To read about the WIR Franc, also known as the “Swiss WIR,” check out the following links:
- Swiss WIR—80 Years of Stability No One Knows About - Global Genius Currency
- WIR Currency – Reinventing Social Exchange - Resilience
- WIR Bank - Wikipedia
- Gemeinschaft. Mehrwert. Schweiz. | Die Bank WIR - Bank WIR (homepage in German, French and Italian)
In 1932, as the world was enduring the worst year of the Great Depression, Silvio Gesell, a German-Argentine merchant and amateur economist, brought forward the idea of a “community currency” that would exist alongside State-issued fiat. In 1934 the idea was formally implemented in Switzerland by two businessmen named Werner Zimmermann and Paul Enz as the “WIR Franc.” The word WIR stands both for “we,” as the WIR was intended to be a community and supplementary currency – supplementary meaning that it was intended to compliment rather than compete with State-issued fiat – and for Wirtschaftsring, which roughly translates to “the economic circle.” The WIR Franc has been circulating in Switzerland for almost 90 years now with a nearly flawless record of fiscal stability and its issuing agency, the “economic circle”, is structured as a sort of cooperative.
MakerDAO community members may find the mechanics of the WIR Franc familiar. A WIR is generated when a borrower pledges collateral to the cooperative. The cooperative then permits the borrower to generate a fraction of the fiat-value of this collateral in the form of newly minted WIR and credits it to the borrower. The borrower pays an interest rate on this loan in WIR. The WIR is pegged 1:1 with the Swiss Franc and is kept in line through a variety of economic incentives, principally the ability to cancel debt at face value. When WIR is repaid, it is destroyed. If a borrower does not comply with the terms of their loan, their collateral serves as the primary method of cancelling the debt.
So what can we learn from the WIR Franc? For one, something very similar to the MakerDAO model (albeit more centralized) has been empirically tested for nearly a century in Switzerland. It works. Yet this empirical evidence produces some results that I do not believe we’ve currently contemplated at MakerDAO. In Switzerland, the WIR acts as a complimentary currency to the Swiss Franc because of its place in the business cycle. When the economy is doing well, WIR has little demand and credit flows easily from the country’s banks. Yet when the economy turns down, and credit is scarce, the WIR becomes popular and helps to stabilize the Swiss business cycle. Now, the WIR is strictly limited to Switzerland given its various constraints (specifically the lack of the international loan demand in Swiss Franc), but Dai is a global currency that compliments and supplements the world’s reserve currency. An often overlooked mechanism in MakerDAO is that historically when crypto asset prices decrease, Maker is incentivized to source more credit, not less. This is in contrast to the legacy banking system where credit is generally reduced in economic downturns. At scale, MakerDAO can have the same stabilizing effect on the global business cycle that the WIR Franc has had on the Swiss economy for almost 90 years.
But what are we missing? A key component of the WIR Franc’s economic stabilization force is that the members of its cooperative will accept WIR at “face value” (i.e. 1:1 with the Swiss Franc) as payment for goods and services, regardless of its market price. This is something with which MakerDAO should reward its current/future borrowers and integration partners for implementing. Let me illustrate why this matters with an example. Let’s say that MakerDAO lends Dai to an invoice factoring company and things go south. The factoring company has a significant percentage of its loans in default and barring some kind of intervention, will cause a drain on the surplus buffer. But this invoice factoring company, as part of its deal with MakerDAO, must accept Dai at face value for the repayment of its loans. Maker can now examine the defaulted borrowers, lend directly to defaulted borrowers who can survive the economic downturn, and in doing so drive MakerDAO’s loan to the invoice factoring company back into compliance. It also ensures that the end borrower (likely a supplier) accepts Dai at face value in exchange for its goods and services, increasing Dai demand in the real economy. Maker has now (1) gained new, higher margin business (effectively refinancing the debt of the factoring company at a higher rate by going directly to the end borrowers), and (2) helped to stabilize the economic sector that the factoring company is lending to.
Let’s also use a crypto example. Maker intends to lend Dai into the Aave D3M. Suppose that Aave has a credit crisis and our Dai is at risk, causing Dai to trade down to $0.95. This will cause all those depositing Dai as collateral in Aave to risk liquidation, which would exacerbate the Dai instability. The same dynamic would play out in the other direction, in that borrowers of Dai would risk liquidation if Dai was trading above the peg. Liquidations due to Dai instability almost always cause further Dai instability in a vicious cycle, and cause needless overall instability in DeFi protocols. If Aave were to “hard code” Dai into their system at $1 rather than using a DAI/USD oracle price, this would create a more frictionless experience for borrowers and a more aligned on-chain economy.
So what is the takeaway? I believe that MakerDAO should subsidize and give preference to borrowers who agree to integrate Dai, at face value, across their own supply chains. This will provide MakerDAO a competitive advantage at the trough of the credit cycle and create network effects that could last for centuries. If it wished to mimic some of the mechanics of the WIR system, MakerDAO could (in coordination with the growth team?) create a sort of cooperative that is governed with NFT membership to manage this network. Additionally, companies like RWA Co. can attempt to source borrowers that will provide a good fit for the overall Dai ecosystem.
Bonus: Negative rates are (empirically) not a solution to Dai instability
"The hoarding of money which Gesell found so inimical to the national economy is to be thwarted by applying a constant devaluation mechanism, thus forcing money to circulate. At first glance this notion appears to contradict the postulate of price stability. But Gesell discovered a sophisticated trick for resolving the contradiction. A bill with a face value of 100 francs would maintain its buying power.
But in order for it not to lose its validity, the user would be obligated to paste a stamp
worth e.g. one franc on its reverse side every month. Annually, then, the money would be
subjected to a negative interest of 12%. This device was practiced in WIR’s early years,
from 1934 to 1948. It proved less than fully useful, however, and was finally dropped."