Lifts, not Payments

Collaborative Finance has made a lot of progress recently, and we're looking forward to CoFi 2 in Banja Luka later this year. The recent paper Constructing systems of exchange by Matthew Slater gives a good framing of how credit can be used for exchange.

In this blogpost I would like to add to this discussion by arguing that too many discussions about systems of exchange are framed around what I'll call the payment problem. Instead, I think we should talk more about the Lift problem.

Definition of the Exchange Problem

We can model the exchange problem as follows:

Note that there may be a better allocation of assets than the one an exchange system with rational agents can achieve. For instance if Alice likes apples and hold twelve bananas, and Bob likes bananas but holds nothing, the maximum global utility would be if Alice gave all twelve bananas away to Bob, but if she likes bananas even just a little bit, or she wants to keep them as leverage in case Bob obtains some apples to trade in the future, this global maximum will not be reached.

Definition of the Payment Problem

To understand payment systems like credit card networks, SWIFT, Bitcoin and Interledger, we should look at a specific kind of exchange problem:

Framed this way,

A lot of research has gone into building payment systems, looking just at solving this specific problem of making credit increase for some agent in exchange for making it decrease for some other agent. As Ethan Buchman tweeted in January 2024, it is time for Collaborative Finance systems to look beyond just payments and "bring the obligations on-chain".

Definition of the Lift Problem

While I've worked on LedgerLoops on and off for years, it was amazing to meet Kyle Bateman from MyCHIPs at the first CoFi Gathering last year. I will adopt the term "Credit Lift" from the MyCHIPs project to mean the (partial) netting of a number of obligations on a loop in a credit network against each other. A credit lift is thus a multilateral netting agreement that is loop-shaped in the sense that each agent involved has exactly one credit and one debit in the equation.

Why it's better

A credit lift is a more generic and more fundamental construct than a payment, since you can model a payment as a credit lift, but not the other way around. Stay tuned for more progress on LedgerLoops in the run-up to the second Collaborative Finance Gathering and please ping me on LinkedIn if you have ideas about these topics!