Mutual Cryptocredit

Difficulty    

I’d like to offer the bare framework for a potential alternative cryptocurrency, which would operate in a mutualist fashion, offering interest-free loans backed by real value.

I’m not going to go into all of the details about why cryptocurrencies like Bitcoin are problematic, but, in short, block chains are inefficient and are not a proper basis for currency. Blips on a computer screen do not have intrinsic value, and blips that cost as much energy as Bitcoin are costly in comparison to traditional money. Where we had a few simple tasks on behalf of a small staff in traditional banking, Bitcoin offers unnecessary and unsustainable computing energy, and classist access to exchange media. It’s for the dogs. Something else is needed.

My model uses things that already exist in the real world to make something very simple and reliable. We already have online pawn shops and online auctions, as well as peer-to-peer practices in place. Algorithms can be designed for just about any purpose.

Online pawn shops allow individuals to upload images of their items and description forms to be sent, to be appraised by an online pawnbroker, who then offers a loan based on the value of the collateral offered. If accepted, the item or title to it may be requested to be mailed to the broker or a custodian for the duration of the loan period. If paid in due time, the item is returned to the original owner. If there is a default, the collateral is put under the possession of the pawnbroker. One can also make direct sales to the pawnbroker, with no obligations of a loan. Simple stuff, online pawnbroking.

Online auctions like eBay exist also, where individuals upload details about and images of their items, to be bid on or purchased outright.

An online auction is perfectly capable of appraising items for an online pawn shop. In fact, it is common for items gained by pawnbrokers to be sent to auction anyhow. We need only let the auction do the appraising directly, and remove the middle man.

It is not difficult to imagine an open-source pawnbroking program that performs pawnbroking and auction functions. It would allow users (individuals or businesses) to upload details and images about their items, and put their potential for future default up for an online auction, wherein merchants could place bids, hoping the users will default, and that they can buy the item cheaply to be resold in their distribution shops.

Once the auction for the potential default is over, the individual would receive an interest-free loan of mutual cryptocredit from the network (not the merchant-bidder) equal to the highest bid price offered, which can be exchanged with anyone on the network. In case of default, the collateral would be sold at the price bid in the auction to the bidder, and the defaulter’s credit line stopped. Merchants would be bound to follow through on the purchase in case of default, or face penalties imposed even-handedly by an algorithm. However, if the loan is repaid, the item or title to it is returned.

Collateral does not have to be goods, but can be deeds to services, such as a promissory note, so as to allow future labor to be used as collateral, as is done with good mutual credit designs. It could also be other forms of currency, such as the dollar.

A simple algorithm could also perform spot-pricing and currency exchanges, such that semi-autonomous sub-algorithms that perform more or less specific functions could be opted into and exchanged at market value for credit on the default algorithm (to purchase on the wider market with). It may be possible to allow for succession between these algorithms, such that competition between them will allow the most widely-used algorithm to become default, should the old default become obsolete. Such a favorite would tend to provide better security, lower costs, ease of use, and consistency of performance.

This model effectively removes the need for a specialist human pawnbroker working in a central organization, and replaces it with peer-to-peer appraisals in decentralized online auctions.

There is only one big detail to sort out: custodians of high value collateral. Typically, online pawnbrokers or banks will let a third party custodian hold onto high-value collateral, such as a title to a car or home or an expensive item, and distribute it to the proper owner once the loan is cleared or defaulted on, so that neither party can even attempt to run off with the collateral in an unruly fashion.

There are different ways this can be worked out, but perhaps the best option is for third-parties to establish themselves as custodians, which can be voluntarily chosen from by those involved, from the network. While not being completely off the map, such custodians could take steps to remain anonymous (except for their user ID, punishable by algorithms, an mailing addresses), and would likely remain fairly decentralized and hopefully distributed enough, so as not to be pursued by authorities without their incurring a great cost.

The custodians should probably put some kind of deposit (or for insurance) into the system in order to act as custodians, which would be forfeited in case of theft or loss on their behalf. The rate of this deposit would need to be enough to be more of a loss than the gain of theft, but in terms of losing clients and sales, so as to keep a low barrier to entry. In other words, the algorithm could ensure that the loss of customers– from being declared a bad custodian on the network– is even more of a cost than the lost deposit (thereby dealing in opportunity cost dynamics), such that custodians can hold onto more collateral than they have monetarily insured with their deposit, allowing them to do more with less.

