Economic liquidity Internet

Only 0.5% of entrepreneurs in the US receive venture capital (Kaufman, 2019). Most small businesses seek loans under $100,000 while banks are increasingly avoiding requests below that level (Forbes, 2014). Ironically, the total money in economies keeps vastly expanding, yet failing to translate into healthy markets (Roubini, 2015) and business growth (Summers, 2016). These failures to source and move money productively can be explained as failures of liquidity (ECB, 2009) for over a decade, and have now become a liquidity crisis (FT, 2020)(WSJ 2020)(HBR 2020).

We build upon proven financial instruments (futures contracts and LSMs) to introduce algorithms that can construct credit pipelines in rapidly changing pathways. They solve liquidity problems similar to how routing algorithms behind the Internet solve connectivity problems. Such a liquidity-Internet could allow solvent businesses and ideas with demand to get started and keep operating during the worst liquidity problems.

Only 0.5% of entrepreneurs in the US receive venture capital (Kaufman, 2019). Most small businesses seek loans under $100,000 while banks are increasingly avoiding requests below that level (Forbes, 2014). Ironically, the total money in economies keeps vastly expanding, yet failing to translate into healthy markets (Roubini, 2015) and business growth (Summers, 2016). 

These failures to source and move money productively can be explained as failures of liquidity (ECB, 2009) lasting since the previous decade, and recently escalating to a liquidity crisis (FT, 2020)(WSJ 2020)(HBR 2020). Even the unprecedented money supply from central banks responding to COVID-19 is failing to reach those who need it the most. Up to 42% of the pandemic layoffs in the US may be permanent (Barrero et al., 2020). Globally, nations are lining up at the IMF for help even when they are technically solvent.

Liquidity problems are particularly acute for marginalized groups who are less likely to have access to collateral, co-signers, and connections. They also affect developing nations disproportionately.

Fortunately, recent advances across computer science and economics have created an opportunity for what can be described as a liquidity-Internet.

At a first glance only, our solution is similar to futures contracts and forward contracts, which farmers and commodity producers have used for centuries to be self-reliant and gain stability in operating budgets without having to get loans. 

But to create futures and forward contracts at least one party must have money to commit. Therefore, they are directly affected by systemic liquidity problems. On the other hand, our ION contracts do not require anyone to have money when they are issued. This novelty sounds implausible at first, because we are used to thinking of credit and payment instruments as 'transfer-and-keep', where a payee needs to hold onto the instrument to get its value. But IONs are 'flow-through' instruments. 

IONs perform accounting on the fly similar to Liquidity-Saving Mechanisms (LSMs) which banks have used for decades to solve inter-bank payment gaps without having to get loans themselves. However, LSMs operate hidden and isolated in a bank backend. IONs (on the other hand) expose this ability into any public market, by using network science algorithms that have been proven in Internet routing protocols and more recently in social networks. 

IONs also empower investors by removing information asymmetry.

The solution is meant for entrepreneurs for whom start-up loans and venture capital do not work, which in the US means 83% (of all good enough to make it to a hiring stage). This unserved population is also carved unfairly across geographic, racial, and gender barriers (Kaufman, 2019). The solution is also for established businesses whose liquidity needs are small enough to be ignored by banks, which in the US is more than half of small businesses (Forbes, 2014). 

IONs make entrepreneurs and businesses self-reliant in forming an operating budget simply by having a connected community of their customers, which today is almost a given with social networks or SMS applications for the poorest. This works even if the whole economy is in a liquidity crisis, because a community connected using IONs can craft the economic flows of its future even in the extreme case when no one has access to money of the past.  

IONs are particularly empowering for marginalized groups and developing nations, because they are more likely to face systemic disadvantages, and IONs make them less dependent on legacy systems for their economic development.

Small and new businesses are the most affected by the liquidity problems above, especially those in developing economies and marginalized communities. 

IONs mathematically transform legacy financial instruments into 21st century technology. They allow a business to capitalize simply by organizing a connected community of customers, even if none of them have money and regardless of how tapped the community is by external assistance. This also makes them more resilient to external shocks.  

Economies with informal transactions like favours, barters, cooperative tasks, are particularly poised to benefit from IONs because the stakeholders in such transactions are already used to self-organizing more.

As far as we know, IONs are the first financial instruments for economic growth not limited by the past, i.e. by how existing money is distributed. This innovation is less due to skills than it is due to the time. For all of history until the past decade we could only have had 'transfer-and-keep' payment instruments which one must keep to keep the payment. It is only the past decade that has made real-time connectivity between billions a given. The 'flow-through' nature of IONs would be hard to imagine without this.

