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2.5 The Basic Economic Questions for DLT-based Mutual Credit Systems
In order to realize the enormous potential of DLT-based mutual credit, the following basic economic questions need to be answered:
- 1.Distributed credit scoring, underwriting, and risk managementHow to assess the creditworthiness of participants, assign credit lines, and absorb uncollectible accounts while avoiding the establishment of central points of control and failure?
- 2.Distributed governance and policy enforcementHow to set incentives and penalties, and ensure the due repayment of debt, while reducing the reliance on central governance and traditional legal remedies to a bare minimum?
- 3.Price and Unit of Account stabilityHow to fix the market value of currency units generated by mutual credit systems, within desirable margins, without relying on external reserves or active market manipulation?
- 1.How to generalize the value of mutual credit currency units to a point where they can function as universally accepted money outside of the mutual credit network?
While answers to question number two have already been partly developed by the DAO movement and are being continually improved, questions one and three are unique to DLT-based mutual credit applications. Luckily, risk management and value stability are intimately connected problems that, when approached correctly, solve each other.
As already stated above, mutual credit–based currency derives its value from the demand exercised on it by outstanding loans. Each unit of currency in circulation is required by someone in order to pay back a loan denominated in said currency. From this we can conclude that the market value of mutual credit–generated currency depends first and foremost on the ability of the network to enforce debt obligations. Hence, the capacity of the network to assess creditworthiness, collect due loans, and absorb bad debt is what ultimately guarantees price stability and the attractiveness of mutual credit–generated money as a universally accepted means of exchange. How this is done on ReSource will be brought forward in detail in this paper.