Throughout this series we have mainly discussed the various ways in which the ReSource protocol allows businesses to access credit at 0% interest and how it can support collaborative market structures, such as the emerging DAO economies. There is however, another powerful attribute of the ReSOurce protocol, which is its ability to protect its users from run-away inflation and crumbling financial markets.
In fact, shielding local economies in times of global collapse was the first large-scale, real-world use case of Mutual Credit. The now famous Swiss WIR bank was founded by two local businessmen in the European interwar period and has helped thousands of Swiss businesses to remain active and liquid, while markets around them were brought to their knees by the Great Depression and the continental rise of Fascism.
When we first begun developing the ReSource protocol in early 2020, we thought that this specific feature of the protocol would primarily serve the denizens of developing countries, plagued by unstable fiat currencies and especially cronyistic financial sectors. As it has turned out, unfortunately, the ReSource Protocol’s ability to store value, and protect entire trading networks from financial collapse, seems to become more relevant to almost everyone on planet earth as months pass by.
While we dearly hope for a brighter future, it is good to know that ReSource members are, at least to some degree, protected from hyperinflationary outbreaks and credit crunches.
How are ReSource members shielded from inflation?
While RSD, the internal unit of account serving the ReSource Network, largely mimics the behaviour of the US Dollar, it is not tied to it by a hard peg. ReSource doesn’t artificially maintain a fixed exchange rate between RSD and USD, rather, it uses various macro-economic tools to establish what we refer to as Autonomous Stability. As long as the US Dollar remains more or less well-behaved, the result is the same, but would it collapse into a screaming abyss, as the Russian Rouble did a few days prior to the writing these lines, RSD and USD purchasing power would almost immediately loose their correlation.
This is so since RSD represents mutual obligations between members of the ReSource trading network, and never leaves this network. These mutual obligations are denominated in RSD, and fulfilled with goods and services ReSource members provide. As long as the supply/demand ratio of goods and services priced in RSD remains fixed, so do their RSD prices - regardless of what the US Dollar does.
Where does RSD purchasing power come from?
So, if there’s no hard peg fixing RSD to an external asset, how does it remain stable?
Well, first of all, you could ask the same question about the US Dollar itself. The answer wouldn’t be all that different. Much like US Dollars, RSD come into existence as a result of loans issued. Each time a member of the ReSource network overdrafts their account, new RSD are born. Each time someone rebalances their account and pays back their debt, RSD are burned.
This mechanism ensures a supply/demand balance, which expands and contracts with the natural growth of the economy it serves. Theoretically, US Dollars are supposed to behave similarly. In reality, the system “minting” and “burning” US Dollars is infinitely more complex and exposed to a plethora of global factors that are almost impossible to analyse and predict.
The US Dollar is much more than a “Unit of Account”, used to price goods and services. It is a “thing” in its own right that is being bought and sold, leveraged, reserved, siloed and traded against other currencies. This relationship between different forms of money, and what economist often call “near money” has enormous consequences on the price of goods and services, and hence - inflation.
RSD on the other hand is a “pure” unit of account. It is simply a measure of the supply/demand relationship between all goods and services that are priced in, and sold against RSD. Without FX markets following their own agenda, the only thing determining the prices of these goods and services is market competition. Prices of a particular good will rise if it becomes more scarce within the ReSource network. If that doesn’t happen, RSD prices are not expected to change. And since inflation is merely the rise of prices, the ReSource network is practically shielded against it.
How Does ReSource maintain RSD purchasing power?
Unless of course the network exposes itself to too many defaults. As we mentioned above, RSD are spent into existence once a user access their credit line, and burned when debts are paid back. If a user defaults and doesn’t repay their debt, a corresponding amount of RSD remains unburned. Consequently, this increases the available RSD supply, which increases the network’s effective demand while the supply of goods and services remains fixed or even contracts. This will overtime drive users to raise prices.
The way ReSource mitigates this is not by simply buying RSD to decrease its available supply, as a hard pegging mechanism would do. Rather, ReSource uses its reserves to ensure that RSD holders always have plenty of opportunities to spend their RSD. That means that if a member defaults, and consequently doesn’t accept RSD as means of payment anymore, ReSource uses its SOURCE reserves to replace this lost RSD spending opportunity while removing RSD from circulation .
A few caveats
With all that being said, honesty demands that we’ll clarify that ReSource is not an island. A collapse of the US Dollar, or any major fiat currency for that matter, would be a Black Swan event with devastating consequences for almost anyone on the planet. It is hard to believe that any far-reaching upheaval within USD-based supply chains would leave ReSource members unaffected and not significantly distress the RSD economy.
Be it as it may, we dearly hope that we won’t be forced to stress-test our hypotheses and that you and your loved-ones are save and will stay this way for the foreseeable future.
If you want to learn more about ReSource, SOURCE and how it can benefit you,
Your friends at ReSource.