# Credit Where Credit is Due

## A Summary of the Collaborative Finance (CoFi) Commons Gathering

On May 20, [Matthew Slater](https://https://matslats.net/) convened the Collaborative Finance or [CoFi gathering](https://opencollective.com/cca/projects/collaborative-finance), focusing on credit theories of money. People from all over the world gathered in the mountains of Austria at the Commons Hub, hosted by the [crypto-commons association](https://crypto-commons.org/), to meet, share, exchange, enjoy and think-feel collectively about how to change money & credit. When we were not talking about money, we heard very powerful talks about how communal democratic self-government works in practice in [Rojava](https://en.wikipedia.org/wiki/Autonomous_Administration_of_North_and_East_Syria) (Autonomous Administration of North and East Syria) and in the [48 cantons of Totonicapan](https://https://es-la.facebook.com/48cantones/) in Iximuleu (Guatemala) by the powerful [Lucia Ixchiu](https://www.nobelwomensinitiative.org/meet-lucia-ixchiu-guatemala).

The days were organised based on different credit structures or credit systems that are used today to settle debts between people in a peer to peer and collaborative fashion: mutual credit, multi-lateral offset clearing systems, mesh credit systems, money voucher systems and more.

### Integration: Mesh Credit UBI and Multilateral Trade-Credit Set-Off

What follows is an incomplete synthesis and summary based on a group exercise I was part of, organised by [Dil Green](https://opencredit.network/author/dil/) from [Mutual Credit Services](https://https://www.mutualcredit.services/) on the last day of CoFi, where we were asked to think how we could collaborate concretely with the systems present, and in the process bring a new financial system into being.

It began when members of the Collaborative Finance team at [Informal Systems](https://cofi.informal.systems/about.html) and members of the [Circles Coop](https://www.circles.coop) and [bitspossessed developer collective ](https://bitspossessed.org/) met to discuss how to integrate the [CirclesUBI](https://joincircles.net) mesh network to the Multilateral Trade-Credit Set-off, or [MTCS](https://cofi.informal.systems/FAQ#what-is-mtcs) being developed by the CoFi Informal Systems team, and to do so in a way that is privacy-preserving by design. This means creating an integrated system architecture where credit relationships are hidden and there is no global view of the payment and trust graphs. Both Informal and Circles teams were surprised to discover we both had independently ended up asking the same questions and looking for answers in similar places. One example is [Taiga](https://github.com/anoma/taiga/tree/main), a framework for generalized shielded state transitions being actively developed by [Anoma](https://anoma.net/). Taiga is based on a post-smart contract logic that separates computation from verification, based on the matching of what they call intents and [validity predicates](https://github.com/anoma/taiga/blob/main/book/src/validity-predicates.md). Serendipitity is a real thing. A member of the Anoma team joined us for CoFi and was kind enough to explain what bizarre sounding things like [fractal instances ](https://github.com/anoma/specs/issues/54)mean while going on hikes. Both teams realised we were sitting on the mountainous shoulders of giants.

The [CirclesUBI](https://github.com/CirclesUBI/whitepaper) mesh credit network is used to deploy a non-state basic income system. Circles has been in production since October 2020. Ideated by [Martin Köppelmann](https://twitter.com/koeppelmann), founder of [Gnosis](https://www.gnosis.io/), and brought into being by what became the Circles Coop and the Bitspossessed collective, the CirclesUBI protocol works in a way where people are the ones claiming the power to issue credit and make payments in a rippling network of trust. The Circles Coop is [running a pilot in Berlin](https://joincircles.net/lessons-learned-from-circles-berlin-pilots-subsidy-program/) with roughly over 2000 people and 20+ businesses that participate in a subsidy program where strategic businesses get to cash percentages of their Circles sales for Euros as a way to increase fungibility. The issuance of a people powered basic income serves as the basis for internal liquidity and a primary market for the businesses.

Now, one of the problems we currently face as a Coop is that the Euros we get come largely from external donors and this is not sustainable. While we have been able to do what economists call "[infant industry protection](https://en.wikipedia.org//wiki/Infant_industry_argument)", funding new local industries using Circles and Euros as a way for them to buy the means of production and begin creating [economic linkages](https://eprints.lse.ac.uk/30779/1/Economic%20linkages%20across%20space%20(LSERO).pdf), we have not yet secured a sustainable source of investment for production. At least not yet. Here's where things get really interesting.

In the early 1990s, as Yugoslavia was being ripped apart by neoliberal policies, one thing made all the difference in the realm of money: a public credit clearing system. During state communism, Yugoslavia's payment system was a public good and not a weapon that is used today by private banks to make a profit. This system is still alive today in Slovenia. Businesses can input the receipts at the end of the month to the multilateral trade credit set-off. The clearing works in a way where if businesses have outstanding debts with other businesses, they can be cleared through an algorithm that checks who owes what to whom. The end result is that businesses end up with less debt to be paid. That is, if they have to pay anything at all. Often it is the case that all debts between merchants can be fully cleared, but not always.

