Editing Chit Fund DAO (section)

== Basic cfDAO function ==
The cfDAO relies on an [[Decentralized underwriting|underwriting DAO]] (uDAO).
[[File:CfDAOmodules.png|none|thumb|656x656px]]


In the above figure, we illustrate five basic interoperating smart contracts which govern the cfDAO.

In the first module, the chit fund smart contract (cfSC) governs instantiations of the chit fund. Each subscriber <math>S_i</math> makes monthly deposits, called premia, into the chit fund. This gives subscribers the right to bid on the fund--which is the ''premia pool''. The cfSC keeps the accounting for each round until the chit fund's conclusion. 

The second module is the Reserve Smart Contract (rSC), which initiates the underwriting reserve. In this smart contract, underwriters pool money to be held in reserve. This reserve money is used to guarantee chit funds continue to be funded properly in case any subscriber defaults. Each underwriter who deposits cash in the rSC is issued proportional underwriting REP tokens (uREP) which lay claim on the portion of the cash reserve. 

In the third module, underwriters may encumber uREP tokens in order to underwrite chit fund subscribers accepted by the underwriter. In case a chit fund subscriber defaults, then this Underwriting Smart Contract (uSC) will use the uREP tokens to continue the deposits until the chit fund ends. For this service, a chit fund subscriber must pay an underwriter a fee. For example, a standard organizer's fee in a traditional chit fund is 5%. 

In the fourth module, the underwriter DAO follows basic [[DAO Governance Framework#DGF workflow|DGF workflow]]. Instead of keeping the underwriting fee, the underwriter is given uREP, and the fee is distributed to all uDAO members in proportion to their uREP holdings through the [[Reputation#REP Salary Mechanism|REP salary]]. The uDAO allows the members to police each instantiation of the chit fund through the [[Validation Pool]], to guarantee all subscribers are fully underwritten to ensure successful conclusions. Chit funds which are not fully underwritten are automatically rejected.

Initially the rSC requires underwriters to make 100% capital reserves. However, as detailed in the page on [[Decentralized underwriting#Capital reserves|decentralized underwriting]], this 100% reserve requirement can be safely diminished once stable fees are proven, because the uREP tokens will gain intrinsic value from the [[Reputation#REP Salary Mechanism|REP salary]]. A fifth module makes this explicit, with a uREP Marketplace Smart Contract. When a subscriber defaults, the uREP tokens underwriting them are sold at auction until the premia are paid. If the encumbered uREP is sufficient, then the remaining tokens are returned to the underwriter. If the encumbered uREP is insufficient, then new uREP is minted and sold at market to cover the premia. In this case the entire uDAO suffers because their uREP holdings are diluted, which motivates proper policing in the fourth module Validation Pool.