Clearing the Books: The Pre-Electronic Version of DLT
Due to the number of parties involved, using ledger entries as a medium of exchange had its risks. In response, by the late 1500s European merchants created a way to “clear the books” – that is, reduce their aggregate outstanding credit.
At the end of market fairs across Europe, debtors and creditors with mutual obligations would pair off where possible to cancel their reciprocal debts. Merchants who couldin’t clear all their obligations in the first round would proceed to a multilateral stage where they resolved those remaining obligations through a series of “clearing cycles” and “clearing chains.”
Clearing cycle: 'A' owes 'B' 5 units, 'B' owes 'C' 5 units, and 'C' owes 'A' 5 units. Through netting, all three parties’ obligations are resolved.
Clearing chain: 'A' owes 'B' 10 units, and 'B' owes 'C' 10 units. 'B' removes itself from the chain by assigning its obligation such that 'A' pays 'C' 10 units.
Fast-forward to today: like DLT, these early clearing systems were multilateral and deployed a series of sequential algorithms meant to net and clear transactions.