Great point. I need to flesh out the exact process. The high level solution is that we can 'fold the blockchain.' Since we have a record of where money flowed, when an entity fails, we can fold the inputs and connect them to the outputs.

N1 sends cash to N2. N2 wastes it on a bad idea spending money at N3,N4, and N5. The great thing about 'money' is that N3,N4, or N5 have a new chance to do something 'valuable' with it. If N2 fails, we can 'fold the blockchain' and pass through the benefits from 3,4,5 back to 1.

Money doesn't disappear...it generally flows some where else where the next person in the economy has a chance to create a recursive value engine.

In the short run, the system is not very different than today. Short term profit motives are virtually unaffected. In the long run there is a value incentive and reward for proactively finding value. The theory is that it is possible to do both.