Whitepaper

2023 - Buchman, Dini, Fleischman - Design of a Collaborative Payments System

Abstract:

For centuries, financial institutions have responded to liquidity challenges by forming closed clearing clubs with strict rules and membership that allow them to collaborate on using the least liquidity to discharge the most debt. As closed clubs, much of the general public has been excluded from participation. But the vast majority of private sector actors consists of micro or small firms that are vulnerable to late payments, generally ineligible for bank loans, and not privy to any clearing clubs. This low liquidity environment results in gridlock and leads to insolvency, and it disproportionately impacts small enterprises and communities.

We propose a payment system designed as an open clearing club. The design allows firms to overcome payment inefficiencies, to reduce their working capital needs, to clear more debt with less money and with minimal legal complexity, and to leverage diverse assets and liquidity sources, including lending and issuance protocols. The design is made uniquely possible by fault-tolerant, privacy-preserving execution of atomic multi-lateral settlement operations defined by a graph optimization algorithm under international obligation law. The design is based on a core insight: a significant amount of "internal" liquidity resides within cycles in the obligation network's structure and can be accessed via set-off notices -- mutual reductions in debt.

The paper extends present payment systems by introducing obligations as a fundamental primitive, by making clearing as a risk-reduction mechanism accessible to the general public, by focusing on the network structure of the liabilities rather than the aggregate structure of the assets, by prioritizing liquidity-saving over liquidity-provisioning, and by enabling new forms of distributed issuance. The trust-based collaborative finance instruments we describe allow for the optimized use of liquid assets and the compression of balance sheets, reducing leverage and risk, and enabling sustainable growth in an increasingly interconnected and crisis-prone world.