Decentralized Debt Clearing

Description

Bitcoin, Venmo, USDC, etc. are all p2p electronic cash innovations for bilateral settlement.

Actually disrupting the foundations of the traditional banking & Federal Reserve system requires something more radical: decentralized debt clearance.

Debt clearance requires a global view and control over the graph of obligations. For centuries, a small number of massive “clearing houses” have gathered around a table to cancel out all the redundant dependencies across their respective networks with the least amount of capital. Banks can typically get away with capital ratios around 10%.

Until now, the technology didn’t exist to clear debt in a decentralized, intermediary-free manner (at least beyond the scale of small villages). That requires:

1. a freely accessible, immutable ledger that records the global network of obligations
2. in a privacy-preserving and secure manner
3. and can settle the debts instantaneously
4. according to a graph algorithm that’s optimized to clear the debt maximally efficiently

In this network of multi-party obligations, all kinds of DeFi protocols and liquidity sources can be integrated. And, since every node in the graph is a smart contract corresponding to a balance sheet, every node is a programmable liquidity source, a lending protocol, a bank. That programmability enables things like automatic, maximally efficient loan drawing and repayment.

Other Thoughts

• This likely requires the combination of multiple privacy-preserving technologies until the day comes that FHE is performant enough
• It could open doors to solving non-speculative lending like trade finance and be extended to things like invoice factoring

Comparable Companies

Cycles

Further Reading

https://www.mackenziemorehead.com/putting-the-cryptography-back-in-crypto/