2.4 Mutual Credit on the Blockchain

While limited in scope, examples such as WIR, IMS, Itex, and the multitude of LETs around the globe demonstrate the potential of mutual credit as a solid foundation for stable currencies designed to facilitate trade. The example posed by WIR, in particular, elucidates how a mature mutual credit system naturally evolves into a commodity-backed currency system, proven to be resilient to systematic financial shocks, often outperforming officially issued fiat currencies.

From the history of mutual credit, we also learn that treating credit as both a natural consequence of and a requisite to production, trade, and consumption radically improves its impact on both the economy and society at large.

However, traditional mutual credit initiatives, as they are described above, are normally closed systems with rigid membership structures, operating under tight central control. This naturally limits the scope of these networks and the utility of the currencies arising from their activity. It also delegates an enormous amount of control to the operators of these systems, which, over time and with expanding ambits, tend to develop the same dynamics as traditional banks.

Distributed ledger technology is the ideal tool to alleviate these shortcomings. Given recent developments in decentralized finance—such as novel stablecoin designs, automated market–making, decentralized insurance, digitally transferable legal debt contracts, and other “money Legos,”—and in conjunction with distributed governance schemes, new, groundbreaking mutual credit applications can be envisioned.

Using Blockchain technology, currency units arising from the activity of mutual credit networks can be rendered into universally accepted money, which transcends the confines of a closed-loop, membership- based market. Such a development would allow clients of mutual credit to access “real-world” liquidity, akin to loans available in traditional financial markets, at rates and terms no bank can compete with. Moreover, and maybe more importantly, a stable asset, deriving its stability from the organic market forces posed by mutual credit networks and the commodities traded within them, would revolutionize decentralized finance.

To date, available forms of “Blockchain money” comprise speculative assets (such as Bitcoin, utility and governance tokens) and assets artificially pegged to an external currency (such as Dai and Tether). 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.

Recent developments in algorithmic underwriting, staking-based insurance models, and reputation-based governance allow mutual credit to expand above and beyond the scope of a single venture, project, or startup. The time is ripe to develop mutual credit as a universally accessible protocol layer, which will provide liquidity, a medium of exchange, and a store of value that is native to the internet itself, independent of state-run or corporate entities.