A word about peer-to-peer finance.

How was it?

When several hundred years ago, the peasant Ivan Pasyuk came to another peasant, Peter Vydryhaylo, and asked to borrow an axe in exchange for a sack of grain from the future harvest, the participants in this transaction had no idea that they were engaging in operational leasing of fixed assets, with a futures contract as the means of payment.

At the same time, this can be referred to, in today’s terms, as complex financial operations that are quite difficult to carry out in the modern world. This is about the crisis of practical finance.

After all, if you go to the bank right now and say, “Give me some money, I’ll buy a tractor, and I’ll pay you back later when I sell my harvest,” the banker, with his chubby little hands resting on his belly, will ask about the collateral for this operation—nobody trusts anyone, and especially no one wants to sign up for the results of next year’s harvest. A poor harvest is bad, and God forbid the farmer has just enough money to pay for fuel, while a big harvest is also problematic because prices drop, and there are times when the price of grain is lower than the cost of fuel used for harvesting. Typically, a farmer doesn’t own large grain storage facilities to hold the grain until prices rise, so he is forced to sell everything right off the combine, especially in a good harvest year when elevators, seeing the demand for storage services, charge exorbitant prices.

It’s all quite sad, as the simple idea of settling with a supplier using future claims is quite reasonable. And no matter how much grain will cost tomorrow, in the grand scheme of things, it doesn’t really matter. Grain is still grain, and if the owner of the axe truly needs a bag of grain, he doesn’t care how much it costs—he will eat it anyway and won’t be worried about whether he overpaid for the axe rental.

It is worth noting that Peter Vydryhailo trusted Vanya Pasyuk and accepted a futures contract as payment. In contrast, modern bankers do not trust. If it were only about the prospects for the harvest, Vydryhailo would be willing to share the risks with Vanya and, moreover, wait another year if hail were to damage the grain this year. This indicates that the issue lies in trust and adverse selection. The banker, who does not fully understand the situation, will attract those who cannot provide for themselves or those who have not found a relative who believes in them. Interestingly, the less trust the banker shows or the more he demands for his services, the more likely it is that Vanya, when approaching the banker, already knows in advance that he will not give anything to anyone. Overall, lending to farmers against future harvests is one of the riskiest operations for bankers and is generally not favored by credit committees.

But let’s go back to the axe. Why did Vydryhailo so easily rent out the axe? There are three reasons for this.

1. The level of trust that existed between Vanya and Petya was quite high, and generally, in those times, within closed conservative groups, reputation was the key to survival. If Vanya didn’t repay his debt, no one would lend him anything the following year. Vanya needs to repay the debt. Vanya wants his son to have a house built for him by the whole community, with the understanding that Vanya would participate in similar construction for every other neighbor. And if Vanya is a scoundrel, then there’s no point in helping him.
2. The axe won’t be significantly damaged from Vanya’s use. It remains “a steel axe with a wooden poll, used, 1 piece.” So, if there’s no harvest, Petya won’t lose much. The axe is just sitting idle anyway, and its depreciation is minimal. This way, there’s a chance to get a bag of grain.
3. Even if Petya doesn’t need a bag of grain right now, he understands that a bag of grain is always a bag of grain and can easily be converted into other values, even in the form of a futures contract. Petya can go to Semyon and ask for vodka in exchange for a future bag of grain, and Semyon will agree. With this futures contract, Semyon can go to Baba Klava to have her fix his tooth, and Baba Klava will come to Vanya, asking him to help her harvest carrots in her garden, secured by the promise of a future bag of grain.

Interestingly, in the end, Vanya will find himself with the feeling of having two bags of grain. One of them he will give to Petya Vydrygaylo, and the other… the other will come from Baba Klava, and now Vanya can easily go to Petya and ask for a saw as well. This is to secure the second bag in the future. And as long as no one thinks to accumulate futures on grain, no one will be aware, and no one needs to be aware, that there is only one bag of grain—and that one doesn’t even exist yet.

The crisis will also arise due to the low transaction speed relative to the length of the chain. Petya Vydrygailo will come to Vanya in August for two bags. But Vanya has only one left. He sold the rest, and the second bag is waiting for him from Baba Klava. So it turns out that if Petya, believing Vanya that he will give the second bag “later,” decides to eat the first bag instead of passing it to Semyon, then Vanya won’t get the bag from Baba Klava and, accordingly, won’t settle with Petya.

