Question on credit clearing

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Question on credit clearing

Postby meThre » Sat Jan 14, 2017 5:40 am

In this example from the whitepaper, where I've given Sally an IOU for $100 in exchange for her IOU, which I pass along to you, and you needed to pay Bob $50, and you discovered that Bob knew and trusted me so I gave Bob $50 of Sally's IOU, which he could give to me in exchange for my IOU, and I could settle $50 of my debt with Sally.

If Erik who Sally trusts then gives Sally an IOU of $50, and You who trust Erik gives him an IOU of $50, does yours and Sallys debt clear, and is Sally left with my debt ?

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What I am wondering is if there is a cost to Sally trusting me if I do not pay her back.
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Re: Question on credit clearing

Postby JoelKatz » Sat Jan 14, 2017 6:28 pm

There's no cost to Sally trusting you if she can transfer that debt to someone else. The risk is that someone will start reneging on debt or incur large amounts of debt throughout the system such that the debt loses value. The value of the debt comes from some combination of the ability to redeem it, its scarcity, and the demand for it. If those legs start collapsing, someone may be left holding a lot of worthless debt after everyone else stops accepting it.
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Re: Question on credit clearing

Postby meThre » Sat Jan 14, 2017 10:54 pm

Thanks for your answer. Its a good thing that my trust-line Sally, who acted as the middle-man in the transaction between Me and You, is the one left with debt if I do not pay back. This means that each identity in the Ripple network has to bear the cost when introducing scammers. This makes trust-lines an ideal identity system.
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Re: Question on credit clearing

Postby JoelKatz » Sun Jan 15, 2017 12:13 am

Exactly. The only way you can lose out if someone you trust decides to trust someone they shouldn't is if it directly forces them to renege. It works the same way in the real world. If I trust Alice to owe me money, and she trusts Bob, the only way Bob's default can harm me is if it leaves Alice unable to pay me back. Otherwise, only Alice can lose out from her poor decision to trust Bob.

The theory is that you would only trust people under two conditions:

1) You have good reasons outside the system to trust them. This is why it's rational to trust a gateway if you know enough about it. This is why it's rational to trust someone you know personally.

2) The risk you take is small relative to the benefit you expect to gain or have already gained. This is why it's rational to, at least in theory in the future, extend trust to people who you know would incur high costs if they were to abandon their accounts and who have the potential to reduce your payment costs.
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