WeTrust is a blockchain startup that wants to increase financial inclusion by bringing new types of commercial banking services into the mainstream. Co-founded by ex-googlers George Li and Ron Merom as well as former CPA Patrick Long , WeTrust will be a platform for a variety of reciprocal aid based financial services, such as mutual insurance funds and peer to peer lending. The first dapp WeTrust plans to launch is a platform for the creation and management of Rotating Savings and Credit Associations (hereafter referred to as ROSCAs).
What is a ROSCA?
ROSCAs are a form of community based reciprocal aid. Members agree to contribute a set amount of money at fixed intervals to a communal pot. Every interval, one member (chosen randomly or through some kind of bidding process) is selected to receive the full pot. For members who win the pot early on in the ROSCA’s lifecycle, this constitutes a short term loan. Winners are removed from the selection process until all members have received the pot exactly one time. Assuming every member meets their payment obligations, the member selected last is no worse off than if they saved independently.
Who uses ROSCAs?
ROSCAs are common in developing nations and among immigrant communities in the United States–in other words, in communities that are often poorly served by the commercial banking industry. In these communities, they serve as an important source of credit and a savings tool. Because of their informal nature, it’s difficult to determine the size of the ROSCA market, but conservative estimates peg the formal ROSCA market in India at around $12 billion1, 2. Since the majority of ROSCAs are informal, the actual market is probably many times larger. In the United States, reports indicate that upwards to 50% of Asian Americans have participated in a ROSCA at some point, indicating that there is a substantial amount of ROSCA market activity3.
How does WeTrust work?
WeTrust allows users to form and manage their own digital ROSCAs on the Ethereum blockchain. Users will be able to establish new ROSCAs, customize ROSCA agreements, join ROSCAs, and manage their payments and membership. ROSCA agreements will be hard coded using smart contracts and users will be incentivized to use their real world identities. Bad actors will be weeded out of the network through the use of a reputation system.
Initially, ether will act as the main currency of exchange on the WeTrust network; all ROSCA payments and distributions will be made using ether. In the future, WeTrust will be compatible with other cryptocurrencies. Transaction fees incurred on the WeTrust network will be paid using TrustCoins, the native cryptocurrency of WeTrust. TrustCoins also reward users for recruiting new members, managing ROSCAs, or performing other services on the WeTrust platform.
Problems with ROSCAs
Despite their impressive market size, ROSCAs have failed to enter the mainstream. This is largely because of problems with efficiency, scalability, and enforcement.
Intermediaries reduce efficiency
Traditional ROSCAs suffer from a lack of efficiency. Formal ROSCAs administered by disinterested 3rd parties are subject to high fees. Informal ROSCAs often don’t have the resources to provide reliable escrow services or keep diligent records. Both types of ROSCAs lack transparency.
Geographic constraints limit scalability
Traditional ROSCAs are difficult to scale. Generally, ROSCA members need to live close to one another in order to participate in required meetings and make in-person payments to the ROSCA administrator. This makes it complicated for large ROSCAs to form and for people to participate in multiple ROSCAs at once.
Lack of enforcement tools
ROSCAs depend on social capital as a way of mitigating risks; as a result, they tend to form between members of a close knit community where individuals know each other’s “types”. That is, they know each other’s spending habits, financial acumen, behaviors, and risk factors. This kind of social capital replaces other, more traditional methods (like a formal credit history) for determining risk. Furthermore, the fear of disappointing friends, colleagues, and family acts as a strong incentive for members to meet their obligations.
Social capital can be an impressive enforcement tool; however, it has it’s shortcomings. For one, it only works if everyone in the ROSCA knows each other extremely well and (preferably) interacts on a nearly daily basis. Formal institutions such as banks don’t have the social capital required to from ROSCAs themselves. Additionally, banks have no way of verifying that the members of a proposed ROSCA actually know each other well enough to avoid default. Secondly, losing face is a non-monetary penalty. ROSCAs built purely on social capital lack a reliable mechanism for seeking repayment of defaulted debt or otherwise punishing bad actors. As a result, banks in much of the world have been slow to adopt ROSCAs.
