In the past year, the complex layer zero network, Cosmos has exploded with activity. Co-founder of Cosmos, CEO of Informal Systems, and President of Interchain Foundation, Ethan Buchman helps us understand what they are calling the "internet of blockchains".
Walter Jennings: Welcome to Waves in the Finoverse. I'm Walter Jennings, the host of a podcast, brought to you by Finoverse. We're talking with the wave makers creating ripples, waves, and tsunamis across finance, crypto, FinTech, Web3 and beyond. Listen weekly to hear the change makers talk firsthand about their experiences in this dynamic industry. Today's guest describes himself as an internet biophysicist, sustainability existentialist and plain text evangelist.
When he's not on Twitter, he spends most of his time in the Cosmos, a complex layer zero network that in the past year has exploded with activity. Our guest is a co-founder of Cosmos, vice President of Interchange Foundation, and CEO of Informal Systems with three jobs on the go. We're lucky enough to have him joining us in the Finoverse. Please welcome Ethan Buchman. Welcome to Waves in the Finoverse.
Ethan, great to have you on the show. I want to kick off with some big overarching topics. Uh, one of the biggest questions is you say that international finance system is structurally unsound and unstable. Why?
Ethan Buchman: Wow. Let's, uh, kick off with a bang. Well, thanks for having me on. Yeah, there's a lot to unpack there. I think ultimately there are a few ways to understand what's maybe structurally wrong with it.
One way to think about it is that we have institutionalized what was historically a form of war finance, right? Where the sovereign would find itself in an emergency condition, and would have to raise funds for that in the form of sovereign debt. And that has become, that debt that was initially used to fund war has become the sort of institutional backbone of the financial system.
And that has certain implications for how we orient, for how we spend funds, for how we think about sustainability in the economy, perhaps more fundamentally, or as a result of that, the way we structure and organize debt in society kind of as a whole is in such a way that we don't really ever expect it to be paid back.
It's kind of continuously rolled over. And that perennial sort of rolling over of, of the financial state, uh, implies a kind of endogenous instability that inevitably leads to these sorts of crises we keep seeing. And 2008 was sort of the worst version of that. But we haven't really addressed the structural imbalances in the financial system that are kind of built into the way we do things. So there's a lot more we can unpack there. It has a lot to do with sort of American hedge money and the sort of structural trade deficit that they have. And the structure of the Euro-dollar system, which is this offshore shadow banking system, that no one really understands or can see, and all the kind of instability lurking there. And the system kind of worked for a while after the war and until about 2008. And then it collapsed, pretty fundamentally and hasn't really recovered since. And things are only kind of getting worse. So crypto obviously merged as a response to this.
Walter Jennings: Ethan, 2008 was a pretty monumental year for the development of blockchain. It was when the Satoshi Nakamoto protocols were published, and that opened the gateway to an alternative form of financial systems. Do you want to talk about what that has managed to overcome and areas where it's still may be wanting?
Ethan Buchman: Yeah, for sure. So Satoshi's protocol Bitcoin was certainly a response to the crisis. And when it launched, you know, there was a message stamped in the Genesis Block, from the Times, the new chancellor on the brink of second bailout for banks. So it's very much a political response. One idea is that Bitcoin is sort of fundamentally an open source money in a world where we hadn't been able to have open source money, but it emerged with a kind of simplicity baked in, that means it's really just a starting point, right?
And so it allowed, an online open source community of people to come together to issue their own money, issued for work they deemed valuable, the proof of work mining and sort of set the foundation for a new way of thinking about how we could create issue, distribute money as a society. And of course, the revolution that's taken off since the crypto revolution has been experimenting in a lot of ways.
But it's also getting stuck in a world of sort of finance and speculation and let's say the maturity of its monetary theory is still pretty limited. And so it kind of has a long way to go to really connecting better with the real world and sort of completing the story of what we need for sustainable money.
Walter Jennings: Now, before we dive into the next question, I want to establish for our listeners, your bonafides. Could you perhaps give us either the world's shortest elevator pitch or a 128 character introduction to yourself and your firm?
