Credit

Credit is essentially a system of IOUs that connect the present to the future and no economy can work without credit. Credit secures network liquidity, it bridges the intertemporal gap of production, and brings forward the capacities of Agents to create that future. Because it is a system of IOUs it requires systemic trust, scale and collateral. The current world of institutional banking and finance perform these and other functions in a way that extracts wealth from, and imposes surveillance on, those who borrow and lend. The ability to charge interest as rent on money is based on the privileged right of certain agents in the system to issue and clear credit, and others not. In the Economic Space Protocol every agent has the same rights to issue and clear. Such reciprocal credit network functions as a distributed payment and settlement system which does not require the external third party issuer of “money”. Credit is thus only about closing the intertemporal gap of production, it does not function as a store of value, and it is just used to settle and pay - but without needing the third party issuer. Such distributed credit issuance is different from centralized credit issuance because it is an agent-to-agent relationship (or more precisely, an agent-to-network-to-agent relationship). All agents have the capacity to offer and/or accept credit to/from other agents. This means that each agent is not just a producer, participating in performances, and an investor, staking other agents’ performances, but also a ‘bank,’ issuing and receiving credit. In contrast, centralized credit issuance is typically done by banks or other financial institutions that have the power to create money through fractional reserve banking. In the economic space protocol, credit gives an agent the right to amend the network ledger – to match an offer and issue a token – when that token is, in effect, provided by another agent. Credit is the key to liquidity because it enables agents to settle token transfers and maintain liquidity in the network. The issuance of IOUs also connects directly to issues of securing network liquidity. In the absence of centrally-issued money, and the associated capacities of a central bank to regulate liquidity, distributed issuance of credit performs money-like functions that must create and sustain liquidity. It is important to remember that credit is also in the economic space protocol still about taking a risk-position.

The breakthrough in the Economic Space Protocol is to connect credit to stake as the preferred collateral for reciprocal issuance of credit. It provides credit a material and expandable foundation through which credit issuance, risk assessment and management takes place. More see Beller, Bryan, Lee, Lopez & Virtanen (2019): Rethinking Money and Credit in Cryptoeconomy: Securing Liquidity without the Central Control of Issuance.