The WeTrust solution
WeTrust aims to leverage blockchain and mobile technology to alleviate the problems that have limited the adoption and use of ROSCAs, especially among the middle class and in developing nations like China and India.
Blockchains eliminate intermediaries
WeTrust aims to solve efficiency problems by implementing roscas on a blockchain.
Blockchains make ROSCAs transparent. All important information relating to the roscas will be automatically documented on the blockchain securely and accurately. These records will be available to any ROSCA member.
Blockchains eliminate the need for 3rd party administrators. Blockchain technology automates payments and record keeping. This enables users to manage roscas themselves with no outside professional help.
Blockchains reduce transactional friction; as a result WeTrust should be able to greatly reduce ROSCA fees. There will be a 0.1 to 5% transaction fee (determined by the ROSCA members) placed on disbursements. This is a much lower rate than would generally be charged by a bank for administering a ROSCA. Furthermore, 70% of the fees generated on the WeTrust network will be distributed directly back to users. This will keep the vast majority of the wealth generated on the network within the WeTrust community.
Mobile technology collapses distances
WeTrust uses mobile technology to simplify rosca participation and management.
First off, the Westrust app aims to make it much easier to establish and manage roscas of any size. Secondly, since transactions take place electronically over the WeTrust network, members don’t need to meet periodically to make payments. The mobile app enables users to manage their ROSCA memberships from anywhere in the world, eliminating the geographic limitations of traditional ROSCAs. In short, mobile technology will reduce the time commitment required for participation and eliminate geographic constraints on membership, allowing larger ROSCAs to form and making it easier for users to join multiple ROSCAs at once.
Enhanced accountability and enforcement
WeTrust makes use of social capital to enforce their ROSCAs in two ways–in the traditional method and through a reputation system. WeTrust ROSCA terms will also be enforced through smart contracts and backed by legally binding agreements. These agreements will make it possible for ROSCA members to settle bad debt through traditional legal avenues.
While it will be possible on the WeTrust network for ROSCAs to form between strangers, the development team strongly encourage users to only join ROSCAs with people they know. In this way, WeTrust roscas will be enforced through social capital in the traditional sense–people will be incentivized to meet their obligations to avoid disappointing their friends, family and colleagues.
WeTrust also employs a reputation and a credit score system. Users on the network will be rewarded for using their real world identities. As users transact over the network, their reputation score evolves. Bad actors will receive unfavorable reviews. Failure to meet ROSCA obligations will result in low WeTrust credit scores. These scores essentially function as a new type of social capital that can be accessed even by strangers. Together, these scores may help users mitigate their risk and make more informed decisions.
Finally, ROSCA terms will be enforced by Ethereum smart contracts and backed by legally binding agreements. Smart contracts automatically manage escrow services, administer the bidding process, and trigger fund disbursements according to the particular rules of each ROSCA. The legally binding agreements allow ROSCA members to seek payment on bad debt through civil courts. Additionally, the legal agreements signal to the signee that they are participating in a formal financial transaction and that failure to make payments will be met with real world consequences.
The Trust Coin: rewarding users with fees
The main function of the Trust Coin is to reward users for providing services to the WeTrust community such as recruiting new members, managing ROSCA formation and providing arbitration to settle disputes. Overall, 70% of fees are distributed back to users and the remaining 30% is reserved for the WeTrust foundation to fund future development efforts and reward Sponsors (explained below).
Sponsors–Sponsors provide support services to the WeTrust community. In return they earn bounties by acting as neutral arbitrators to settle disputes, validate accounts, and make judgements about penalizing users with negative marks to their credit score. As the WeTrust platform expands and the role of sponsors grows, bounties may be replaced by a decentralized reward system.
