Local Exchange Trading Systems

A local exchange trading system (LETS) is a local mutual credit association in which members are allowed to create common credit money individually, written into a common ledger. LETS can be thought of as a mechanism to facilitate the velocity of trade, goods, and services out-with the existing monetary system, allowing us to create sustainable local economies.

As an example, assume that Alice, with zero balance, is willing to buy a litre of raw milk from Bob.

First, they agree on a price; for example, assume that the price is about 2 Euro (as Alice and Bob are living in Ireland). After the deal is written into a ledger, Alice's balance becomes -2 (minus two) Euro, and Bob's balance becomes 2 Euro. Then Bob may spend his 2 Euro, for example, on homemade beer from Charlie. Such systems often impose limits on negative balances, and sometimes even on positive ones, to promote exchange in the community.

Bob can spend his balance with other participants of the LETS, and the creation of credit allows for economic activity and velocity of money even where people have, temporarily, no cash. Of course, borrowing limits can be imposed, even on positive ones, to prevent hoarding within the LETS.

Crisis measures

Systems like this have historically become popular during times of crisis. Michael Linton established the first system of this kind in a Canadian town stuck in depression back in 1981, and LETS were also popular during the 1998-2002 Argentine Great Depression.

Most LETS groups consist of 50 to 250 members, with paper-based credit notes and ledgers maintained by a committee. However, it is unsurprising that paper-based LETS have suffered from problems such as counterfeit notes, fraudulent activity by administrators, and so on (much like centralized crypto exchanges). A blockchain-based LETS could be vastly superior to any previous system.

Moreover, building lots of small credit systems on the same blockchain enables interoperability and novel financial products designed to strengthen the system. Hundreds of different LETS could exist, for individuals and small businesses, with different participation criteria, credit limits, collateralization requirements and other parameters. And yet, they could still be connected by gateways allowing liquidity to move between different LETS if required – while avoiding exposure to toxic debt.

More information

There are draft contracts for basic implmentation, and thanks to Sigma Protocols we can create a Trustless LETS on Ergo with no membership record; therefore, no management committee is needed for enrolment, allowing it to operate with full autonomy.

See this blog post for a longer introduction, or head over to the LETS Discussion Summary on ergoforum to see the latest developments.