Ethan Buchman: Yeah, sure. So my background is in biophysics. I studied the Origin of Life and statistical mechanics and got into computer science. I did a master's degree on a consensus algorithm called Tender Min. And then tender Min is a general purpose blockchain engine, blockchain solution that people can build their own blockchains with.
And then on top of Tender Min, um, I co-founded a project called Cosmos that proposes allowing anyone to build their own blockchain, any community, to build application specific blockchains that they can launch with their own proof of stake validator set. And that can connect to each other in an interoperable manner using a general purpose protocol. We developed called IBC. So Cosmos is quite popular today. It's pretty much the most popular way to build, uh, a blockchain. There's 50 plus public chains, connecting that, that are built using the Cosmos technology.
And nowadays I run a company called Informal Systems, which is structured as a workers' cooperative. That's a leading development team within Cosmos. But we also do security audits. We run improve of state validator, and we're building a new kind of financial solution, that we call collaborative finance. We could get into all that.
Walter Jennings: Okay. Well, I will come back to collaborative finance, but going back to the earlier question. You mentioned about the international finance system being built off the back of war, made me better understand why the tax collectors were roaming through Sherwood Forest, uh, back in the days of Robin Hood and made Marion. But carrying all the way through to present that had been why states needed to raise funds.
Now, since 2008, with the Satoshi protocols, we've moved into a world of virtual assets and crypto exchanges. But in the last fortnight, Ethan, we've seen the collapse of FTX. How will we regain people's trust in exchanges? And how fundamentally does this alter the kind of the future prospects for cryptocurrencies?
Ethan Buchman: Yeah, so the FTX failure was certainly a tragedy for all the folks who lost money. It seems there were a lot of potential signs as well. But ultimately, this was the failure of a centralized institution who failed to manage their risk, who failed to be sufficiently transparent and accountable with user funds and collapse.
And we've seen other instances of this year, and certainly in the past, we will likely see more instances of this again, but really this most fundamentally underlines the importance and validity of what's being proposed with decentralized finance, with these transparent ledgers, transparent financial systems on which you don't have to trust some centralized third party to behave. There's deterministic code that controls funds, that can be audited, that everyone can verify. Everyone can see the current state and verify, you know the proof of reserves and that user funds are safe essentially, and how things will be executed.
So really this is just another failure of an unaccountable centralized entity, that had very poor governance. You know, there was, as far as I know, there was no actual board, even though there were hundreds of millions of dollars invested, right? So just chronic unaccountability in centralized institutions. So it's quite unfortunate. I think, they were one of the biggest exchanges very popular in a lot of mainstream media, and so it'll certainly shake some trust for a bit. But I think we just continue to rebuild and stay values aligned with what this movement is all about and continue to push back against centralized institutions and to promote better transparency, verifiability and so on, which is really what this is all for.
Walter Jennings: Now, Ethan. Um, clearly FTX was the equivalent of dropping a large rock in the center of the pond. And we see the waves rippling out. We've seen some early casualties, but I'd like you to put on your kind of forward looking fortune tellers hat and kind of tell us where some of these, where do you see the ripples extending to, and what are some of the areas that are under potential vulnerability?
Ethan Buchman: Yeah, it's hard to say. I mean, it's certainly a big shock to the ecosystem in some sense. This seems like it's still downstream of the terror collapse earlier in the year, which is, you know, was perhaps triggered by macroeconomic conditions. So, all of this might just be downstream of rate hikes, but it's really hard to say, the central bank hikes the rakes and suddenly the fraud becomes a lot more apparent in the system. So, uh, yeah, I mean, I..I don't know. I don't have a crystal ball. I think there will still be some fallout to be had. I think we'll still see some players that suffer significantly from this, there's been rumors about certain other centralized service providers in the space.
And so we'll have to see how all that goes. There really could be another blow, and we could be... This bear market could be extended significantly longer, but we don't really know. Could also be, it's important to shake things out and to shake out bad decisions and unsustainable debt and so on. So, hopefully the space will just continue to grow back stronger than ever, which is sort of what happens each time.
