Informal Systems, a blockchain infrastructure firm headed by one of the Cosmos founders, has floated a peer-to-peer clearing system that would allow people to clear their debts without relying on intermediaries like clearinghouses or banks.

According to a white paper shared with Cointelegraph, Cycles aims to be crypto’s solution for clearing, a process essential in traditional banking for secure payment transfers and liability settlements.

It argues that decentralized clearing is the other side of the equation to Satoshi Nakamoto’s famous white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” 

But Ethan Buchman, CEO of Informal Systems and one of the founders of the Cosmos Network, said it’s been largely ignored by crypto innovators who have been more focused on assets than the liabilities side of finance.

Informal Systems is looking to roll out a first version sometime in 2025, Buchman said.

Cycles will work via a blockchain-enabled process called “atomic multilateral settlement,” which is designed to “clear the most debt for the most people with the least money,” Buchman said.

“We can even combine many kinds of currency types in a single graph, allowing more and more people to benefit, even if they don’t use or accept that currency.”

Cosmos co-founder proposes peer-to-peer clearing system in white paper image 0

Diagram of cryptocurrency, fiat and mutual credit payments in the proposed peer-to-peer clearing system. Source: Informal Systems

If a Bitcoiner wanted to use the clearing system, they would need to transfer Bitcoin ( BTC ) via a Bitcoin-Cosmos bridge such as Nomic to Cycles, Buchman said.

For centuries, banks have formed closed-clearing clubs to settle large volumes of debt — often with little or no money. 

“This results in massive liquidity savings for them,” Buchman said.

As a result, everyone else has been “systematically excluded” from the liquidity savings benefits that clearing provides for banks, Buchman said, in making his case for why a peer-to-peer clearing system is needed.

“The network view opens tremendous opportunities for everyday people and businesses to save liquidity: Save on cash flow stress, working capital costs, late payments, and so on.”

A successful solution would massively reduce their reliance on intermediaries like clearinghouses or central banks.

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Buchman pointed out that Cycles will offer other use cases that range from auto-repayment loans and private funding for small and medium-sized enterprises to stablecoin lending.

“[It] provides a convenient all-in-one platform for managing their assets, making payments, tracking settlements, and participating in new kinds of credit protocols.”

Buchman said the biggest challenge would likely be integrating real-world accounting systems into Cycles and making the batch-clearing operations as intuitive, accessible and user-friendly as possible.

Cycles will be competing with the likes of Yellow Network, which received $10 million in funding led by Ripple in September.

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