History of the LedgerLoops Project

After a simple IOU-centric e-invoicing protocol was proposed in a 2011 post to the Unhosted mailinglist, there was some post-capitalism discussion and research on how this system could be used between humans and possibly also organisations.

In the fall of 2016, a "challenge and trigger" loop resolution algorithm was added (see Whispering Merchants) and due to a name clash the project was renamed from OpenTabs to LedgerLoops. The "challenge and trigger" loop resolution algorithm soon turned out to have a lot in common with the Interledger protocol, or at least a circular version thereof.

In 2021 and 2022 we held a weekly brainstorm meeting around Federated Bookkeeping which kept alive the original IOU-centric e-invoicing vision, adding a focus on data portability. A non-profit company, Ponder Source was created with the goal of bringing Connect Your Books to market, but we basically failed to do so.

And then in 2023, something amazing happened: at a gathering in the beautiful hills of Austria, Collaborative Finance (CoFi) was born. We can now refer to some generic theory about Collaborative Finance (PDF) and can rephrase LedgerLoops as "a P2P CoFi system" - and that is where we are now.

LedgerLoops is published free of patents, under the CreativeCommons BY-SA license. Michiel de Jong is working on it full-time.

Since LedgerLoops is patent-free, you can join the network of LedgerLoops-compatible nodes without prior permission, as long as you don't use the name "LedgerLoops" in a misleading way. We might create a test suite to certify software compatibility and bring the algorithms/protocols to a standards body, if there is interest in that.

Three Mechanisms for P2P CoFi

The ultimate end goal of LedgerLoops is to help to allow goods and services to move to where they are most valuable. In society, this can happen through sharing (abundance based), but it often happens through win-win exchanges of property. These can happen across time thanks to the use of commodity goods and/or the administration of credit. Credit arrangements can form a network, and that's where LedgerLoops mechanisms can add their value.

In a credit networks, various economic arrangements can take place - the most important ones probably being barter, lending, netting, payment, factoring and market making (see Economic Arrangements for my definitions). I created this list of economic arrangements to make it clear that LedgerLoops is neither really an IOU system, nor a payment system nor a netting system. The credit graph exists on its own, independently. Different economic arrangements make the credit balances move, whereby goods and services can move to where they are most valuable, as is the end goal. What is probably a more fundamental economic construct than payment is what the MyCHIPs project calls a "credit lift", i.e. a transaction in which a number of debts are (partially) netted against each other. LedgerLoops offers three mechanisms that can help with this.

Decentralized Loop Detection (DLD)

In the Strategy Pit repository, I pitched different decentralised loop detection algorithms against each other. I found one, which I simply call DLDt, which seems to work. I hope to present these results at the CoFi 2 gathering in Belgium.

Lift Negotiation

In our current research, we assume that a credit lift is negotiated independently from the negotiation of trades. This is fine if there is enough local credit available in the network, and cost functions are more or less linear. In practice, a combined negotiation mechanism that optimizes trades and lifts at the same time would probably be more widely applicable, for instance, to only let a trade happen if the resulting credit relationship can be settled immediately. So then the handover of the goods between two parties and the credit lift cancel each other out for these two parties, and only their other credit balances change. In this situation we would call the lift a payment, and the payment and handover together would constitute a sale (see my blogpost about lifts vs payments).

Lift Resolution

There are various ways to execute a lift resolution, see Lift Resolution in the Strategy Pit repo for more details.

It's worth noting that many projects came up with different ways to do lift resolution. The "challenge and trigger" loop resolution algorithm I invented in 2016 and described on this website as a solution to the Whispering Merchants problem can be described as "making an Interledger payment to yourself", "making a rippling payment to yourself" or as "a DEX on trustlines". If you use a referee instead of a hashlock, then it is a MyCHIPs credit lift. If you use a smart contract instead of a hashlock or referee, then this becomes similar to systems like Sikoba, Trustlines Network, and probably CyclesMoney. There can be multiple variations of it in operation in the same credit network - for instance with / without timeouts, different mechanisms to express units of value, or with SHA-256 vs other hash functions.