Essentially, the program would utilize the threat of loss to custodian futures as security, and provide incentive to be good custodians. A custodian will not steal a $20,000 item, even if they have only put down a deposit of $100, so long as they will face $40,000 in lost sales to customers (granted that they don’t mind working and don’t have better options).

The math behind these opportunity costs would need to be worked out by someone more specialized, but this is theoretically possible.

Further, it is possible to allow individuals (or businesses) to choose the algorithms they want to opt into, and so not to rely on the default algorithm, such that a competition between the algorithms can take place (but the costs of these choices should not be socialized in the same manner that I advocate for later on for the default algorithm). In such a case, these sub-algorithms should act autonomously and self-sufficiently, with the master algorithm simply performing a currency exchange or loan if it is needed.

Of course, the viability would have to be established over time. I don’t imagine courts enforcing title-transfers on cars or homes from mutual cryptocredit exchanges anytime soon, so the market for these items will have to be developed alongside the market for the currency in general. That is, if one is exchanging their house or using it for collateral on the network, the loss of participation on the network in case of fraud must be greater to them than the loss of the home, so that the title will ultimately be transferred, despite the courts not enforcing such an action. This would need to be worked out in the algorithm, so as to be even-handedly applied and to maintain an equilibrium.

Also, an algorithm could be created that balances any fluctuations or mishaps with demurrage and dividends, or otherwise acts as mutual crime insurance. If credit is issued backed by real value, and this collateral then goes missing or deteriorates, this will cause deflation in the value of the currency, which must be balanced by removing some of it (demurrage). As theft by a well-rated custodian is not the fault of the customer, this demurrage needs to be socialized, and not a punishment levied on the customer’s individual or business account (an exception, however, can be made in the case of free choice between algorithms, in which case losses should stop at the level of that subnetwork).

Demurrage from lost value in the system would not be a popular occurrence, but could keep the economy balanced (prices at cost, consistency of exchange rate), and may even be enough to incentivize private investigations into the causes and a resolution. If the item is returned, and its value covers the cost of investigation, the remaining value will be issued back as a dividend to all whose accounts were punished, functioning as a reverse demurrage.

Of course, another option is something more like insurance. The downside is paying premiums upfront, the upside is not being surprised by demurrage.

Obviously, an algorithm should sanction the account of the offending custodian, and not allow for any transfer of funds. Sanctioning someone’s account based on an accusation alone is not sufficient. For this reason, custodians and their customers should agree upon a third-party mediator, who will retain the final say about whether a theft or other loss has occurred. These intermediaries, like custodians, could offer their services to be selected from through the program, and can establish their own models of ownership and policy-creation, and depend on their reputations and ratings to maintain customers. Various levels of mediation could be established if so desired, with mediators of mediators.

The model then has these simple components:

Open Source program
Online anonymous profiles
Online p2p pawn and auction
Credit generator
Currency exchange algorithm
Linkability with third-party “wallet” applications
Signup and rating for third-party custodians
Opportunity cost algorithm for custodians
Loss report receptor
Demurrage/dividend OR insurance algorithms
Signup and rating for third-party mediators

One signs up to participate on the open source software, receiving an anonymous user ID and free form profile with peer ratings. One uses the default algorithm or another favorite. On default, one uploads an image and description of their item that they would like to sell or get a loan for, which is bid on by merchants. One makes a sale or receives an interest-free cryptocredit loan equal to the highest bid price from the credit generating function into a crypto wallet.

If one’s item is of high value, one chooses a custodian to hold their items and a mediator to settle any potential disputes that may arise between them. If each party so decides, they can choose separate mediators to either come to a consensus or to defer to yet another third-party mediator. Each custodian, however, has more to lose than to gain from theft imposed by the algorithm. Nonetheless, if a poor choice is made, and a theft or loss occurs, the loss is reported by the mediator, the custodian is sanctioned, and either an algorithm adjusts for fluctuations in inflation and deflation, by socializing the costs or benefits, by way of demurrage or dividends, OR a mandatory (to be in the network) mutual crime and loss insurance program built into the network covers the costs. In some renditions these two options look very much alike.

Rating systems for mediators, custodians, merchants, customers, etc. should be used to establish reputation and incentivize transparency as a competitive advantage.

I see no reason this couldn’t work (though perhaps a few adjustments or additions can be made).

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