A simple solution we see would be for Vanya to issue a promissory note, which Petya would give to Semyon instead of promising to deliver a sack of grain. Semyon will know that he needs to go to Vanya for the grain, not to Petya, and Baba Klava will know the same. Petya, having received his own note back from her, will settle it himself by paying for the axe with a harvest of carrots from Klava’s garden.

The second interesting observation is that if the bill will eventually be redeemed by its issuer sooner or later, then the text written on the bill that determines its value is irrelevant. It could just as easily say “a bag of dirt” or “a bag of gold” with equal success. At the same time, despite the arbitrary nature of the writing on the paper, the participants in the chain should not be tempted to take the underlying asset (exchange the bill or the rights it represents for what is specified in it), nor should they feel that the bill is useless and thus want to get rid of it.

What about now?

We have now entered what is known as the post-industrial world. A world of services, where a significant portion of the gross product is generated from intangible things. Essentially, the essence of modern business boils down to the idea of “buying a chip and plugging it into the network.” Whether it’s a microchip production line or a hair salon, in both cases, the share of raw materials in the final product’s cost is minimal or insignificant. Notaries, photo studios, massage therapists, tour guides, auditors, consultants, lawyers, programmers, engineers, telecommunications operators, advertisers, artists, architects, and others create their products with little to no use of working capital. Their labor costs are almost the only expense aside from financial costs: payments on loans for purchased equipment, rent for premises, leasing. Moreover, financial expenses do not depend on the volume of goods or services produced. Yes, there are also energy or fuel costs. However, such expenses can be considered conditionally variable, as the same truck can transport 1 ton of goods providing logistics services or 2 tons, and it will still make the trip. Allocating fuel costs to the transportation of a specific package is not entirely accurate.

What further exacerbates the situation is the “wikification” of the economy. This is a scenario where producers become fragmented, large companies outsource everything they can, the means of production become increasingly complex and less dependent on personnel, reducing the workforce to the size of a household. Meanwhile, the products being produced contain less and less in terms of material components, such as raw materials or energy, and more and more intangible components, such as design or financial aspects, like equipment leasing fees.

In today’s world, we’ve come to the same conclusion as Vydryhailo’s ax: basically, it’s not a big deal to give it away, but still. The owner of the fitness center doesn’t care how many people are in the pool—2 or 15. The pool can hold 30 people. He’s even happy to offer a 50% discount if he were sure that many more people would come to the pool. But he has no confidence in that. When he does have confidence, that’s when he offers the discount. This is exactly what services like Groupon or Pokupón take advantage of.

At the same time, the owner would be happy to fill his fitness club with people. He is even ready to issue… ta-da — rights of claim. Certificates or bearer bonds that grant the holder the right to swim in the pool. But who would take them?

Will another post-industrialist take them on if he is confident that a) he won’t be able to get money from the fitness center, b) he can find a way to use these promissory notes, even if it means accepting a discount, and even a 50% discount (which, by the way, the owner of the fitness club is secretly willing to do, if only he weren’t so busy), c) he is sure that the holder of the promissory note won’t be denied service? And all of this, of course, depends on whether the fitness club owner actually needs the services of this other post-industrialist. For example, it could be advertising or auditing.

Only a marketer or an auditor is unlikely to want to bother with the implementation of these promissory notes and their monetization. They will take them if they are ready to use them themselves or if they are confident that someone in their circle will use them and pay real money for them.

Barter network

How interesting, do you hear how the rough smell of banal bartering gradually gives way to the subtle aroma of social networks? 🙂 We will also add a touch of bay leaf to the dish we’re preparing, meaning, the suggestion that people from the circle might also pay not with money, but with claims.

Now, before we start trying this dish, let’s remember about salt — point 1 from the story about the axe and point b) from the story about fitness. Salt in trust and reputation.

First of all, if we talk about the post-industrial world, on one hand, we often observe an excess of established capacities. There are no constantly overcrowded restaurants, no always full fitness centers, and there are no auditors unwilling to take on another client. In other words, there are no serious material incentives to refuse service to someone with a promissory note instead of cash.

Secondly, for this entire system to function and for promissory notes to start circulating, gradually detaching from their issuer, a system for tracking the issuer’s reputation is necessary — a voting system that shows others the level of trust in the issuer or their digital reputation — karma. Practically, karma will slowly grow with each quality promissory note redeemed and sharply drop with each refusal of service. An issuer with low or negative karma simply falls out of this economy, which is undesirable for anyone.

So, it turns out to be something akin to a social network where anyone can register claims for their own services and, in return for these yet-to-be-provided services, receive claims for the services of other members of the social network.

