sábado, 28 de junio de 2014

P2P A to B Credit contract

We propose a P2P credit system inspired in the Fractional Reserve Banking Model. Other P2P credit systems amongst peers have been proposed. The most common is the LETS system. Ripple is also popular.

First, we need to clarify that this kind of credit is not intended to finance large loans to acquire capital goods. For that purpose, we propose to use B2P type of currencies as a promise of goods in the form of B2P currency mortgages. Instead the kind of P2P credit we discuss here is intended to finance Peer to Peer individual transactions or collective actions in the format of crowdfunding. Ultimately, it will be used to "crowdfund" the public services of the Government.

In the LETS system, every member is allowed to have at his account a negative balance. This negative balance is no other than a credit by the community. The amount of negative balance has a limit fixed by each community. In some cases there is also a maximum amount, so that the member has to circulate the money. There is no monitoring by the system of the time the account remains negative. In our view it is not scalable to large communities, in which people do not know each other, and need to use larger amounts of credit may be over large periods. We think that the model of credits in Fractional

Reserve Banking system, without interest, and without the monopoly of the banks, is much more flexible and accountable financial instrument.

The Ripple concept is closer to the P2P credit system that we explain here. The negative balance limit fixed by the LETS community is replaced in the Ripple system by a more tailored negative balance limit which is fixed by the limit of credit your friends trust to give to you. This is influenced by the amount they receive in turn from their friends. Again, this is an atemporal credit. The amounts remain low.

P2P Loans

Any member can transfer out of the nothing any quantity from his or her loans account to another member current account.
It detracts the amount of the transaction from the sender and adds the amount to the receiver. The receiver can be also any organisation account. It requires two signatures, the signature of the sender and the receiver of the loan accepting the loan.
Lending abuse may result in inflationary effects.  Equalitarian Peoples Associations may want to regulate this activity and set some rules. If the Equalitarian Peoples Associations wants to have some control of these operations using these rules, the contract may require a third signature, that of a control body.
The transaction itself is a lending smart contract signed by all parties that includes the automatic payback to the loans account of the lender, at the agreed timing and the agreed conditions.
A variant may include an interest, that is, the payback of the principal to the loans account of the lender and an interest to the current account.
As this is how banks operate now in the Fractional Reserve Banking system, all Equalitarian Peoples Associations people become banks for Peer to Peer lending and thus creating money. If the Equalitarian Peoples Association misses the old banking system, it may authorise the creation of DAO corporations that also have a loans accounts and can give loans out of the nothing.
Public service enterprises have no loans account, and therefore cannot lend money.
The monetary consequence, as it happens at all P2P monetary systems like time-banks, is that there is no fixed monetary mass. The monetary mass grows with the lending and decreases with the payments back. In one word it grows with the intensity of the trust based transactions between peers. Interest payment does not change the total monetary mass, but sucks and detracts money available for transactions of goods.
Other B2C oriented monetary systems, like currencies that consist in a contractual promise of a good (commodity based), need to have a fixed monetary mass. Bitcoin is a special case. It has a fixed monetary mass like B2C systems, but floats in value. 

The credits we need to have should be able to be as large as necessary, have a clear payback timing and deadlines, short or long, and the outcome of a default at payback has to have a clear remedy. 

The remedy in the Fractional Reserve Banking system is the guarantee of the collateral. In case of default, the collateral goes to the moneylender. This is not fair, if the moneylender has created the money out of the nothing with no reserve. It is also a bad monetary solution. The credit that is not returned stays in the system as money that will not extinguish, creating inflation or excess of money. 
The moneylender social role is to guarantee that he gives credit in name of the community and has well analysed the solvency of the borrower. He advances money that did not exist before, but the condition is that this extra money will disappear in the future. He will be entitled to do so in function of his reputation as moneylender
What we propose is, instead of a guarantee of collateral's, the smart contract P2P credit financial instrument includes a shared responsibility of returning the credit. If the borrower does not pay, it is the moneylender who pays.
 This does not prevent that other, not monetary, conditions exist at the smart contract. For example, a non monetary clause could say that in case of default the ownership of the collateral goes to the moneylender. If the ownership of the collateral is expressed in a smart contract, you may change the owner. But this is not a monetary transaction and does not solve the destruction of the money created by the loan. To close the loop, the moneylender cannot keep the property (unless he buys it); he has to put the collateral in the market again, sell it, and restore the credit to zero. Maybe this causes another credit to be created.

Technically, a credit would be a unique smart contract between two parties that result in a positive transaction towards the account of the borrower at a currency shared by a community, the legal tender currency of that community, their P2B sovereign currency. A loan creates a positive increase at the borrower's account of P2B sovereign currency out of the thin air.

