08 Overview

In its most abstract form, the ledgering logic driving mutual credit poses a use-case agnostic clearing and settlement engine which holds the potential of significantly simplifying otherwise complex economic transactions, and thus facilitate exchanges that would otherwise not come to fruition due to unjustifiable overhead.

In any scenario in which a large group of participants engages in interdependent trade relationships, mutual credit can be harnessed to significantly reduce friction imposed by lack of trust, liquidity or simply available information. For example, in the illustration posed above in chapter 2.1 of this paper, the exchanges between Alice, Bob and Carol can only be completed because both Bob and Carol hold trade relationships with Alice, which in this case serves as a bridge through which the mutual obligations of the three parties can be cleared and settled. Thus, a seemingly simple accounting trick has increased the combined turnover of the triple from 0 to 3

While in principle it could be argued that similar transactions may be facilitated using an external means of exchange, this means of exchange would have had to be previously acquired separately by each party, introducing a hypothetical forth party which doesn’t necessarily contribute inherent economic value to the illustrated exchanges and thus would pose a net cost to the existing network (comprising Alice, Bob and Carol). This cost may seem negligible at first sight but increases significantly as the complexity and interconnectivity of the network increases.