Towards a Tokenless IOU Credit Network Realization in Ethereum

Aniket Kate
Nov 16, 2018 · 3 min read

I Owe You (IOU) credit networks offer an interesting alternative to fiat money and cryptocurrencies towards financial settlements. Among others, the rise and growth of IOU credit networks in the Ripple and Stellar systems in the post-Bitcoin era is a good demonstration of their usefulness and acceptance.

Consider the following illustrative IOU credit network example. Assume that Alice and Bob are two friends and Bob owes Alice 4 USD. This real-life situation is then represented in the credit network as an IOU from Bob to Alice for a value of 4 USD.

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An illustrative IOU credit network

The potential of a credit network resides on transitive payments where two users can pay each other if they are connected by a path of intermediaries with enough IOUs. In the running example, Alice can pay only up to 1 USD to Edwards using Bob and Carol as intermediary. Interestingly, Alice can also settle a EUR debt with Frank through Bob and Diana if Bob offers an exchange rate USD/EUR (even when Alice does not even have EUR IOU on her own!). (For a more detailed examples and relation to the barter system, read the IOU paper by Ryan Fugger and the ledgerloop article.)

The Ripple network is the most widely deployed system built upon the IOU credit network concept so far. The Ripple network uses its own (permissioned/federated) consensus to validate and order transactions. It also employs a native currency XRP that every user has to use to pay for their transactions in the network. Moreover, unlike most cryptocurrencies, validator/consensus nodes do not earn these XRP fees, instead the used XRPs are simply burnt. XRP is today among the top cryptocurrencies according to market value. More importantly to our work, the Ripple network has more than 200,000 active accounts, 350,000 IOU links, and more than 500,000 transactions per day on average. (See our WWW 2018 paper for interesting statistics and analyses.)

Questions are always raised about the distributed nature of Ripple, and we are set out to examine the feasibility to building an IOU credit network in a permissionless system like Ethereum. We are developing an Ethereum smart contract that resembles the functionality of an IOU credit network. We are now ready with an initial version of this smart contract (see here) and calculated the costs in terms of gas for prominent transactions in a credit network. The preliminary results are shown in the table below.

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For information on how these values were obtained, refer Section 3:Benchmarks in our documentation.

Although the numbers are self-explanatory, we would like to emphasize on the following aspects.

  • Although further optimizations in our smart contract might be still possible, we observe that the costs for creating wallets, links and offers are already significantly cheaper than in the Ripple network today. This higher cost in Ripple creates a possible entry barrier to the system not present in our approach.
  • The cost for a payment with several intermediaries in our system is maintained below 0.05 USD and we expect to further reduce this value with further optimizations. Moreover, the transaction costs in our system faithfully represent the computation and storage costs of the underlying blockchain (i.e., Ethereum) and not artificially created and managed fees as it is the case with Ripple.


This is a collaborative work with Pedro Moreno-Sanchez from TU Vienna and Adithya Bhat from Purdue university. The author is a faculty member at Purdue.

We refer the readers to our website for our work on credit networks and closely related payment channel networks.

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