3.4.1 Default Insurance

In the context of the ReSource Network, default is defined as a member maintaining a negative balance for more than 12 consecutive months (adjustable by governance). As already mentioned above, such a scenario does not result in a creditor having lost their investment, as it would be the case in the context of traditional credit lines. Rather, default within in the context of mutual credit results in the following consequences that need to be addressed:

  1. Contraction of supply. A member failing to redeem their negative balance essentially deprives the network of goods and services they have committed to provide in return for credit consumed. A prolonged negative balance entails that a member has extracted more than they have contributed in return, implying as a result that their peers have provided more than they have gained.

  2. Inflation. Since rUSD is created when loans are issued, and destroyed when debt is redeemed, unpaid debt results in an access of rUSD that needs to be absorbed to maintain monetary equilibrium.

Unaddressed, contraction of supply conjoined with inflation would result in a stagflationary environment that could bring the trading network to a standstill. To avoid such a scenario, the ReSource network offers MU reimbursements to members with positive rUSD balances. This essentially means that rUSD holders will be able to redeem part of their rUSD holdings for MU at the rUSD pegging target price ($1 worth of MU against 1 rUSD). Since MU is a liquid asset, members can exchange it on the open market for the currency of their choice.

MU reimbursements alleviate the above mentioned default consequences in the following ways:

  1. Deflation. rUSD acquired this way will be absorbed by the Reserve and taken out of circulation

  2. Supply Substitution. While the internal supply within the ReSource network contracts as a result of defaults, conversions into MU allow members to purchase goods and services on the open market in return for the goods and services they have provided to their peers on the ReSource network.

The MU required to fund the above described reimbursement scheme stemmes from the following sources:

  1. Transaction fees 20% of all transaction fees flow into the Reserve as described in the graphic above

  2. Confiscated Underwriter stakes The ReSource network requires Underwriters to stake 20% of the size of an underwritten member’s credit line. This warranty is confiscated in case that the respective member defaults.

  3. Ambassador penalties Ambassadors are fined in case that members affiliated with them default. These fines are subtracted from their transaction fee income.

  4. Debt sale proceeds Debt contracts of defaulting members are sold to third parties, which can then foreclose on the defaulting member.