DAOs and the future of “chamas” in Africa

DAOs have been all the rage in the last few months. But why will they be groundbreaking for Africa?

This article focuses on how Africans — with a particular focus on Kenya — save and invest, and how this could change through the introduction of DAOs.

Context

Due to consistent economic growth in Africa, increased levels of internet penetration, and higher levels of tertiary education, the African consumer today is hungry, exposed to global trends, and is more digitally native than ever before. While a few years ago the lady selling groceries down the street was likely to be uneducated and not digitally savvy, today it would not be a surprise for her to have a college diploma and run part of her business online. This tweet by Michael Kimani breaks this down brilliantly.

Africa has changed, how we save hasn’t

Even though this generation is different than the previous generation, how they save and invest remains largely the same. In Kenya, they invest through chamas. A chama is an informal cooperative society/investment club that is used to accumulate and invest capital. A report by Financial Sector Deepening Kenya (FSD Kenya), an organization working to promote financial inclusion in Kenya, estimates that chamas were already being used by 41% of Kenyans in 2018. There are estimated to be 300,000 chamas in Kenya that control up to a total of 300 billion (US$3.4 bn) in assets.

While the principle of saving together is similar across the board for most chamas, what they do with the contributions varies from one chama to another. For instance, some chamas are merry-go-rounds where each member is given the proceeds of every round of contribution, depending on frequency, until everyone gets their turn. Another might be built on the premise of investment, where after saving a certain amount of money, the members decide on which investment to make, i.e buy a piece of land and develop it, or invest in the stock market.

This model has served most people well as it has made it easier for people to accumulate capital and invest. It has also been facilitated by the fact that most chamas are formed among friends hence trust has largely not been an issue. However, even though many have benefitted from chamas, the failure rate is still high. Anecdotal evidence suggests that the reasons why chamas fail include:

1. Inability to scale: because of the amount of capital being pooled together on average, chamas are often left with investment opportunities that yield abysmal returns i.e returns lower than/equal to the prevailing inflation rate. To solve this, some chamas have opted to add members to increase the amount of capital pooled. This has, however, been fraught with challenges because while it is relatively easier to build trust among a group of 5, a larger group is harder to manage because there has to be a mechanism implemented to ensure there is trust. For some, voting in a group of people to recommend, verify, and present investment opportunities to the members and subsequently manage these, is often the best option. In most cases, mismanagement/embezzlement of funds have bugged these organizations, and members have lost money as a consequence. According to a report by FSD Kenya, theft and embezzlement of funds in chamas stand at 13%.
2. Unclear/lack of governing rules — given chamas are mostly started by a close circle of friends, rules of engagement are not defined clearly before the group starts.

Enter the DAO

Over the last 15 months, we have seen the emergence of De-Fi with some of its popular applications including lending, stablecoins, decentralized exchanges (DEXs), derivatives, synthetic assets, and insurance. (If you are not familiar with what Defi is all about, here is a good breakdown.)

The value of De-Fi locked in the Ethereum blockchain has grown from $4 in August 2017, to $159.64 billion at the end of November 2021. More recently, another concept has become increasingly popular — DAOs. While there are varying definitions of what a DAO is, Linda Xie of Scalar Capital, in her post, A Beginner’s Guide to DAOs, gives a good definition of DAOs:

“A decentralized autonomous organization (DAO) is a group organized around a mission that coordinates through a shared set of rules enforced on a blockchain.”

Ultimately DAOs are mechanisms to organize people around a specific course but done through programable code. These smart contracts are trigger certain actions upon some circumstances being met. With DAOs the members become the decision-makers hence removing the need to have executives that make decisions on behalf of everyone else. For instance, at the founding of a chama DAO members would be required to buy tokens that give them a right to vote, and participate in the economic upside of the organization. Unlike the traditional way of doing things, these approaches will be beneficial in the following ways:

1. It would enable chamas to pull larger amounts of capital from a diverse group of people, geography notwithstanding, as the issue of trust will no longer be a hindrance.
2. Because of the large amounts of capital that could be accumulated through these means, chamas can get access to high-yielding investments. For example, instead of bidding for a copy of the US institution, a chama operated by a DAO, could use its savings to invest in Defi protocols like the Terra ecosystem — a blockchain protocol for issuing algorithmic stablecoins. Under this scenario, every time members make contributions, the smart contracts trigger a purchase of UST, which can then be stacked, earning its members a yield that currently stands at 19%, etc.
3. Given all rules are captured in smart contracts there’s no room for ambiguity. Further, all transactions, like voting and transfer of tokens from one party to another, are stored on the blockchain, members can put to bed any transparency issues.

Concerns

Before we get too excited, there are still issues that need to be figured out. First, given that this innovation is relatively new, there is no regulation that defines DAOs and how they are to be managed. This leaves developers carrying a significant amount of risk compared to investing in regulated corporations. Secondly, after “the DAO” — the premier investment DAO that launched the Ethereum network, was hacked and $50 million worth of ETH stolen, questions still abound about the security of DAOs. Before this innovation can go mainstream, security concerns have to be addressed conclusively. Thirdly, even though, some African countries have shown impressive adoption of blockchain applications like crypto, a significant amount of time must be spent to educate the masses on the benefits of the blockchain, and in this case, DAOs. It is hard to say how this will happen but it is a significant hurdle that needs to be addressed.

The challenges notwithstanding, I think DAOs have the potential of changing the face of chamas across the continent and can’t wait to see the innovations that come out of this. Going Into the future like🕺🏽

We are here for this!