Credance-based Collateral Exchange

Abstract

This paper introduces Credance-Based Collateral Exchange (CBCE) as a formal category of financial instrument distinct from conventional repo and from existing distributed ledger collateral protocols. Building on the concept of credance-the collective anterior belief that makes a financial transaction possible before any track record exists (Laverriere, 2026)-we argue that a significant class of collateral exchange activity operates on the basis of credance rather than documentation. We formalise credance as a time-varying bilateral function C(P₁, P₂, t), define the credance threshold θ as a composite score of transaction history, temporal depth, and costly honouring, and propose a three-mode typology of CBCE instruments. We analyse the conditions under which each mode is optimal, examine the implications for Islamic repo market development and for distributed ledger technology design, and argue that blockchain-based collateral protocols have systematically failed to incorporate credance as a design variable. A credance-aware DLT architectureincluding a credance oracle, a zero-knowledge credance proof mechanism, and a variable collateralisation ratio governed by C(P₁, P₂, t)-would represent a genuinely novel class of financial instrument. The paper concludes with a research agenda including a call for collaboration between financial economists and DLT researchers to prototype the proposed architecture.