FA cleaner offers a solicitor 30 cleans in exchange for preparing her legal work. The solicitor charges £1200 for the legal work and she charges £40 for an office clean. Seems fair, right?
The deal is not a good one for the solicitor because he realises that if he gets his office cleaned once a week it will take 7 months before he is paid for the legal work and this entails some risk. The cleaner may go out of business in that time, for example.
In fact, it is very rare for two parties to want what the other provides. There are many reasons for this and is one of the main reasons why money was invented in the first place. The solicitor may also refuse because he already has a cleaner.
Introducing an exchange solves the mismatching of needs problem. Now the cleaner can pay the solicitor immediately in the exchange's currency and instead of owing 30 cleans to the solicitor she effectively owes 30 cleans to the whole network. These can be scheduled in the quiet times and the debt to the exchange can be paid back relatively quickly because there are many people who need their offices or houses cleaned.
It costs the cleaner £10 to provide a clean that she sells for £40. Therefore, the legal work really cost the cleaner 30 x £10 which is £300. Adding in Silvatree's 5% fee of £60 (5% of £1200 = £60) means the legal work still only cost the cleaner £360. This is paid for by extra business she otherwise wouldn't have had from network members who would ordinarily have used another cleaner.These new customers are financially incentivised to buy from her because paying in trade silva means that they are also receiving a discount equivalent to their own gross profit margin. Note that the larger the profit margin of the business the greater the effective discount is.
There are numerous benefits to the cleaner from having conducted the business on trade. Some of these benefits are listed here.
There are numerous benefits to the solicitor from having conducted the business on trade. Some of these benefits are listed here.