This is also known as a Liquidity Saving Mechanism (LSM). According to the amazing [Tomaž Fleischman](https://twitter.com/T_Fleischman), part of the Informal Systems team and co-author of the paper [Liquidity-Saving through Obligation-Clearing and Mutual Credit: An Effective Monetary Innovation for SMEs in Times of Crisis](https://www.mdpi.com/1911-8074/13/12/295/htm), it is possible to create a network of obligations using this method, clearing off debt and thereby saving about 25% of the liquidity in any country's economy (without mesh/mutual credit). Informal Systems has now furthered developed this as an algorithm that can run millions if not hundreds of millions of settlements.

Now, what came out of the initial meeting between Informal Systems and the Circles team is that businesses in the Circles network could use the MTCS algorithm developed by Informal to clear debts with each other and any outstanding external debt. What brings things full circle is that loans to productive investment in small and medium enterprises (SMEs) & the cooperative sector could also be ran through the MTCS algorithm. Before using external liquidity (loans) to help MTCS, we can use internal liquidity, either via fiat bank balances plus businesses own credit balances. If we were to allow not just internal but external liquidity in the form of business zero or low interest loans, strategic businesses everywhere could use the extra liquidity to buy the stuff they need from others, thereby creating linkages and larger Business to Business (B2B) trade. As more and more business trade is denominated in Circles, businesses reduce their costs while increasing their overall sales, which are used in part to pay back their loans. For example, the profits generated from the business network can be given as shared equity back to the people receiving their UBI and to fund new community industry protection. What's not to like?

We had gotten this far by Thursday. In the group exercise on Saturday, we had representatives from CirclesUBI, Informal Systems/Cosmos, Holochain and an organisation called the Economic Space Agency (ECSA). We were tasked to think collectively how to create concrete collaboration with the other projects present: Holochain, Cosmos and ECSA.

### Holochain & Cosmos

Enter [Holochain](https://www.holochain.org/). Holochain is a distributed application platform that enables users to build and run p2p applications. Holochain's architecture is unique in that it is agent-centric, meaning that each node in the network is responsible for its own data and processing. This allows for high scalability and eliminates the need for a central server or database. Additionally, Holochain is highly flexible, allowing developers to create custom applications and protocols tailored to their specific needs.

[Paolo Dini](https://www.lse.ac.uk/media-and-communications/people/research-staff/paolo-dini) from Informal suggested that we could make a Circles Holo App because of the similarities in architecture. Because [Cosmos](https://cosmos.network/) requires fast finality, there could be an Inter-Blockchain Communication ([IBC](https://ibcprotocol.org/)) bridge between Cosmos and Holochain that runs the MTCS monthly or quarterly to manage the change of states.

### A few words on ECSA

According to their own website, [ECSA](https://economicspace.agency/vision/) is:

*building a peer-to-peer economic networking protocol which is open and free to use and gives everyone equal capacities of ECONOMIC-ORGANIZATIONAL EXPRESSION...creating a LANGUAGE for new economic expression.*

The provocation many of us posed throughout CoFi to the ECSA was: can you explain what you do in a simple manner?

ECSA is proposing a protocol they refered to as "[mutual staking](https://economicspace.agency/protocols/)" to form a cartel of projects that have mutually aligned interests through what I understand as co-investments based on digital asset token sales. This rings similar to the [crowd-staking app by Breadchain](https://breadchain.mirror.xyz/nwQx4CqPAcwZ5zSNB2_K25N1quOF1NGcKaYcS3S33CA).

Having had one foot in the crypto-world for some time now, I am generally skeptical of projects with fancy grammar and little direct action, specially on the socio-economic and technical dimensions. The ECSA team is a lovely bunch that has been around for a decade or more, and since they are largely a group of north-atlantic academics, it should be clear that for horizontal collaboration to take place with others who don't have the same powers that they do, we should give credit where credit is due: to the people, communities and teams that are, in the present and on the ground, building infrastructure and experimenting with real economic alternatives. The best example of such projects is [Grassroots Economics](https://www.grassrootseconomics.org/), who have been working for over 15 years in Kenya building what they call Community Inclusion Currencies ([CIC](https://www.grassrootseconomics.org/community-currencies)) and were present at the CoFi gathering showing to others how it's done. If we do not see nor value these experiences properly, we risk the invisibilization of the people doing the actual (care) work, the actual systems, in favor of abstractions.

### CoFi Commons

To recap, we have within reach a:
* privacy-preserving mesh credit basic income system where
* businesses in the network can use the credit clearing for external (loans) and internal (p2p credit) liquidity injections,
* running as a Holochain dapp that interfaces with the Cosmos IBC
* using the cryptographic frameworks and protocols developed by Anoma, potentially being able to settle transactions anywhere (EVM, Polkadot, etc)

Circles communities spread through trust relations, where a person only accepts credits from people they directly trust but can pay anyone in the network through transitive transactions. People in the UBI mesh can support trade credit networks through p2p liquidity provision. Therefore, communities are likely to benefit from MTCS even with smaller numbers. In that sense, there could be some sort of Cosmos/Anoma chain for doing the credit offsets which could become a persistence layer for multiple Circles/Holochain communities.

It would appear we have the making of an alternative financial system, a "CoFi Commons" as Paolo put it, that centers the care of people via basic income, one where economic autonomy is built through (re)productive investment of local vital infrastructure and b2b trade. We agreed next steps is to continue building the missing pieces of the puzzle and do more pilot projects to prove that this is not only possible but absolutely necessary.

Julio Linares
co-founder - Circles Coop
Reichenau an der Rax - May 28, 2023