Even the most similar financial instruments such as futures contracts, IOUs, or crowd-funding, still require at least one party to have access to existing money.  

Credit-clearing groups and community currencies are also independent from mainstream liquidity, but unlike IONs they require their own local currencies and payees need to trust their private payment unit.  

As an indirect consequence, IONs can be a new tool for one of the biggest problems of the investment industry, information asymmetry, which distorts the ability to make loans. Instead of handing out their capital in bulk to a business, investors can stream their capital through ION flows by market-making for them. This gives investors visibility the same information businesses have. 

For governments, IONs offer a novel way to increase money supply. The options today involve increasing debt and/or printing money and risking risk inflation. IONs avoid both because they are created out of specific productive activity and deleted when its supply-demand loop closes.

After a Business agrees on an ION ("I-Owe-the-Network") contract with its Customers for a Product, the Business can pay others for operating expenses using the ION even when the payee is completely unrelated to the Customers or the Product. All of this can start in any sales frontend: existing apps, websites, SMS, even on paper.   

There are two types of such payees:

1. Type-1: Those who are part of the liquidity-Internet but don't want the Product or don’t trust this Business.
2. Type-2: Those outside of the liquidity-Internet who may not even know any of this exists. 

For type-1 payees, the ION works in the backend like a simultaneous 'transfer-in' on accounts payable plus a 'transfer-out' on accounts receivable. If a network is sufficiently connected, the Business may operate with only type-1 payees. 

For type-2 payees, we use a proven method from stock markets to bridge supply-demand-time gaps: [by allowing for] Market-Makers. They algorithmically buy an ION whenever its flow hits a type-2 payee, and sell it [for a profit] when the ION is called back to the network. The latter is mathematically guaranteed. 

An ION flows through any number of non-Customers (type-1 or type-2), performing many transfer-ins and transfers-outs, and always ends with a Customer when that Customer receives any kind of income or gift. The ION can be reflowed for any number of transactions, always starting and ending with a stakeholder (Business, Customer, Market-Maker). Whenever any Customer decides to claim a Product with an ION, that ION is deleted.

Practical evidence would require a pilot of a large enough network using the algorithms.

The long-term success of commodity futures provides some evidence that businesses are willing to get into contracts for delivery of products in the future, in exchange for purchasing power in the present; similarly, customers are willing to be part of such contracts. 

Commodity futures are not really part of daily consumer economic activity, but some direct-to-consumer businesses have become successful with a futures contracts model, like Community Supported Fisheries. 

Liquidity-Saving Mechanisms (LSMs) provide some evidence that algorithmic balancing of transfer-in/transfer-out flows can empower financial independence from external funds. Modern internal clearinghouse accounting provides similar evidence.

A few thousand attempts in community currencies and credit-clearing systems suggest how far people are willing to go to be able to self-govern liquidity, and how successful such efforts can be. 

If ION issuers can secure a market-maker, their IONs are usable immediately, because the market-maker buys them time for the network to build flow paths. 

There is hopeful evidence even without a market-maker. Many networks involving social relationships fall under the category of ‘small-world’ networks, where most nodes are not directly connected but have a path between each other over a small number of intermediaries. The average number of intermediaries is surprisingly small, e.g. 3.57 for Facebook in 2016 and 3.76 for Twitter in 2010. The smaller the number of intermediaries, the more likely that IONs can flow without the help of a market-maker.

Activities:

1. Theoretical work through peer review papers and academic partnerships

2. Hosting all the code as open-source and facilitating a development community

3. Enabling jurisdictions to turn up their own networks that lets their members issue and flow IONs

   1. Each network is customized and managed for its own jurisdiction, which could be communal, municipal, national, regional, inter-organizational, etc.

4. Developing inter-network routing protocols, both technical and administrative

Outputs:

1. Activities (1) and (2) reinforce each other and lead to more co-creators, better evolution of the algorithms and code, and greater awareness based on higher confidence. 

   1. One example of such a link is with AI algorithms, where the activities (1) and (2) in that domain have led to output (1)

2. Activity (3) enables the participants local to a network (e.g. members of a community network, or citizens of a national network) to start powering their economic growth with self-managed and self-sourced liquidity 

   1. Entrepreneurs and businesses get access to a new purchasing power that is independent from problems with legacy liquidity. 

