True peer to peer system that aren't really centralized somewhere (like Napster) have one undisputed king, BitTorrent.  It scales incredibly well, is heavily used, and is decentralized very effectively.  It is the system that millions of dollars in lawyers could not kill.  It's relatively simple and extremely powerful--Bram Cohen did an amazing job with it.

Naturally I'm drawn to that model when brainstorming peer to peer systems, and it seems like it would work great as a distributed debt market as well.

(BitTorrent in a nutshell:  a BitTorrent peer--like the one you run on your desktop--hosts blocks of content for torrents, and advertises those blocks on a tracker.  The tracker coordinates content distribution among peers.  The Pirate Bay, for example, is a tracker with a front-end to let people submit and search for torrents.)

So if we think of a chunk of debt as a torrent, and an exchange as a tracker, things look pretty good.  Slices of debt become blocks of a torrent, and Blocks of a torrent become slices of debt and can move freely among peers that accept it.  The only difference is that a block of debt only exists in one place at a time, and it goes away over time as it's paid off.  This is a fantastic model that could result in very liquid debt markets.

Instead of creating torrent that describes a file you want to share, you'd create a torrent that describes debt that you're wanting to offer (amount, interest rate, collateral, etc).  For example I could create a debt offering for $100,000 of capital because I want to buy Yahoo (zing!)  I could post this debt to my personal tracker, a venture capital tracker I belong to, and maybe a regular ol' banking system tracker.  Another tracker accepting your torrent would effectively be acting as an exchange, vouching for you at some level--that they've run your credit score or have examined your financials or something else useful.

Ideally each of us would have a tracker where we could offer our personal debt, and that tracker would participate in the exchanges we belong to.  Right now we only have two exchanges available to us:  the Federal Reserve system and our friends and family.

There are debt exchanges out there, such as Lending Club and Prosper (which recently opened for business again), but they're not open and they're very centralized.  In a decentralized model transactions can happen at the edges--if two people both accept each others' debt then they can make a transaction directly.  This can even happen in transactions which require more than two parties, simply by tracking who accepts whose debt--thru personal connections and exchanges.  For example Lending Club lets you buy and sell loans, but you can't buy or sell Prosper debt there.  A distributed system results in a much more liquid market, and doesn't rely on the exchange to issue the debt.

If one exchange is found to be corrupted (and I'm not talking data corruption here, I'm talking about corruption like the NYSE potentially allowing Goldman to front-run orders by colocating servers in their data center), participants who trust each other will simply move to another one.  The exact same thing that is happening right now with the Pirate Bay.

And if you're thinking that this would make it incredibly easy to securitize this debt, you're right.  You could easily group debt into chunks and tranch it, this is actually a very useful function when done right and not leveraged.  However, if you did do something truly moronic like lend money to jobless people like Barney "Fife" Frank wants to do, or if you leveraged up by buying derivatives, that risk would have a very small chance of infecting the entire system.  You just put it under a shell and blow it up.  No harm no foul, except if you're the genius who bought the debt.

This is pretty out there, but I really haven't seen a model that's more compelling, and the more I think about this idea the more I like it.