specialized third parties to uptake legal action against non paying debtors.
Since the ReSource protocol is not dependent on recovering lost capital from bad debts, the protocol and its participants are in the privileged position of offering debt contracts to third parties cheaply, which then enjoy significantly above-market margins when suing debtors. This is facilitated via public auctions in which debt contracts are sold to the highest bidder in a “Dutch Auction” format. Proceeds of these sales flow to the network’s Reserve pool, further fortifying the system’s resilience and liquidity.
It is important to note that despite original debts being denominated in the system’s stablecoin, third parties acquiring debt contracts can sue debtors for the same amount, denominated in fiat currency. Hence, default converts a member’s stablecoin debt into debt denominated in fiat currency, owned by a specialized third party in their own jurisdiction. To enforce the stablecoin’s peg, this conversion occurs in accordance with the stablecoin's pegging target. In the case of the ReSource Network, a 100 rUSD debt will be sold to third parties as representing a $100 debt.
This way, specialized third parties can obtain high-quality debt contracts worth thousands of dollars for a fraction of their market value, take on legal action while keeping the majority of the proceeds. At the same time, the network administrators, be it a DAO or another kind of organization, are relieved from handling legal operations and may serve members in legally unreachable jurisdictions without exceeding their network’s risk appetite.
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