   2. Customers get a new purchasing power because the ION flows open up more income possibilities that would not exist otherwise.

   3. Investors get a uniquely safe way to grow their capital without information asymmetries, by playing market-makers. The new opportunities may not have existed for them if liquidity problems were impeding the use of legacy methods. 

3. Activities (3) and (4) lead to a more scalable global inter-network, where ION flows cross jurisdiction domains and facilitate more diverse economic growth and symmetric investment opportunities globally.

   1. The data Internet is an inspiration for this activities-output link with the way its routing protocols have interconnected its many local jurisdictions.  

Outcomes:

1. Future economic growth is far less limited by the past, for both communities and nations

2. Because IONs build stakeholder associations, we become more invested in each other, more bonded in each other’s growth. 

   1. The positive outcomes with community currencies and credit-clearing groups support this link.

Assumptions:

1. Users have at least an SMS phone or regular access to an online computer

2. The open-endedness of smart contracts will not be let to explode in complexity and put off users.

We are currently in a prototyping stage.

The number of people we could end up serving depends on the size of the first economies that implement ION networks, that could range from communal to national, as well as the scope of the implementation. 

The application opportunities we seek in the next year will likely be defined by the fall out from COVID-19. The size of its economic impact will require economies to somehow grow faster than has been possible while carrying unprecedented debt. The novelty of IONs as instruments for growth that is not limited by the past might therefore be even more attractive. At the same time, governments are now engaging in unprecedented experimentation to deal COVID-19 crisis, including “sweeping, structural changes to how their economies work.”

In the longer term, we will look for direction and opportunities in the field experimentation with alternatives that has become dominant in development economics in the 21st century (Banerjee & Duflo, 2009; Barrett & Carter, 2010), as well as grassroots economics projects. 

Within the next year we plan to:

1. Finish peer-review and publication of our academic papers on the solution. 

2. Keep testing with Agent-Based Model simulations

3. Mature the software development for the backend and user facing apps, including mobile, web, APIs and other integrations into existing platforms.

4. Partner with 1-2 implementation candidates and customize the solution for them

5. Launch the first ION network

Within the next five years we hope to:

1. Mature the solution with multiple ION networks in different jurisdictions. 

2. Setup resources and knowledge sharing for self-implementations

3. Start focusing on the inter-network protocols and governance

The biggest barrier for us in the next year is getting an economy willing to undertake a pilot. It could be a sub-economy such as specific to a new infrastructure project, certain community, migrant camp, etc, as long as it starts off with sufficient complexity of supply-demand relationships. Otherwise the ION flows will be trivial and not convincing for growing the adoption. 

In general, getting interest is not hard due to the benefits ION can bring for economies running out of legacy maneuvers. However, the very first economy has only lines of code and simulation results to base a serious decision on. Without much bigger partners, our small team and venture profile might not inspire the needed confidence.

In the next five years, the key barriers will likely be regulatory, in particular regulation that might spring in response to implementations, and especially for grassroots implementations that do not have their government as a partner.

Luckily, we can answer most of the fears for adoption because we can show how non-disruptive IONs are:

1. They do not take away from existing funding operations because they empower potential that was stuck with legacy funding. They only expand investment opportunities for existing capital by creating profitable market-making opportunities. 

2. IONs do not require the setup of new currencies. 

3. IONs do not even require a new app or a new user interface because the liquidity-Internet can interface over APIs with existing e-commerce platforms or government apps. 

4. IONs are likely less susceptible to fraud than existing instruments because they can inherit the risk protection mechanisms evolved by commodity futures, while removing the information asymmetry that troubles risk assessments. 

The work is therefore mostly in communicating all of this well, and working early enough with all stakeholders and regulators. 

We also plan to prioritize getting governments involved as partners. Not only will their partnership help with all the barriers, but they are naturally the best market-maker for an economy because they have so many supply and demand network links with the population.

5, located across Canada (ON and BC), Ghana, and Trinidad

All of us are volunteers currently.

This solution is made possible by transplanting algorithms from computer science and social network technology into economics. Our team members have cross-disciplinary backgrounds, each coming with various combinations of computer science, economics, social sciences, and public policy. All of us have a big bias for social innovation and the open-commons.