Forepersons–Forepersons manage and organize ROSCAs. They collect 50% of the fees from the ROSCAs they operate.
Referral Partners–Users earn 20% of the fees from any ROSCA disbursements earned by users they recruit.
Like the ROSCAs themselves, ROSCA fees are customizable. The foreperson sets a fee ranging from 0.1% to 4% and the members of the ROSCA agree to it. In the example below, A is the foreperson of a ROSCA that includes herself and members B, C, D and E. Members A and B were both referred by F, so F is awarded $3.00 from each. The same is true for member H who referred members D and E. Member C wasn’t referred by anyone, so their portion of the referral fee is allocated to the ROSCA foreperson by default.
Value of TrustCoin
Initially, the TrustCoin will have a limited roll on the network. Users will be able to earn fees by referring new members and acting as a sponsor or a foreperson, but holding TrustCoin’s is not required for participation in the ROSCA platform.
Fees for each ROSCA will be procured in advance by WeTrust on the open market, and distributed to users once the ROSCA is completed. Since it has no other role on the network, there will be little incentive for users to hold on to their TrustCoins or for investors outside of the ROSCA network to buy them. As result, the WeTrust Foundation will be the single largest purchaser of TrustCoins and the distribution of fees will in large part determine their value.
In the future, the TrustCoin may grow to play other roles on the WeTust network. TrustCoins may be required to participate in a proof-of-stake distribution of sponsor tasks and rewards. Or, TrustCoins could be spent to reveal another user’s credit score. Additional applications of the TrustCoin may help raise it’s value in the long run.
Savers vs. Borrowers
There are two ways to participate in a WeTrust ROSCA: as a saver or as a borrower. In a random ROSCA, where the allocation of the pot is left up to chance, borrowers are the members who receive the pot early on in the ROSCA cycle and savers are the members who get it later.
Bidding ROSCAs use a reverse auction to decide which users are rewarded the pot first. In this type of auction the highest possible bid is equal to the size of the pot and the lowest bid wins. The winner is awarded a lump sum equal to the size of their bid and the remainder is split between the rest of the Rosca members as “interest”. In the event of a tie, the pot is randomly allocated to one of the tied bidders. Below is an example of a bidding process taken from the WeTrust white paper.
In a bidding ROSCA, borrowers are members who bid low in order to win the pot as early as possible. In the above example, Adam and Carla behaved like borrowers. Savers are members who don’t require the pot right away. Savers bid high in order to collect the maximum amount of interest from borrowers, like Diane did in this example.
This raises the question, what types of interest rates can users expect to earn/pay on the WeTrust network? This depends on a number of factors including ROSCA size, the interval length, and the preferences of each individual user. Let’s take the following ROSCA as an example. This ROSCA has 12 members who live within the United States and have agreed to contribute $100.00 once a month for 12 months. As a result, this ROSCA functions much like a traditional one year personal loan.
In order to simulate how ROSCA 1 will function, Smith + Crown has made a few assumptions. First, members will have a random preference to pay an interest rate of somewhere between 0 to 35.99% APR. 36% APR is the maximum amount of interest that can be charged for a loan like this in the United States, so we assume that no one will be willing to pay more than that. The second assumption we make is that the maximum interest rate members are willing to pay will decrease at a constant rate every round. This is due to the fact that the chances of winning the pot increases every round and the time a member has to wait to access the pot decreases every round. If a member with a low urgency to access ROSCA funds doesn’t win in early rounds, eventually it becomes more expensive to bid for the pot than it does to wait.
