To many born into comfortable geo-locations, owning a home symbolises our common aspirations to and is the just result of our hard work, yet less than 5 % of people in Sub-Saharan Africa have access to formal financing — mortgages, credit, savings that will allow them to buy, build or repair a home. Homes are constructed by pooling of capital, through remittances sent home by the diaspora. Families build when they can with what they can, in stages, the permanent replacing more temporary materials and some homes take a generation or two to complete. Due to the perception of high risk of default, lack of a strong currency and access to capital, loan interest rates can run into double digits, and so homes are built with very little debt.
In comparison, mortgage debt in USA has ballooned to $15.8 trillion with 60% of homes mortgaged. The average loan size is around $282,660. 55% of those who took out a mortgage in 2018 did so with a down payment of less than 6%, well below the nationwide recommendation of 20%. This was despite there being a subprime mortgage crisis of such proportions a mere decade before that it caused the loss of 9 million US jobs and US household net worth declined by nearly $13 trillion.
I’m always amused/bemused when I read that interest rates are tied to likelihood of default. At Tingo Inc, an African payment gateway with over 9 million customers, publicly listed in New York, where I serve on the board, default rates on credit are a few per cent per annum. I doubt many (or any) American savings and loan businesses can boast this level of prudence amongst their consumers. Yet interest rates are for a conventional 30 year fixed-rate mortgage charged out at under 4% per annum.
That’s because global credit rating agencies like Fitch, Standard and Poor and multilateral financial institutions such as IMF or the World Bank, are funded and situated in nations that print global currencies and have strong political reasons for ensuring that its middle class citizens’ cultural right to own a home is maintained. This cultural right is maintained at the expense of the citizens of countries who are not part of the club.
Decentralised Finance (“DeFi”) as opposed to Centralised Finance (“CeFi”) or Traditionalised Finance (“TradFi”), cares nothing about historic privileges, post-colonial baggage or what wins votes in small towns. Instead, like justice, it is blind. It pools liquidity anonymously and dispenses it through pre-ordained smart contracts relentlessly searching, without prejudice or favour, for yield. DeFi can be defined as public banking blockchain applications and products that avoid intermediation by external agencies.
The pathway of DeFi is frictionless. It is clean. Unburdened by ignorance or arrogance, it is the latest and greatest chance for a final and lasting financial emancipation for Africa and Africans. In a continental economy, that through global neglect avoided the ravages of an exploitative, ill-audited, politically dominated global banking system, that was at best confusing and at worst punitive to its own global customers, Africa can build bottom-up solutions to its financing needs that can meet on chain those global consumers without intermediary interference resulting in fair pricing and right behaviour for all participants.
This is why DeFi is revolutionary. It is a monetary system without inherent racial or sexual bias.
DeFi still requires denomination in a currency and preferably a fairly stable one at that. Currencies that are centrally controlled are subject to inflationary printing for political expediency. Biden’s administration is no less guilty of this than the Weimar Republic. And within the confines of a national economic plan such state government control can make sense. However, when that currency, for example, the dollar, is a proxy for global financial value regardless of border, environment or culture the printer has a greater responsibility. Failure to rise to this greater responsibility is incompatible with the role.
And dressing up the same misfortune in new clothes is no answer. In fact, it is likely that the epidemic of Central Bank Digital Currencies, such as China’s eYuan will only aggravate the issue by transmitting domestic fiscal issues so they infect unwitting international recipients with unrelated requirements. This problem is obvious if we consider the foreseeable results of America devaluing the dollar to increase domestic employment by reducing the cost of manufactures goods exported and how that reduced value of the dollar may affect the ability of other countries using the dollar in global trade to buy raw materials to supply its own manufacturing plants. Global questions require global solutions.
I consider that the answer of the “what” underlying for stable coins or tokens lies in either an algorithmically defined currency such as Bitcoin, or a derivative thereof, or one based on a commodity such as gold or data or a value such as goodness or love.
The last portrait in this revolutionary crypto-triptych is non-fungible tokenisation (“NFTs”), which have exploded into the collectibles market with its band of badly pixelated boys, girls and primates reaching auction prices in the tens of millions of dollars. A NFT certifies (on chain) that a particular asset, portrayed digitally, is unique and who the owner is. This allows the asset to be traded, stored and archived. In societies, with flaky or non-existent Land Registries, this means if combined with a geo-location technology such as what3words, for the first time in history the owner of property can prove his ownership irrefutably. Definition of ownership is the pre-requisite for land title, and, therefore, of value and accordingly, for any mortgage loan to be given.
Additionally, combining NFTs and DeFi to create P2P mortgage lending is a matter that protocol architects can tackle in many ways. Fast and easy access is critical in this regard, and many different solutions can arise with multiple approaches. To name a couple of possibilities:
- A house could be tokenized as NFTs. A user can then lock some collateral (that gets progressively augmented) to purchase these ‘shares’ as a mortgage and use a lending protocol to finance the whole enterprise. The lender can have total certainty that the money he’s lending is going towards the financing, and, should the borrower fail to pay him back, the liquidation of the collateral can be used to repay the loan.
- A user can set up a contract for a P2P loan, issued as an NFT. The NFT would entitle the holder to receive the collateral directly in their wallet should there be any problems in the process. In this case, the mortgage payments would have to either be monitored by an oracle or a middleman providing verification (which could be a decentralized platform such as Kleros.io).
We’re just getting started.
If you are involved in the DeFI ecosystem in any way, you probably can look back, even into relatively recent times, and be amazed at how far we’ve come.
If you sat with us through this article, you probably are one of the very few who understand that our ecosystem’s real fun is just beginning. The next few years, regardless of any regulation, jurisdiction, or influencers jumping into the space, will see all the applications of the technologies that we love taken to their logical conclusions.
It is up to all of us to decide what we plan to do with these opportunities.