Income risks are a very real problem in today’s complex global economy. For many reasons, the prospect of running out of money to meet financial obligations is very real. Complicating this problem is the fact that many people do have access to formal credit.

If you live in the United States or Europe, there are some safety nets. When something goes wrong financially, there is easy access to things like savings, credit and insurance. The model that exists in the developed word today isn’t perfect. It can be expensive, but is there if needed.

However, there is a large swath of the global population that live in places where access to credit is really poor or not even available at all. This is why something called reciprocal finance exists. One of the most popular mechanisms for this is a rotating savings and credit association, also known as a ROSCA. These are organizations where a group of people get together to save and borrow as a community.

With blockchain, the ROSCA concept can now be used anywhere. It doesn’t matter whether you don’t like how expensive existing financial service are or if you have no access to them at all. ROSCAs could be a great opportunity for blockchain to re-think the way we think about savings, credit and insurance.

How a ROSCA Works

Perhaps you have never heard of a ROSCA. This might be because you live in a place where financial services are easily accessible.

For at least a billion people, however, ROSCAs are used for savings, credit and insurance purposes by pooling resources together.

The ROSCA concept has several names across the world. It’s called tandas in Latin America, hui in Asia and Game’ya in the Middle East. Here’s how it works. A group of people get together to put money into a communal pot every month. Each month, the group of individuals are then able to take out of the pot for paying bills, daily needs, etc.

Source: Collaborative Finance

ROSCAs have been around for centuries. Today, with blockchain technology, it’s now possible to use ROSCAs in the digital world. Having financial control should be a right everyone enjoys. However, because of big government and financial institutions, that hasn’t been easy to accomplish. ROSCAs could help.

Blockchain Reciprocal Finance Can Supplement Insurance

The insurance industry is big, big business. The global insurance industry is worth almost $5 trillion. Multinational companies have opulent buildings in world-class cities as an edifice to success. In addition, they constantly advertise the dangers of not having insurance.

All of this costs insurance companies lots of money. The money for these ads and office buildings come from insurance premiums is paid by everyone who is a customer. When you think about it, insurance is a highly regulated crapshoot. We pay into a system and someday when something happens we hope to be covered. The insurance provider’s strategy is to make sure they take in much more in premiums than they eventually pay out.

Does this sound fair? Maybe it does in a world where centralized insurance is the only option. However, it’s not the only choice. In places where access to financial service are not good, people have long used ROSCAs instead. Maybe they are on to something.

The appreciation in bitcoin’s value offers proof people are looking for more options in financial services. An entire blockchain economy is developing. ROSCAs might be one of the best reasons for people to look towards blockchain-based cryptocurrencies. And the “pot” of money collectively saved up can be used for many things, including what traditional insurance often provides.

Blockchain Doesn’t Need to Return Profit

It’s become obvious a new generation isn’t as interested in traditional finance or insurance.

New insurance companies, like Lemonade, prove this. A company with a more philanthropic bent, Lemonade offers its customers home insurance with a flat 20% cut of premiums. An additional 40% goes into reinsurance, with the remaining left (if any) at the end of the year going to charities. The company keeps costs low by not using traditional marketing tactics. It relies on its members’ trust in one another to keep the service viable.

Still, Lemonade is a centralized model. ROSCAs can be set up the same way utilizing blockchain technology to distribute this process. Smart contracts can be used for claim processing and fraud automation, catching issues before they become problematic.

Most of all, ROSCAs don’t need to make a profit. The entire idea for each individual ROSCA is to have a community of like-minded people with financial goals. In this way, blockchain doesn’t have to return a profit. It serves the community members, and no one else.

Blockchain Doesn’t Care Where You Live

Source: WeTrust whitepaper

In the United States, there has been an uptrend in the amount of peer-to-peer (P2P) lending people participate in. Not only is this uptrend driven by those investing in these types of loans, but also people seeking them out. Both sides end up winning in this environment. Investors are looking for places to get a good return. Borrowers are looking for rates they can live with over the life of a loan.

P2P lending is not only seeing an uptick in the US, it’s also becoming popular in places where informal credit is the norm, such as China. Community systems worldwide are another reason why blockchain is great for leveraging reciprocal finance. ROSCAs are seeing growing popularity in the US, primarily within immigrant populations.

ROSCAs could prove utility for those interested in cryptocurrencies by essentially, taking the widely-used ROSCA system and replicating it in an autonomous fashion. The difference between the two is that a blockchain-based ROSCA could be used by anyone, anywhere. The social links would still be based in the real-world, yet they are solidified via smart contract technology that is enforceable and transparent.

Blockchain is a Community Already

There are deep social ties inherent in the blockchain and cryptocurrrency space. Without communities, various blockchain projects, including Bitcoin, wouldn’t have been able to take off and become successful.

The need for informal credit tools in the blockchain space is clear. ROSCAs can be a successful supplement to regular financial services — another tool in the toolbox. Reciprocal aid is a perfect fit for blockchain technology, enabling people around the world access to more advanced financial tools.

In the developed world, these tools are not taken for granted. In addition, the time has come for them to be available no matter who you are. 2.5 billion people in the world don’t have a bank account, and billions more don’t have access to credit. Existing financial services in the developed world are overly expensive and not easy to use. Bitcoin, blockchain and the larger cryptocurrency industry can help fix that.