We Need to Go Beyond Tokens to Unlock Blockchain’s Financial Revolution, Says Cosmos’ Ethan Buchman

At EthCC, amid the buzz of new token launches, I had the chance to sit down with Ethan Buchman, co-founder of Cosmos and CEO of Informal Systems. A key proponent of collaborative finance (CoFi), Ethan offers a refreshing perspective on using blockchain to create sustainable and inclusive financial systems. His latest project, Cycles, aims to realize this vision by driving real-world benefits for communities and reshaping the future of finance.

Ethan, your background spans biophysics, permaculture, and distributed systems. How did these shape your views on finance and technology?

While studying biophysics, I became fascinated by what makes life possible in a universe that appeared to be constantly running down. This idea contradicted my experiences with emergent systems and the stunning beauty in nature. As I started exploring permaculture, my perspective shifted beyond just being a professor who studies and teaches. Its focus on sustainable systems got me thinking about the larger world of political economy.

When I came across Bitcoin, it felt like the phenomenon I was studying in the biophysical medium was happening in the digital medium—an origin of life moment. I became captivated by the possibility of consensus systems and organizing agreements to create reliable systems from unreliable parts, which is the essence of distributed systems and cryptography. This is similar to biology, where random molecules come together to form complex organisms like human beings.

That got me thinking about how we could leverage consensus systems, distributed systems, and cryptography to build more robust, sustainable, and resilient human systems. There was a clear mismatch between people's ideas, their understanding of the world, and the institutions that were supposed to represent them. Social media allowed for self-expression, but institutions failed to represent that adequately. Blockchains offered an opportunity to build a new layer of infrastructure to enable more political and economic expression, leading to Cosmos and all my subsequent work.

With traditional financial systems' competitive and extractive nature, what might a more sustainable and inclusive approach look like?

I've spent a lot of time thinking about this and trying not to be naive. I still believe in the importance of local currencies, local economies, empowering local businesses, and getting money flowing in communities. The challenge is scaling that.

One way to approach this is by going back to the basics of the three factors of production: land, labor, and capital. I think about land, labor, and money and how our institutions represent these factors. The constitution we're stuck with in Canada, created in the 19th century, focuses on nation-states and shareholder-based capitalism. It represents capital interests but largely ignores land and labor interests, leading to societal dislocations and tensions.

We need better representation in our institutions for land, people, and money—not just as capital but as a means of exchange and a way to value things. Value isn't universal; it's subjective. Yet, we try to standardize it globally, which undervalues essential elements of society. COVID highlighted this when the most essential workers were the lowest paid, showing our failure to value things correctly.

I'm pro-markets, not necessarily capitalism. Markets need to be grounded in the right social environments. They are always creatures of law and social reality, and we need to consider that in their design.

For land, I support a land value tax. For labor, I favor worker cooperatives, giving employees a direct voice and ownership in companies. For money, we need to understand that banking power comes from managing liabilities, not just assets. Banks clear huge amounts of debt with little money through clearinghouses. This functionality isn't accessible to others, causing liquidity stress. Addressing this could lead to a more sustainable and equitable financial system.

How can we leverage blockchain to achieve this?

Blockchains excel at atomic multilateral settlement, which means settling transactions in an all-or-nothing manner (atomic), involving multiple participants (multilateral), and allowing them to clear debts (settlement). This enables the clearing of large amounts of debt for many people with very little money. Surprisingly, few in the blockchain space focus on this use case.

Most applications today concentrate on the asset side of things and tokens. However, there are numerous outstanding debts where people owe money and are owed money. Many small businesses are solvent but face a duration mismatch where their assets are due later than their liabilities. They need to pay today but won’t get paid until tomorrow or later. This liquidity crunch can lead to insolvency, with late payments being a major reason small businesses fail.

We can address this with better-designed liquidity mechanisms. Our goal is to allow small businesses and individuals to pool their debts in a privacy-preserving way. By surfacing information about who owes whom, who has assets to pay, and who is willing to accept those assets, we can use the structure of the debt graph to clear as much debt as possible with minimal money.

Simply put, we need to respect the graph.

This approach hasn't been tried before, and that’s what we're aiming to do now. Cycles, the protocol we're building (incubated out of Informal Systems), aims to solve payment system bottlenecks and enable liquidity to flow. It's an open-clearing protocol designed to clear the most debt for the most people with the least amount of money from the most preferred sources. By surfacing the structure of the obligation graph, we can do more with less, unlock liquidity, reduce capital and working capital costs, and address cash flow issues.

Can you give me an example of a successful real-world application of these collaborative systems?

There are several examples of mutual credit systems and local currencies using blockchain. In Kenya, a mutual credit system leverages blockchain to scale and enhance its functionality. Mutual credit has existed long before blockchain technology; however, blockchain can now improve its effectiveness. Such systems allow communities of businesses to issue their own currency, backed by future productivity. These currencies can be pegged to the local unit of account and are accepted for goods and services within the community.

Switzerland has the WIR Bank, the most successful mutual credit system in history. Sardinia has Sardex, and Africa has Serafu. We're interested in enabling more of these systems because they are challenging to get off the ground. We aim to build the infrastructure to make it easier to bootstrap and scale these systems, making credit more accessible to small businesses struggling to obtain credit from banks.

Is the main advantage of blockchain in these systems about scaling trust?

Yes! Banks today use clearinghouses to gather and net out all their debts, but that's a closed club with high levels of trust and barriers to entry. It’s not feasible for the 200 million businesses worldwide—or even a million. Small businesses can't access that and can't afford the legal reviews for contracts.

With blockchain and privacy-preserving technology, we can build a similar system without introducing new central counterparties and a lot of risk. People can upload their debts securely without needing to trust anyone else. That’s also what we hope to achieve with Cycles—more transactions with less money.

How do we define success in this process? Do we need to create new metrics to understand value?

Probably. There's been an overwhelming focus on quantities, like GDP, but we need to move towards more quality-based assessments. We need to talk about concrete things to understand them. When it comes to businesses, statistics often overlook the health of small businesses and how to measure it. If small businesses are going under due to liquidity issues, being consolidated, or bought up by private equity, that's likely harmful to the economy, job creation, and growth. We need to find ways to measure their health, assess their liquidity, and improve it.

Can this system be applied on an individual level, like in a community of farmers? What would be the biggest challenge?

These debt-clearing systems work best when sampling across a broad swath of society. If everyone's from a single industry, they might prefer a buyer's cooperative, which is common among farmers. They pool resources, gain more buying power, and compete better. But if farmers have deferred payments, they might do more business with less money and increase the velocity of their money. Most people think they need more money to create more growth, but increasing the velocity of money is another way to grow. Credit clearing enables this, allowing individuals and businesses to make more transactions with less money and utilize existing money and assets.

Credit clearing can operate at a global scale, a local scale, and move between them, connecting global and local monetary systems. It encourages more local commerce, helps clear local debts, and requires less external capital. This can help bootstrap local economies and help small businesses and individuals survive liquidity issues.

Gridlock is a great analogy. If traffic engineers coordinated the lights, traffic would flow. The same problem exists in the payment system, where bottlenecks prevent payments. I am really excited to discuss these topics (and chat about liquidity) at the Modular Summit and beyond! I’m looking forward to meeting people, hearing about their projects, and finding new ways we can push the space forward together.