How DAOs can help solve poverty

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Funding good ideas and making the world a better place, what’s not to love?

Among the most important aspects for social and economic development in a society is quick and easy access to capital. Without it, ideas are never meaningfully pursued and innovative businesses remain as daydreams.

Yet, the problem is that in the developing world, these funds are completely out of reach. The primary reason is that traditional banking institutions don’t see much worth in providing “microcredit” as the effort involved traditionally overshadows the potential monetary gains. What few microfinance institutions there are though, often charge usurious interest on lent capital, so it’s not uncommon to have people rack up debt several times higher than the money that was initially lent to them.

Obviously, most businesses would not be able to repay this type of debt and survive. As such, businesses in the developing world - unless they’re already well connected and capitalized - never get funded.

Increasingly though, this is changing through the use of Decentralized Finance (DeFi). Loan protocols like Aave are making it easier for people and businesses to receive loans. The problem is that these loans tend to be overcollateralized, meaning that unless you already have considerable resources at your disposal, you likely can’t make use of them.

“It takes money to earn money” after all, but what if you want to not just make money but create wealth? To do that, you need to be able to build from scratch and go where few dare go.

If we want to improve the developing world and simultaneously earn more money, we must have a way of not relying on overcollateralized obligations. Decentralized Autonomous Organizations (DAOs), blockchain entities where users jointly create policies and pool assets, are the means by which you could begin to address this issue.

Borrowers could build a reputation by taking small loans and repaying them in a timely manner while supplying their identifying information to a DAO. As such, defaulting on debts would carry a severe reputational risk that is permanently reflected on the blockchain.

In other words, both the size of the loans available and the relevant interest rate would primarily depend on the actual capacity to repay the loan and be responsible, and their track record, as opposed to merely having had a large initial investment.

Furthermore, lenders could pool assets and have them be issued jointly to collections of debtors packaged according to their risk profile. As such, the ROI could work similarly to how insurance works; where you can’t predict what exactly will happen with any specific actor within a system, but you can broadly predict what will happen with a large enough sample size. 

The more astute among you might have noticed some similarities between this suggestion and CDOs in the 2008 crisis, where “subprime borrowers” were given credits and then they were packaged and sold. Admittedly, this system does have some outward similarities with the system.

The key difference is that banks were doing the lending and the different debt packages were quite opaque after a few trades between bankers. So in the shuffle, nobody quite knew who was buying what. Blockchain technology and the DAO structure ensure that this doesn’t happen as it’s structured transparently with smart contracts and the behaviour of every user is easily viewable by all on the blockchain.

In the past, our ambitions might have exceeded our capacity, but time is making those things possible. DAOs can bring much needed transparency to banking and finance generally. Furthermore, it is democratizing the access to resources based on merit, not an accident of geography and lack of opportunity.

This is the promise of DAOs - a meritocratic future where people get to succeed based on their ability to meet the obligations they accrue. However, in order to fulfil that promise, we must prepare now in the nascent stage of the industry.

The WACEO is a blockchain advisory entity that helps DAOs achieve regulatory clarity, as well as scalability and structure to achieve their original goals. We enable the future to develop in the way that the dreamers of the world want it to happen. 

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