Each time there's a crisis and you like to think people learn somewhat from previous ones. Maybe they don't always or they kind of disappoint you, but we just keep building the next wave of these things and keep focusing on pushing to really connect to real world use cases and make it not just about speculation and number go up and so on, but actually focus on real world value. So hopefully that's what the next cycle will have in store.
Walter Jennings: Great. Well, let's leave the past behind us and move forward into your thinking and your business and Cosmos. Your goal is to build tools that encourage humans to self-organize into functional systems. How do these tools work, and why would we want to do this?
Ethan Buchman: That's right. Yeah. Um, great question. So I like to think of this in terms of, the evolution of computing and, and how computing systems kind of evolved. I think there's an important analogy to be made. In the past when computing systems were evolved, first we kinda had mainframes and mainframes were these sort of big bulking computers and the basement of IBM or whatever. And there was this notion that not everyone needed a computer.
Everyone could just use one or a few large mainframes, and that would be fine. And people who said there would be personal computers were ridiculed, right? Uh, but of course, what happened, the personal computer emerged and gave every individual the ability to be sovereign over their own computing machinery, to own it, to turn it on when they want to install the software, they want to operate it how they want, but to also be interoperable with all the other personal computers out there, right?
And that interoperability emerged through what we call the internet, through standard communications protocols over the internet, like TCP to standard communications protocol, right? And this world sort of emerged of, you know, interoperable personal computers. And we see in the blockchain space something kind of similar happening except, um, you know, instead of physical computers, the computers we're talking about are what we might call consensus computers or blockchains, right? Each blockchain is really logically it's a single computing device, even though it's made up of many physical computers. All of those physical computers are kept in sync. They all compute the same thing, the same function, the same output.
So logically it's like a single computer run by a large community. And we have a sort of mainframe version of that in the Bitcoins and Ethereums of the world, the so-called world computing vision. But Cosmos proposes ultimately what would be the personal computing equivalent in the blockchain world, or what we would call the community computer.
So in Cosmos, the each blockchain is a, we call it a community computer, because really it's giving to some community, however they define themselves, the ability to build and, and run and maintain and evolve their own computer in their own community computer in the form of a cosmos blockchain, right? And so we've seen a number, 50 plus communities emerge and, and, and they're sort of, uh, many more coming that are building. They're using the Cosmos machinery to build their own blockchain that represents their own values with their own validator set, their own token, their own governance, so their own real political economic system.
So these are ultimately tools for political, economic expression, right? To organize yourself. You don't have to pay rent to any other token or use anyone's token or infrastructure. You sort of have complete sovereignty over your blockchain, and yet you can still be interoperable with all the other blockchains out there. So that's the sort of core idea. This community computer vision and philosophy that gives every community the ability to sort of run their own computing.
Walter Jennings: Ethan, we've spoken in the past with leaders of some of the other competitive blockchains. We've heard of layer one blockchain such as Bitcoin or Ethereum, layer two networks and blockchain or Next Generation. I know that Cosmos is a key layer of zero blockchain, so what exactly is layer zero?
Ethan Buchman: Yeah, so I don't love the whole layering distinction. I suppose it can be useful. You know, the idea that a layer one blockchain is an independent blockchain with its own consensus mechanism, right? So there's a bunch of participants, they're running a consensus algorithm so that they agree all of them on every state on the history of transactions and so on.
And you have a bunch of these things, like you said, Bitcoin, Ethereum, and so on, in Cosmos, we really want to, and then so for instance, on Ethereum, you have the Ethereum blockchain, and then people will build smart contracts on top of Ethereum, they'll deploy onto Ethereum. So they're all kind of sharing one Ethereum blockchain, but you have many different applications. The idea with Cosmos is to provide a different model for building applications where each application is its own blockchain, right?
And so each application is sort of like its own layer one blockchain with its own validator set, its own token, its own security and so on. But the key is that there's a general purpose interoperability protocol for those different layer one blockchains to communicate with each other. And we call that thing IBC, the inter blockchain communication protocol. And some people will like to think of that as a sort of layer zero because it defines a generic interface through which different layer one blockchains can actually communicate with one another.
