Celo is powering incredible DeFi use cases in Africa amid market turmoil

The blockchain network, designed to host decentralized solutions for financial inclusion, is piloting a DeFi loan program for smallholder farmers in Kenya.

Celo is powering incredible DeFi use cases in Africa amid market turmoil

Although crypto assets had started shrinking in value since the turn of the year due to growing fears of a global recession, things have gotten worse over the last few weeks, thanks to peculiar fragilities in the current decentralized finance (DeFi) setup. Some of the largest projects are struggling to repay investors, raising doubts over DeFi’s credentials to run more efficiently than traditional finance (TradFi ).

But in Africa, there’s a potent reminder of DeFi’s power to give agency to the financially underserved.

What is Decentralized Finance (DeFi)?

DeFi is a crypto-based financial system designed to offer the same type of services accessible in traditional finance — e.g., savings and loans.

In April, the Celo Foundation, a non-profit promoting the Celo blockchain, launched a pilot program in Kenya to assess the scalability of microloans powered by the DeFi protocols on Celo. For the trial phase, it partnered with Mercy Corps Ventures to launch an employer-based stable coin lending solution — leveraging Moola Market and Kotani Pay. Cinch Markets is the employer for the pilot program.

Moola Market is a borrowing and lending protocol built on Celo, while Kotani Pay is an on- and off-ramp service that allows crypto users to convert crypto to fiat and vice versa. Cinch is an agriculture company that leases farmland from smallholder farmers and hires farmers to grow high-value crops at scale.

DeFi for financial inclusion in practice

As part of the project, $10,000 in loans were distributed to 68 Cinch employees at an annual interest rate of 8%. Interest rates on salary advances in Kenya can run as high as 20% annually. Th s demonstrates DeFi’s potential to make the world a global village in terms of access to finance. These employees now have access to the same interest rates as someone in Europe taking a loan from Moola Markets.

In addition, the participating smallholder farmers have successfully gained access to competitive loans without needing an excellent credit score — which they probably didn’t have.

A pilot participant said:

“This is the best loan group I have ever seen. It is the first one I have seen with such a low interest rate.”

In a time when irrationality born out of the hunger for sky-high DeFi returns has eroded hundreds of millions of dollars in wealth, many would consider the real-world application in Kenya a glimmer of hope. It would also serve as a reminder that decentralized finance’s first objective was never to get rich quickly but, as its name suggests, to decentralize access to finance.

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There are still hoops to jump to achieve scalability

DeFi lending currently operates on an overcollateralized model. For example, Moola Markets, the protocol that powered the microloans in Celo’s pilot, has a maximum loan-to-value ratio of 5%. In essence, to facilitate the $10,000 in loans, Cinch had to first deposit at least $13,333.33 worth of Celo tokens to Moola.

While Cinch earns interest on its deposited tokens, it’s unknown if, outside of a pilot program, employers would be willing to commit their working capital to a DeFi protocol just so their employees can access loans. Also, there’s the risk of liquidation if Celo, like most crypto assets, drops in price to a level that makes its loan-to-value ratio fall below the 75% mark. An employer would essentially need to start its own crypto desk to manage this service. That’s unlikely.

One way to scale this service would be to launch a consumer loan company that partner with employers, generates loans on-chain for employees, disburse and oversee repayments.