Example 1: a LET system or a TimeBank

When a new user joins a TimeBank, and his account is at zero, he can already ask for the services of another member, cause TimeBanks and LET systems allow to have negative accounts up to a limit. The newcomer pays the services from his account, that becomes negative, actually as a credit from the community. He is supposed to return this credit by offering at a later time his own services to other members an thus return his account to zero or positive. The same way, using a P2P, somebody of the community could provide his services to a newcomer with zero balance at his account by giving the newcomer a credit for the amount he needs to pay. The service provider has been paid.To return the credit, the newcomer will offer at a later time his services to get the money he needs to payback the credit or more.
Example 2: a credit for a larger expenditure

Occasional consumption needs, like going holidays, may require a credit to buy expensive services. In this case, a couple of Peers may crowdfund an exceptionally expensive trip of a friend.
Example 3: an SME DAO with cash difficulties

An SME DAO may have obtained most of the credit it needs for the exploitation cycle by issuing a B2P type of currencies as a promise of its future production of goods. The need for investments in capital goods is covered by B2P currency mortgages. Nevertheless, it may arrive at a certain moment to cash flow problems. The SME may launch a crowd funding campaign for a short period credit.

Obviously, the credit results in an increase of the total amount of existing currency in the system. It results in an increase of the monetary mass used by that community.

The overall logic is that this currency starts with a total monetary mass of zero. The monetary mass has to grow only as required by the volume and the speed of the trade of that community. Scarcity of currency will result in the need of credit by somebody. New money is created as credit. As the credit has to be returned, the total monetary mass has an embedded drive, a kind of gravitational force, to return to be zero when all credits are returned. When this goes too far, somebody will again need some credit in order to be able to trade, and the monetary mass adjusts again up.

That is why credits need to be necessarily paid back, and not replaced by other non monetary operations like a change of ownership of a good.

; part 1 of the contract (setting the loan parameters)

; write the contract out of a template. First you type the agreed loan amount and the payback date (or series of dates).
; A is the moneylender and B is the borrower

loan = amount
paybackDate = date

; then, both parties need to sign

If sign A, sign B

; part 2 of the contract (fixed code in the credit contract template)

; you create the contract with an address. This address is not an A account or a B account, it’s a specific account for the credit smart contract 

Create account ACreditB

; as with banks, you may put the condition at the moneylender to have a percentage of the loan as reserve. A would send to the credit account some % of the loan fixed by law. If not, the loan does not happen 

reserve = x% loan[amount]
If AAccount[balance]  >=  reserve
AAccount[balance] = AAccount[balance] - reserve 
ACreditB[balance] = reserve
Else stop

; if the reserve is there, the credit account sends the amount of the loan to the borrower. The credit contract is deducted by the loan amount

BAccount[balance] = BAccount[balance] + loan[amount]
ACreditB[balance] = ACreditB[balance] - loan[amount]

; now you wait until the payback date and in the while you do nothing

While today(0) < paybackDate(date) stop

; by the time the payback date arrives, it may be that the borrower has already sent some transfers to the credit account. Therefore, the due amount could be less than the original loan. In order to find how much money has to be paid back on the payback date you need to look at the current negative balance of the credit account
; try to extract from the current account of the borrower all the due money, send the remaining balance to the credit account and the reserve back to the moneylender

If BAccount[balance]  >=  │ACreditB[balance]│+ reserve
BAccount[balance] = BAccount[balance] – │ACreditB[balance] │- reserve
AAccount[balance] = AAccount[balance] + reserve
ACreditB[balance] = 0

; if there is no sufficient money in the borrowers account, then several things may happen
; first, you may penalise the moneylender and borrower in their reputation; the moneylender for not looking for a solvent borrower, the borrower for not honouring his commitments
; alternatively you may branch here to change the ownership contract of the collateral

AAccount[reputation] = AAccount[reputation] - penalisation
BAccount[reputation] = BAccount[reputation] - penalisation

; Second, you start a loop until all the due money is there

Else until ACreditB[balance] = reserve

; First you take all the available money from the borrower

ACreditB[balance] = ACreditB[balance] + BAccount[balance]
BAccount[balance] = 0

; Second (optional) you take all the available money from the moneylender. This action may be optional. But it would be a strong punishment against cheating by giving P2P loans to insolvent friends

ACreditB[balance] = ACreditB[balance] + AAccount[balance]
AAccount[balance] = 0

; this loop works taking away all money that arrives at the accounts of the borrower and lender until the loan is paid.
; Finally, when all has been paid the reserve is given back to the moneylender 

ACreditB[balance] = 0
AAccount[balance] = AAccount[balance] + reserve

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