But it's really just a communication standard, just a protocol standard. It's not like a platform that's owned by a company or that, or its own blockchain that has its own token. It's really just a general purpose, standard for different blockchains to communicate, just like different computers communicate over the internet using a protocol called TCP, different blockchains can communicate over the interchange using a protocol called IBC. So it's a kind of perfectly analogous.
Walter Jennings: Fantastic. So it's a little kind of series of piping underneath the layer ones that allow everyone to speak the same language and connect with the same code.
Ethan Buchman: That's right. Yeah exactly.
Walter Jennings: Tell me, what are the, what are most of the Cosmosnauts doing in Cosmos? Uh, how are your users using Cosmos?
Ethan Buchman: Yeah. Well, there's a lot of different kinds of applications being built. You know, there's decentralized exchanges, there's lending protocols, there's stablecoin systems, there's new virtual machines that are being experimented with or even old ones. So the Ethereum virtual machine exists on its own Cosmos blockchain called fmo. And so there's a lot of experimentation with different kinds of applications, but then there's also some that are more focused on social impact. You know, there's the Regen network project that's building carbon credit system and more incentivization of ecological regeneration. There's Althea for mesh networks.
So there's a lot of different real world social impact projects as well. There's a few projects trying to advance the state of cryptography and what you can do in a sort of privacy preserving way using an independent blockchain. So there's a whole gamut of experiments in different applications. And so probably the ones I'm most, interested in are those that are really targeting sort of real world social impact or environmental impact or things like that, or really advancing the state of the art in some kind of technology in a way that's only really possible using a new blockchain. And they can use the Cosmos tools to actually launch their own blockchain. And so that's really gratifying.
Walter Jennings: Ethan, Cosmos is a proof of stake chain. And if so, how do you validate your contracts on the Cosmos chain?
Ethan Buchman: So there are many Cosmos chains, and each chain uses proof of stake. So we have sort of different layers in the stock that people can use. We have the baseline consensus engine is called tender, and then we have an application development framework that we call the Cosmos SDK. So most of the Cosmos blockchains are built using the Cosmos SDK and the Cosmos SDK comes with a built in proof of stake module that determines who the validators are in the consensus based on a delegated proof of stake scheme.
So anyone with tokens can delegate to validate. Well, basically anyone with tokens can sign up to be a validator. You can sign up permissionlessly just with a transaction on the chain, and then anyone with tokens can delegate to the candidate validators and the top, you know, hundred or two hundred, or it can, it's different for every blockchain. The top two hundred with amounts delegated are the actual validator set for that chain. And so there's different validators on all the different chains. There's a decent amount of overlap between them, and then they actually operate the software for each blockchain, and they execute the transactions and compute the state and return the results.
And because each chain can be implemented using a standard common programming language in the case of the chains built with the Cosmos SDK, that would be go programming language or you can build arbitrary custom logic in there to do kind of whatever you want as an application developer. So it gives a lot of power and flexibility to the developers of the application to actually build them however they want, and to leverage the sort of existing batteries included proof of stake module to figure out who the validators are of their chain.
Walter Jennings: Ethan, apologies have hearing the wrong information, but some folks have said, in proof of stake, there's a possible vulnerability of a single entity building up a large quantity of token, and then suddenly we're on what might be the equivalent of a Microsoft blockchain or an Amazon blockchain. Is that a .., am I listening to the wrong sources?
Ethan Buchman: No, I mean, that's certainly, that's always a risk. I mean, you have that kind of risk also in a proof of work system where some entity can buy up a significant fraction of mining hardware, or buy out a bunch of mining companies and sort of take over the chain. There are different arguments on how the network responds and the proof of work context or in the proof of state context. I think in either case, the network, you generally see it coming, but in, especially in the proof of state context, I mean, they, the attacker actually has to literally buy up the coins, and there's only a limited amount of coins usually sort of available on the market. And so they have to spend a decent chunk of change to accumulate that position.
