The ability to manage and underwrite credit risk is a key component of the Stable Credit protocol. Mutual credit networks that underemphasize risk management will see their network currencies lose purchasing power, which will quickly erode member's trust.
Almost all existing mutual credit networks, such as LETS and other barter networks suffer from these tendencies. Two root problems have been identified that Stable Credits address - (1) misallocated credit lines and (2) the inability to absorb defaulted accounts. Without these proper mechanisms in place, most networks end up in situations in which large quantities of Mutual Credit currencies have been minted, without them being destroyed through the repayment of due debt at the end of their lifecycle.
Over time, this leads to scenarios in which complying members of afflicted networks can amass large quantities of currency that can't be adequately spent within the network. This phenomenon results in stagflationary tendencies that often drive the most productive members to abandon these networks, leading to an economic "spiral of death".
The Stable Credit protocol has been specifically designed to address these challenges and render Mutual Credit into a predictable and reliable financial instrument. In order to achieve this, Stable Credits provide the mechanisms that ensure the Stable Credit supply is always equal to the value of outstanding and payable debt, with bad debt being covered by reserved funds.
The following chapters elaborate on these mechanisms and the predictive tools that support them.