Many crypto-natives think of DeFi and big names like Uniswap and Aave come to mind. However, for the everyday person that knows nothing about crypto, those names mean nothing. Why is that? Mostly because DeFis main use cases in 2023 are still targeted at solving needs for the crypto-native. Use Uniswap to swap ETH for your favourite meme coin. Use Aave to take out a loan against your staked ETH to buy your favourite meme coin. Of course I am mostly kidding, but there is some truth here. DeFi is still quite far away from mass adoption. Or at least it feels that way. Being born and raised in North America, we can be quite ignorant to the financial problems that people in developing nations faced. In some places around the world people face:
- Governments and banks stealing their funds
- Inflationary pressure
- High FX conversion rates for illiquid currencies
- Expensive fees on cross-border payments
And for the above reasons, citizens and businesses in African countries are looking to DeFi and crypto more broadly to circumvent the challenges of their existing financial system.
Enter Canza Finance
The team at Canza Finance is building a suite of products that will bring DeFi to developing regions such as sub-saharan Africa and onboard millions of users into crypto.
Canza Finance solutions entail five different but interconnected areas encompassing Cryptocurrency Onramp and Offramps, Crossborder Settlements, Treasury, Decentralized Finance, Crypto Teller Machines, Agent-based banking, and IPFS Storage.
In the future, Canza will offer on-chain asset management solutions before eventually becoming a fully on-chain investment bank.
The Canza team has high ambitions and we could spend hours detailing every area of the business, but for the purpose of this article we are going to highlight Baki.
The Problem with African FX
Currently it is quite tough to operate an intra-African trade network for many reasons. Businesses in countries like Nigeria face a crucial obstacle stemming from restricted access to central bank rates. The Nigerian government has taken it as a matter of pride to artificially keep the &ldquoofficial" FX rate for the Naira low, and only offers this rate to exclusive investors and exporters. This restriction has led to the emergence of fragmented liquidity and parallel rate markets, where trading occurs at substantially higher rates than the central bank rate. Consequently, businesses seeking to engage in local currency transactions may encounter significant limitations in obtaining the necessary liquidity, potentially resulting in additional costs when settling larger transactions.
Introducing Baki
Baki V1 introduces an FX exchange that ensures unlimited liquidity for users. It does this by providing access to synthetic on-chain assets known as zTokens, which are pegged to African currencies. Baki will pioneer the implementation of on-chain African stable coins. Its primary objective is to alleviate the scarcity of US dollars in emerging markets, offering users the ability to enter dollar markets without slippage and at the most competitive rates available in the markets.
By developing a synthetic asset that can be freely traded at the central bank rate, Baki democratizes access to exclusive exchange rates. Additionally, Bakis architecture facilitates infinite liquidity, ensuring that a unit of zUSD can always be exchanged for an equivalent value in any supported currency. This directly addresses the challenges arising from the fragmented liquidity in existing models.
Finally, Baki offers another significant advantage by enabling assets to be natively quoted in local currencies on the blockchain. This opens up opportunities for exchanges to price assets directly in local currencies, eliminating the necessity for fiat-priced on-ramps or assets denominated in US dollars.
Baki in Action
While this all may sound good in theory, lets take a deeper dive into Baki's potential user base and the LP partners that will make all of this possible.
An American construction company is looking to purchase Nigerian Naira for a project. They can either approach and onboard with Jara Network or Baki. Jara Network is a Canza Finance business line which is a typical FX OTC desk (with lower fees than the competitor). This infrastructure will act as the means to onboard future users of Baki as they have a trusted anchor in the real world.
A company that is new to crypto can easily sell their fiat for a zToken (stablecoin currencies from around the world) and then become a Baki user. Furthermore, firms that have other access to crypto can simply use other stablecoins such as USDC to mint zTokens.
If they needed to buy $1m USD worth of Naira, they would deposit $1.5m of USDC to mint $1m ZUSD. They could then use Baki to trade zUSD for zNGN at 80 bps premium to central bank FX rates.
So who provides the liquidity on the other side of the trade?
Baki LPs
Canza agent partners act as LPs that can offer NGN to zNGN swaps. They hold large USDT/USDC positions and therefore have an incentive to mint zTokens.
Baki LPs enjoy access to two notable properties, which offer distinct advantages:
1) They implicitly take a short position on African currencies since these positions are essentially debt positions. This means they can benefit if African currencies devalue in comparison to the US dollar.
2) 50% of Baki transaction fees are distributed to minters as yield, paid in zUSD. Consequently, during periods of volatility in African currencies, there will be excess yield available.
Considering all factors equal, let's assume someone provides NGN to zNGN, with a spread of 75% between the official exchange rate (used as a reference price by Canza) and the parallel rate (at which all P2P liquidity is provided). In this case, the price for 1 zNGN should ideally be 1.75 NGN. However, since the minter earns yield on their position, they should offer it at 1.75 NGN minus the yield they earn to maintain a fair value. Assuming a yield of 30%, they should offer 1 zNGN for 1.45 NGN.
It's also important to consider the implicit short position they hold on African currencies. As a result, they should offer zNGN at a price lower than 1.45 NGN per zNGN. Consequently, given the markets high sensitivity to fees, any entity capable of offering zNGN below the standard parallel market price will be able to capture a significant portion of the market share for FX swaps that provide on/off ramps into zNGN instead of directly into USDT.
In Conclusion
Not all market participants are as privileged as the western world to have the access to robust financial markets and systems. In many emerging markets there are shortcomings that make it tough for consumers and businesses to predict the financial markets they reside in, making it tougher to interact with one another.
Cryptocurrency protocols such as Baki are providing solutions to these problems. DeFi in Africa has the ability to change the financial landscape as we know it, as builders in web3 find creative ways to reduce the friction of these markets and provide them with more autonomy over their financial decisions.