For simplicity’s sake, the twelve ROSCA members are listed in the order of their willingness to pay. Alice had a pressing bill she needed to resolve right away. Because of this she was willing to pay the most and won the first round. In the next round, Bob submits the highest bid and uses it to buy books he needs for school. In the seventh round, Fran is the winner. She used the funds to buy a computer for her home business. Fran is also the first member to make a net profit on the ROSCA. By playing her cards right, she was able to gain access to capital sooner than if she had saved independently but still ended up earning positive interest. Isacc, Jenny, Kyle and Laura all behaved strictly as savers. They provide capital to the other ROSCA members and collect interest.Smith + Crown repeated the above simulation one hundred times in order to make further generalizations about the types of interest rates WeTrust users are likely to pay. We found that, on average, users who behave more like savers will earn a 12.26% APR while borrowers will pay an average of 13.26% APR. For borrowers, particularly those without an established credit history, these rates are much lower than industry averages4. For savers, WeTrust ROSCAs would offer much higher rates of return than traditional high interest savings accounts which typically offer no better than 2.00% APR.In ROSCA 1, member’s willingness to pay was highly variable. Some needed an infusion of capital right away, and some were willing to wait. As a result, ROSCA 1 displays a wide range of interest rates paid (or earned) by each member. However, it’s equally possible that members of a ROSCA will have similar preferences. People who know each other well might be in similar financial situations, have similar access to alternative credit, and barring some kind of unforeseen emergency, have a similar willingness to pay interest. Below we’ve repeated the above simulation with a group of members who have a more homogenous set of preferences.In ROSCA 2, the members all have above average credit scores, and so they are less willing to pay higher interest rates. Because of their reluctance to pay, they are more likely to behave like savers. More savers means fewer borrowers and lower interest payments compared to ROSCA 1. As a result, savers in ROSCA 2 earn a much lower APR. This simulation demonstrates how the ratio of savers to borrowers can impact ROSCA outcomes.
Because of the informal nature of the ROSCA market, little is known about their default rates. Anecdotal evidence suggests that default rates tend to be quite low. Mission Asset Fund (MAF), an NGO that manages ROSCAS in San Francisco, boasts a repayment rate of greater than 99%. In 2015, MAF provided over $5 million in loans through their ROSCA program to over 5,000 people. Smith + Crown does not know what sort of vetting process or training, if any, MAF participants go through. However, it is possible that they do considerable risk screening before they accept a new ROSCA group. In contrast, the default rate for short term payday loans is much higher. According to a 2015 report by the Center for Responsible Lending, 46% of payday loans end up defaulting.
It is difficult to guess if Wetrust ROSCAs will function more like payday loan provider or more like a NGO micro finance operation, in terms of their default rate. Wetrust plans on coping with this risk by shifting the burden of responsibility squarely on the shoulders of Wetrust users. If a member of a ROSCA fails to make a payment, it will be up to the foreperson and other members to resolve the problem or else dissolve their ROSCA agreement. Likewise, forepersons only collect fees if their ROSCAs achieve 100% repayment. This incentivizes everyone involved to form ROSCAs with trusted partners and meet their individual obligations.
- Acharya, Mamrata. “Chit funds eye Rs 5K crore a year from NRIs”. Business Standard, 18 Jul 2015. Web. www.business-standard.com/article/companies/chit-funds-eye-rs-5k-crore-a-year-from-nris-115071800734_1.html. 13 Jan 2016.
- “Chit funds scams: Rs 80,000 crore and counting”. The Times of India, 24 Apr 2016. Web. http://timesofindia.indiatimes.com/india/Chit-fund-scams-Rs-80000-crore-and-counting/articleshow/51967231.cms. 13 Jan 2016.
- Chung Hevener, Christy. “Alternative Financial Vehivles: Rotating Savings and Credit Associations (ROSCAs)”. Federal Reserve Bank of Philadelphia, Nov 2016. Web. 13 Jan 2016.
- “Estimated loan offers for $1,000”. NerdWallet. Web. www.nerdwallet.com/personal-loans?annualIncomeFilter=50000&creditScoreFilter=POOR&loanAmountFilter=1000&loanUseFilter=HOME_IMPROVEMENT&page=1&sort_key=apr&zip=. 13 Jan 2016.