# 4.2 Default Insurance

In the context of the ReSource Network, default is defined as a member maintaining a negative balance for more than 6 consecutive months (adjustable by governance). As previously mentioned, such a scenario does not result in a creditor having lost their investment, as would be the case in the context of traditional credit lines. Rather, default within in the context of mutual credit results in the following consequences that need to be addressed:

1. **Contraction of supply** \
   A member failing to redeem their negative balance essentially deprives the network of the goods and services the member has committed to provide in return for credit consumed. A prolonged negative balance indicates that a member has extracted more than they have contributed. The implication is that the member’s peers have provided more than they have gained.
2. **Inflation** \
   Since RSD is created when loans are issued and destroyed when debt is redeemed, unpaid debt results in an excess of RSD that needs to be absorbed to maintain monetary equilibrium.

Unaddressed, contraction of supply conjoined with inflation would result in a stagflationary environment that could bring the trading network to a standstill. To avoid such a scenario, the ReSource Network offers SOURCE-based mechanisms to remove RSD from circulation if necessary, while reimbursing members with positive RSD balances for lost purchasing opportunities. 

As will be explained in the following chapter, holders of positive RSD balances will be offered RSD savings plans which yield SOURCE rewards. In return for these rewards, RSD deployed into savings accounts are exposed to demurrage deductions in cases in which RSD needs to be removed from circulation in order to preserve monetary equilibrium.

This mechanism alleviates the above-mentioned default consequences in the following ways:

1. **Deflation** \
   RSD demurrage charges will be sterilized and taken out of circulation. 
2. **Supply Substitution** \
   While the internal supply within the ReSource Network contracts as a result of defaults, SOURCE rewards paid to RSD savers allow members to purchase goods and services on the open market in return for the goods and services they have provided to their peers on the ReSource Network.

The SOURCE required to fund the above-described reward/reimbursement scheme stems from the following sources:

1. **Transaction fees** \
   A portion (adjustable by governance) of all transaction fees flow to RSD savers as described in the following chapter. 
2. **Confiscated Underwriter stakes** \
   The ReSource Network requires Underwriters to stake 20% (adjustable by governance) of the size of an underwritten member’s credit line. If the respective member defaults, this deposit is confiscated and distributed among RSD savers. 
3. **Ambassador penalties** \
   Ambassadors are fined when members affiliated with them default. These fines are subtracted from their transaction fee income. 
4. **Debt sale proceeds** \
   Debt contracts of defaulting members are sold to third parties, which can then foreclose on the defaulting member. Proceeds of such debt-sales flow into the network’s Reserve.


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