Martin Dimkovski:

• Strategist for emerging technology in large enterprises, creating and leading R&D programs.
• Cross-disciplinary education in computer science and social sciences, graduate degrees in AI with a focus on biological relevance and social impacts.
• Software development, DevOps

Angie Fleming:

• Strategic Foresight and Innovation (MDes) graduate program candidate at OCAD.
• Consulting organizations in humanising data, data literacy, and combining data, design, and dialogue to better understand the people they serve.

Kobina Aidoo:

• Harvard Kennedy School graduate, MPP in International Trade & Finance.
• A decade of consultancy at the World Bank.
• Strategic adviser for the African Center for Economic Transformations.
• Combining analytical depth with storytelling through writing, graphics, social media, and videos.

Leena Patel:

• Executive leadership across multiple organizations.
• Innovation strategy with data analytics and emerging technologies like IoT and blockchain.
• Experience in developing CX, organizational & community culture.

Fitzgerald Scott:

• Software developer with particular experience in business accounting systems.
• MBA, Computer science major.

Our beneficiaries are members of all economies struggling with debt and liquidity problems, i.e. failures to source and move money productively, which disproportionately affects marginalized groups and developing nations. 

1. We provide a novel financial instrument, ION contracts, which allows solvent businesses and ideas with demand to get started and keep operating simply by organizing a connected community of customers, even if none of them have money.

2. The principal value proposition is economic growth not limited by the past, i.e. by how existing money is already distributed. It can be broken down into: 

   1. self-reliance in funding operating budgets for businesses

   2. new purchasing power for customers

   3. safer and additional investment opportunities for third-parties

3. The impact can be measured by the level and properties of economic activity that builds up in the ION network.

4. Governments and community administrations have incentives to invest their time and resources to get such capabilities, especially during today’s global liquidity crisis and unprecedented debt. 

5. Long-term, we plan to focus on horizontal channel development, trying to reach governments and community administrations, and enable them to scale their local ION networks vertically. This would allow us to focus on routing protocols that would interconnect the separate jurisdictions. In the short-term, we will likely be involved more in all aspects. 

6. Resources and costs: we hope to build an open-source community that will evolve the code and an open-commons governance. Each network can customize for its own jurisdiction and carry its own operating costs from the revenue model described below.

The larger part of our revenue model is in facilitating market-making, a proven practice for capital liquidity in other markets (Bank of England, 2012). The existence of the ION network makes it easier for capital to come in and profit safer. We will collect fees from profitable bid-ask spreads. 

This revenue would scale proportionately with every additional local network.

Capital coming to market-make can be from any conventional capital source, including crowd-funding. 

Depending on the network scale, some purchasing power would also come from the IONs issued by our organization for implementing the IONs platform, since our activity is just like any other who gets spending power based on demand for that activity in the economy. 

We hope to get the self-sustainable revenue model in motion within 1-2 years, but first we need to mature the backend software and user applications and integrations. To do this, we will be asking for grants as a one-time funding stage. A fully funded scenario for the next year would be $520,000.

Another option for funding the initial year is a partnership with an early market-maker for our own ION contracts, i.e. for the delivery of the first networks. This would be the first investor of the new type enabled by IONs. They would stream their funds through the beta network as we progress throughout the year, and start to recoup them when we start the revenue model. 

The main reason is the effect Solve could have on us getting to a pilot stage. This solution requires a whole economy, even if only communal, for the ION flows to become non-trivial. We can explain at length in theoretical papers how non-disruptive it is, etc., but in the end all the users need to feed confident and motivated to start using a new kind of financial instrument. MIT’s Solve could give IONs the kind of exposure and credibility that can make all the difference. 

More generally, the Solve community could be a great enabler for raising awareness about ‘flow-through’ instruments and for finding co-creators and partners.

Please see below.

Tech organizations who innovate in related ideas with economic flow information, for example Social Trade Organization, who create e-wallets that can keep money circulating locally longer, or Ixo Foundation which networks crypto-economic proof of development impact.

Organizations who help communities implement complementary currencies, e.g. Grassroots Economics or Complementary Currency Resource Center.

Complementary currency projects and credit-clearing groups. 

Organizations that work on transformational economic models for social good, e.g. Wellbeing Economy Alliance or Capital Institute.

Municipal governments involved in Municipalism movements. E.g. Fearless Cities, which spans in major cities globally.

Fintech companies like MasterCard or VISA, who have R&D in financing and payment evolution, and might facilitate market-makers with a deeper system integration.

Organizations involved in field experimentation with alternatives that has become dominant in development economics in the 21st century (Banerjee & Duflo, 2009; Barrett & Carter, 2010)