And then by taking over it, and once people find out, this is actually owned by a centralized entity that might actually affect the price. So they might hurt their own investment through this attack. So that said it's definitely always a concern and it's why it's important that chains build up some level of security through, you know, essentially through the value of the tokens that are at stake, and that sort of determines their economic security. But I also try to argue that these systems aren't just economic, they're political economic, and so they have the ability to respond politically and socially to these economic attacks. And so what it really comes down to is the strength of the culture and the community to be able to deal with these kinds of attacks and to secure their system.
And if they're taken over by some hostile party, they cancoordinate to fork them out and, and, and so on. So, you know, Cosmos encourages a kind of more active culture of governance, and we see that on a lot of the different Cosmos chains. There's very active governance participation, from validators, but also from delegators and users. And it's a sort of a thriving ecosystem of political economic expression really. And so that's really exciting to see. But of course, we do have to keep security in mind and keep these attacks in mind and figure out ways to defend against them.
Walter Jennings: Yeah, it really is a great incident or explanation of the blockchain trilemma. How do you develop scalability, decentralization, and security simultaneously in order to retain the principle purpose of the chain? So it seems like you're working well with that at Cosmos.
Ethan Buchman: Yeah, that's right. I think we're exploring an interesting area of that landscape by rather than trying to solve for all of that in a single chain, you make it so that there can be many chains and they can sort of pick where they want to be in terms of their trade offs. And there's a variety of development efforts going on to improve the security, approve a stake, and to improve the decentralization and the scalability of the system. So, we'll continue to experiment and these chains will continue to evolve and we'll see.
Walter Jennings: Yeah, you're a sovereign tree model stresses a lot on the freedom of users, but does it make the blockchain more susceptible to attacks?
Ethan Buchman: Yeah, that's right. I think we're exploring an interesting area of that landscape by rather than trying to solve for all of that in a single chain, you make it so that there can be many chains and they can sort of pick where they want to be in terms of their trade offs. And there's a variety of development efforts going on to improve the security, approve a stake, and to improve the decentralization and the scalability of the system. So, we'll continue to experiment and these chains will continue to evolve and we'll see.
Walter Jennings: Yeah, you're a sovereign tree model stresses a lot on the freedom of users, but does it make the blockchain more susceptible to attacks?
Ethan Buchman: Insofar as the security is kind of fractured across the different chains? You could say that, but on the other hand, you know, so compared to a single chain like Ethereum where all the security is focused on a single blockchain, and then all the applications are built on top.
But by doing that, those individual applications give up a certain other form of security, which is really security over their infrastructure and their future. The base layer can make changes that they don't agree with or can become too expensive for them to use and so on. And so with a sovereign chain, you do have to put up your own security, and there is an inherent cost to that, but I think contrary to what people thought it would be, um, there's a lot more appetite for communities to actually do that and to define their own boundaries and to defend them and to try to secure them.
And not every application needs the full security of the Ethereum blockchain and to have to pay for it is really overkill. And so applications can sort of choose to define where they need to be in the security landscape. And by using their own blockchain, they don't have to overpay for security. And so it might mean that their security is less, but there again, there are also other ways to defend their political and sociological ways to defend chains and to define the security boundary and so on. So I don't think it's so easy as just saying, one thing is more secure than another, because really security is a pretty broad landscape of potential requirements or guarantees.
And so Cosmos provides a lot more opportunity for fine tuning and for communities to really define what makes sense and what works for them. And so one thing that's worth adding here is, there's one blockchain in this ecosystem of blockchains, in this internet of blockchains, and we call that chain the Cosmos hub. It's just one of the chains among the many chains in Cosmos. But it has the highest security of all of them. It's sort of been around for the longest. It hosts the ATO token, which is a a quite liquid and well distributed token. And there's a new feature launching on the Cosmos hub early next year in January that's called Interchange Security, that allows new blockchains, new blockchain application specific blockchains to launch using the security of the Cosmos hub.
So they'll inherit that security and be able to leverage the security of the state data so they won't have to come up with their own security, but they can still have their own token and their own sort of application. It'll just be run by the same validators as the Cosmos hub. And so ultimately the goal of Cosmos is to really fill in the spectrum of possible ways to provide security. We start with sovereignty as sort of the base model and go bottom up and say, the first and most important thing is that communities can be sovereign over their own computing infrastructure and applications, but then we wanna actually fill in the spectrum of possible ways to share security across the interchange.
