Let's take a simple network of three parties A, B and C. A owes B 100$, who in turn owes C 100$, who in turn owes A 100$.
In theory, the debts cancel out each other... and the same can be done e.g. with debts of states. What I don't get is why we prefer to pay debts and especially interests when we could just take the debts and cancel them out where possible.
> What I don't get is why we prefer to pay debts and especially interests when we could just take the debts and cancel them out where possible.
Working capital.
Perhaps you borrowed $100,000 and are obliged to pay that back at 10% interest. If you happen to have $100,000 in your pocket, perhaps you're better off using that $100,000 to generate additional revenue, which would hopefully show a better return that 10%, thus effectively covering the 10% interest on the loan and a small profit margin.
If you used the $100k cash to pay off the $100k loan you'd have no working capital, which would likely stymy cashflow and hamper further growth.
That's the theory anyway. You need money to make money and the one way to obtain money is borrowing.
If you cancelled out the cyclical/reciprocal debts then you'd still have the same amount of working capital as you'd pay back $X but also get $X back as a creditor.
A somewhat related idea has been used by institutional players for quite some time now - there are companies specializing in bilateral counterparty risk netting, e.g. http://www.trioptima.com/
The basic idea is identify and simplify multi-lateral transactions for multiple market participants participating in such an agreement, with the ultimate goal of reducing counterparty risk.
In example above, although amount owed nets out to zero in theory, paying back such a loan would require A,B, and C to either have extra $100 cash to begin the payback process or mutually agree to cancel each other's debt (notice that this will NOT magically make an extra $100 appear out of thin air).
Furthermore, credit risk needs to be priced into the transaction - i.e. how certain you are that the borrower will actually ever pay you back.
Traditionally that's how banks operate, they settle up and the end of each business day. I think it's called reconciliation? Maybe that's only in the UK, I forget now. But that's only possible between peers who do X amount of business in a common timeframe.
Remember that different debts have different interest rates and maturity times. Also, remember, not everyone wants to pay off their debt. It's a burden for the individual but for a business debt can be a good thing - you get a known amount of capital that you can invest with a predictable repayment schedule at a known rate of interest. Have a look in this thread, I wrote up a short explanation of why some months back: https://news.ycombinator.com/item?id=8624979
In theory there's no reason not to but in reality it's often impossible to find debts that align that cleanly.
Often the lenders aren't the same entities as the borrowers, until you start talking very large banks, nations, etc. but then at this point the debts are held on lots of different terms like lengths, interest rates, currencies and often with lots of individual parties that have a stake and some level of control.
What exactly do you mean by: '...resolve the whole networks of debts, funds and obligations between all market entities?'