The basic building block of accounting, a snapshot of a company's financial position based on the fundamental accounting equation Assets = Liabilities + Equity. Summarized total position of accounts.
T-Account
view of a subset of a balance sheet. Visual aid used to focus on a single account or transaction across time.
Asset
Left side of the balance sheet. A resource with economic value that someone owns or controls. Orients towards the future.
Liability
Right side of the balance sheet. An obligation to repay that arose from some past event. Orients towards the past.
Debtor
An entity with a liability on their balance sheet
Creditor
An entity with an asset on their balance sheet
Balance Sheet Expansion
Both assets and liabilities expand. Associated with leverage and money issuance.
Balance Sheet Reduction
Both assets and liabilities reduce. Associated with deleveraging and debt repayment.
Asset Transfer
movement of an asset from one t-account to another
Liability Transfer
movement of a liability from one t-account to another
Counterparty Substitution
Replacement of debtor or creditor in a contract. In most jurisdictions, a creditor can arbitrarily assign other creditors to take over a debt from them, forcing the debtor to pay a new party instead. Most common examples are factoring an invoice or securitizing loans.
Contract Novation
Collective agreement to discharge one contract and replace it with a new one. Most common example is a clearing house, that novates all contracts between firms to contracts between clearing house and firm. A multi-party contract novation is counterparty substitution, but not all counterparty substitutions are novation (factoring is not).
Graphs
Graphonomics
Respect the Graph!
Graph
a network of nodes and edges representing a settlement system
Node
a vertex in the graph, corresponding to a smart t-account. Implemented as a smart contract, and representing agency in the network that can do balance sheet operations via settlement flows.
Edge
a link between two nodes, corresponding to commitments about the past and future relationship between t-accounts (nodes). Edges are stateful. They can change state via the will of the node owners they connect and via a settles flow (application of a settlement record to this edge).
Solver
a mechanism that proposes a valid settlement flow that can be executed atomically on a blockchain.
Flow
Any subgraph. A path through the network. A non-cyclic flow is an opportunity to become a cycle. Liquidity is the formation of cycles.
Settlement Flow
Balanced sub-graph. Comprised of cyclic flows.
Settlement
Settlement System
the system of obligations and acceptances, tenders, and settlement records. Obligations and acceptances are commitments about past and future debts, tenders are intents to participate in settlement, and settlement records describe the resulting settlement flows.
Obligation
commitment about a pre-existing debt. Most obligations come from settlement flows over prior acceptances. On obligation can be payable on demand or with a due date.
Acceptance
commitment about a future debt. Acceptances spawn new obligations.
Discharge
reduction in an obligation or acceptance. Obligations are reduced/eliminated while acceptances become obligations in the other direction.
Settlement
a more common word for discharge that is also its plural since settlement involves a flow. Discharge one obligation, settle many obligations. Individual obligations can be partially or fully discharged by a settlement flow.
Deposit Acceptance
an acceptance that generates an on-demand obligation (eg. to a liquidity source, like a bank or BTC)
Repayment Acceptance
an acceptance that generates an obligation with a due date (eg. a loan)
Liquidity Source
a node with many deposit acceptances pointed to it
Liquidity
a topological property of a network. Share of edge amounts in cycles. Fully balanced network is 100% liquid.
Tender
Participate in settlement by offering an obligation or acceptance, especially from a liquidity source. We refer to tendering an obligation as assignment (an asset transfer), and tendering an acceptance as overdraft (drawing on credit)
Settlement Record
a record defining how much an obligation or acceptance is discharged. Settlement is executed by applying settlement records to a graph of obligations and acceptances. A group of valid settlement records is a settlement flow, a cyclic structure of operations to be applied atomically.
Set-off Notice
a formal and legally binding notice of a settlement record that can be applied off-chain to a balance sheet
Four Ways to Settle
There are four fundamental ways to settle a single obligation, given by a 2x2 matrix of whether the debtor and creditor used their assets or their liabilities. We refer to these as set-off, assignment, overdraft, and assumption. They correspond to network balance sheet reduction, asset transfer, network balance sheet expansion, liability transfer.
Set-off
Network balance sheet reduction. Receivables and payables are offset in a loop. Debtor uses an asset and creditor uses a liability.
Assignment
Asset transfer. Debtor uses an asset and creditor uses (accepts) an asset.
Overdraft
Network balance sheet expansion. An external balance sheet expands to lend funds for settlement. Debtor uses a liability and credit uses (accepts) an asset.
Assumption
Liability transfer. Debtor uses a liability and creditor uses a liability.