And there's another protocol called mesh security that allows different chains to sort of share their security with each other and to augment each other. And so I think we'll see a lot more complexity in the space of how these blockchains are secured over time and Cosmos and IBC really let you explore that. So that's something pretty interesting, I think that we'll see evolve.
Walter Jennings: Yeah. Well, thanks for that. That's a really helpful explanation. Ethan, before we started the recording, we were talking about Terra, which was built on Cosmos, and we were speaking about the incident. So can you explain to everyone what that incident was and how Cosmos was impacted?
Ethan Buchman: Yeah, essentially, Terra was its own blockchain. So it was a sovereign blockchain built using the Cosmos technology. It was, I think it might have been the biggest at the time, or certainly one of the biggest. Terra had a stable coin that was called Terra USD had a two token model, so there was Luna and Terra, but it wasn't a collateralized stablecoin, so there wasn't actually collateral, backing the issuance of the stablecoin. It used what sometimes referred to as a algorithmic stablecoin mechanism or as a seigniorage based.
Walter Jennings: Ethan, apologies. I'm just going to interject for our listeners. We did an interview with David Buckthought of an ANZ bank who introduced the Aussie dollar stablecoin, which is a collateralized coin, and there's a good explanation of the difference between an algorithmic and collateralized coin in that episode. But just a side note for our listeners.
Ethan Buchman: Yeah, no problem. So essentially in these seigniorage based or algorithmic stablecoins, you know, because there's no collateral actually backing the system is effectively collateralized by the liquidity of another token, right? So the stability of the stablecoin sort of depends on there being a very, sort of liquid stable market of another token, in this case, Luna.
And unfortunately, that mechanism has a sort of fatal flaw, which was well known and discussed, which people refer to colloquially as the death spiral. Because essentially what happens is the mechanism can get into this positive feedback loop where the price of Luna keeps dropping. And so there's not enough liquidity to actually back the stablecoin. And if the stablecoin de pegs and becomes worth less than a dollar, and you get into this situation like this where there's a lot of selling, it may not be possible to actually recover the peg that can happen if there's flight out of the system, which is essentially what took place with Terra.
They had an unsustainable application called Ancor that they were subsidizing very high interest rate loans, 20%, that people were using sort of irresponsibly, because it was billed as secure or safe. And, ultimately there was, I think like 20 billion in loans or something in Terra and a couple billion decided to cash out one day and exited the system. And it basically just caused this de pegging event and the system entered this death spiral and wasn't really able to recover. And now there's forks of the system and the community is trying to recover sort of socially and in its own way, which is really kind of amazing to see and to witness.
But you know, the unraveling of Terra was certainly quite dramatic and tragic event in the industry. And it did have a little bit of contagion, certainly across Cosmos, but because each blockchain is sovereign the faults are isolated as well. So if one blockchain fails, the other blockchains don't fail at all. They might be exposed in this insofar as the coins of the failing blockchain were on other chains or vice versa. And so they might have to deal with that. But most of the impact was quite contained and was contained to a larger lead Terra.
And I think a lot of lessons have been learned about all that, and it was quite a critical test of the Cosmo software and the resolve of the community and the sort of philosophy of sovereignty and interoperability. And I think the whole ecosystem has become a lot stronger since then.
Walter Jennings: Great. Well, I'm pleased to hear Cosmos survived the incident and the community is regathering its strength. Now, Ethan, you personally have a very interesting background in cellular biology, machine learning blockchain. Do you foresee a day where you'll be able to bring all of those knowledge pools together into some kind of organized organoid blockchain computer?
Ethan Buchman: Yeah, I certainly hope so. I certainly try. We're working on something now what we call collaborative finance that I think is really building on a lot of different threads from my background. And so I'm excited to be seeing that pull together really... I'm really inspired by organisms as sustainable systems and by the closed flows of energy that constitute organisms and organismal growth and ecosystem growth and really defines what it might mean to do sustainable growth or to grow sustainably.