Why would an auditor accept a promissory note from a fitness center? Because he is confident that there is demand for this service. How will he determine that? Will it be based on his own vision, or will it be because the system’s algorithms suggest it to him and, moreover, map out the “path” through which the chains of rights will flow, ensuring that the auditor, after working with the fitness center, gets what he needs—a restaurant where he can celebrate his birthday in a few months?

This is not about an instant global replacement of money with a mega-branched barter system. No. Industry and agriculture are still very much in play. A significant portion of production relies on raw materials, which need to be extracted and paid for. Money won’t just disappear overnight, and there should still be a nominal value for various services in this social network, if only for reference.

But with the reduction of manual labor, any industry inevitably turns into a service sector: “buy a widget and plug it in.” After all, even at the stage of iron ore extraction, we are talking about creating added value from a service that is increasingly performed automatically.

The point is that literally every entity in the economy, in a system of monitored reputation, will be able to issue various claims and use them to pay for the services they acquire.

At the same time, when it comes to the extraction of primary resources—minerals, food, water, human labor—the issue of their scarcity always arises. In fact, the scarcity of resources is half of the fundamental postulate of economics. The other half states that needs are unlimited. Thus, resource providers and other economic agents who, for any reason, do not have a surplus of supply or excess capacity will exchange their services to the extent that they can consume the services of the rest of the economy.

What else?

Transparency

Of course — transparency. Moreover, mutual If, for example, a painter decides to buy a house from builders, he will want to issue claims for painting services for the next 100 years. The builders, accepting his promissory notes (so to speak, arranging an IPO), need to be able to assess their reliability. After all, if the claims for painting services issued by the painter are not backed by the painter himself, then no one will buy those claims from the builders either. This means that both builders and painters, as well as waiters and everyone else involved in the system, should be able not only to declare their resources but also to provide a way for others to verify them. Peter Vydrygailo would never have given Ivan an axe for a future sack of grain if he weren’t sure that Ivan had everything he needed to obtain that sack. It’s the same here.

Money

Sooner or later, with the development of such a system, expressing the value of claims in some abstract units will become inappropriate. Initially, there will be a temptation to “inflate the price” in order to receive more services from others for one’s own services. Later on, the robots within the system will always be able to provide an accurate real-time answer to the question of “how many camels this bride is worth,” creating optimal exchange chains at the user’s request, should the user wish to evaluate certain claims in, say, gold or oil.

Difference from barter

There are now barter websites where complex exchange operations can be organized. However, the focus there is specifically on natural exchange, involving the trade of goods, often on an industrial scale, and it concerns the exchange of something that already exists or is ready to be delivered.

In this case, it’s not so much about the nature of the transaction. Ultimately, any sale is a very complex barter. It’s about the fact that economic agents issue claims on their goods. This is especially relevant in situations where, for example, a restaurant purchases advertising and pays the advertising agency with claims on the services of that restaurant. The advertisement is created and broadcast now, while the restaurant feeds the employees of the advertising agency months later. Moreover, theoretically, nothing prevents the advertising agency from settling with someone else not with advertising, but with the claims it holds on the restaurant.

In other words, when we talk not about barter but specifically about the issuance of claims, essentially the emission of money by each participant, this can look quite realistic in a) a transparent and b) a reputation-tracking social network. Moreover, the end consumers of services circulating within this social network can either be outside of it or be registered but not offer anything of their own; instead, they can purchase claims to services on trading platforms. Considering that any bill of exchange is subject to discounting, it would be possible to acquire a restaurant visit or a “deposit at a restaurant” for a price lower than the nominal value of that deposit.

Conclusion.

The gradual transition to a post-industrial society, the increasing share of services in the gross product, the emergence of goods that are virtually independent of raw materials (such as software, consulting, and communication services), and the ongoing trend of excess capacity among suppliers are prerequisites for a favorable attitude of economic agents towards barter transactions, provided that these agents find such barter necessary.

At the same time, the development of social networks or the creation of specialized barter social networks will enable economic agents to accept barter payments not only when they have a direct need for it, but also when there is a demand from other individuals within the supplier’s network or those identified through special algorithms that establish optimal barter chains.

Further abstraction of claims from suppliers is possible by monitoring the suppliers’ reputation and ensuring their transparency for the system participants.

It is already possible to create a barter social network where providers of “clean” services (lawyers, consultants, hairdressers, advertisers, programmers, doctors, restaurateurs, etc.) can exchange their services with each other and receive either real services or claims to them, which can be monetized at face value or with a discount outside the network.