And I think there's a lot we can learn and apply from that to how we build economies and how we organize and engineer money. And collaborative finance is in a sense an attempt to do that. So I write about that a lot and I hope one day to write a book sort of synthesizing all these, but in the meantime we're building product and doing research and trying to bringing these ideas to market to really help improve finance, make things more sustainable, and really help real world businesses.
Walter Jennings: You talk about collaborative finances, the equivalent of an organism. Dive a little bit deeper into that. You've introduced the concept. How might collaborative finance be used in a day to day situation? How might I use it? How might you use it?
Ethan Buchman: Yeah, so the way I like to think of it is there's a lot of obsession in finance and economics about the quantity of money, right? There's the so-called quantity theory of money. Everyone's looking at the size of the Federal Reserve's balance sheet and different measures of the money supply, M one, M two, all of this sort of thing. But no one's really talking about the quality of money, right? What does it mean to have a quality theory of money? And what do we even mean by quality money?
Well, we sort of have a definition of what quality money looks like, and it's effectively money that flows in closed cycles, in closed loops across firms in society. And the essential idea is that if we are in a closed loop of business relationships, say, I owe you $10 and you owe Angus $10, and Angus owes me $10, then we have monetary relations, we have credit extended to each other, but we don't actually need any physical money to clear those debts because we can become aware of the fact that there's a closed loop here and we can just offset $10 from each of us, right?
And if it's I owe you 10 and, and you owe six, and they owe me four, then again, we can net off four from each, right? So these closed loops exist all across society, and, but no one's aware of them because people are only aware of their sort of bilateral obligations, right?
But if you actually map out the graph of invoices in the real world trade credit economy, these loops actually exist everywhere. And what they allow is what we call liquidity savings, right? Because normally when we have a loop of obligations like this, everyone needs to come up with cash, or someone needs to come up with cash to pay things off so that the loop, the money can actually flow through the loop, right? But if we simply become aware of the fact that the loop exists, then we can clear it without any money.
And so this is sort of the essential insight of collaborative finance or of CoFi. And what it really allows a business to do at the end of the day, by pooling invoices for many different businesses, every business can effectively have its invoices reduced to the extent that they're part of closed loops. So as a business, the effect for me might be that I can essentially pay off my accounts payable with my accounts receivable without having to first collect cash, right? So it sounds a little bit like factoring where I might factor an invoice and accounts receivable, and some banker will take it off my hands and they'll give me cash at some steep discount, and then I have cash to pay, I have some working capital and I can pay off my own bills.
Whereas what this does is instead of having someone come in and factor your invoices for a big discount, it actually looks at the structure of the payment system, of the existing outstanding invoices and obligations, finds the cycles, and allows you to basically reduce your balance sheet, reduce your receivables and payables in tandem. And that's actually a very powerful foundation for then building a lot of more interesting solutions and clearing services on top, because of course, only a limited amount of credit is gonna be in cycles from our research. It's anywhere from 5% to even 20% in developed economies, which is quite substantial.
But then you can do a lot of interesting things in terms of the way you introduce liquidity into an economy to optimize for different properties to clear the most amount of debt for people and so on. By mapping out the payments graph, we can provide a lot of value to businesses by saving them liquidity, essentially. So that's the essence of CoFi in essence.
Walter Jennings: Ethan, you have solved for cash flow, and I know many small and medium enterprise that will be blessing you for that revolution. So I look forward to learning, seeing more and more of it.
Ethan Buchman: Exactly. The goal is major cash flow savings for businesses. That's right. Yeah.
Walter Jennings: If you could listen to one song in the Finoverse, what would it be and why?
Ethan Buchman: Um, the song that popped into my head was, Any Color You Like by Pink Floyd,which is just a beautiful instrumental track from the dark side of the moon that I think really captures their sound. And, I used to love waking up to that track. So, it's a short song. Maybe I'd get bored of it if I had it forever, but I'll go with that for now.
Walter Jennings: Ethan Buchman of Cosmos, thank you so much for your time today, and thank you for joining us on Waves in the Finoverse.
Ethan Buchman: Thanks so much for having me. It's great chatting.
