Editing Chit Fund DAO (section)

== Advantages ==

=== Unmanaged interest rates ===
In this decentralized banking scheme, interest is automatically handled. When more people want to save their money (invest), then interest decreases naturally. When more people want to take loans, interest increases. Therefore, there is no need for central planning for banking rates.

=== Automated optimal actions ===
A sophisticated cfDAO will make the numerical decisions automatic. This is because there are optimal actions based on the subscriber's goals. For example, if the subscriber wishes to use the chit fund as an investment, then the proper bid in any round is given by the formula <math>$\Bigl(Np+\tfrac{F-Np}{T-i+1}\Bigr) </math>.  

The notation is explained next with a justification for the formula. 
Denote the number of rounds in the chit fund as <math>T</math>. The current stage is <math>i</math>. The premium is <math>$p</math>. The number of subscribers is <math>N</math>. (In the basic chit fund <math>N=T</math>.) At each stage <math>i</math> the subscribers add <math>$Np</math> to the fund <math>$F_i</math> so at each stage <math>$F_i \geq $Np</math>. Note that if two or more subscribers have not bid on the fund by the final round, then they split the fund equally. 

Assuming the interest rate is positive, <math>$x</math> is worth more than <math>$x</math> in the future. Consider the case when there are two bidders who wish to maximize their earnings from the chit fund who are the only ones left to bid in the second to last round. As a rational bidder you should accept <math>$\Bigl(Np+\tfrac{F-Np}{2}\Bigr) </math> on the second to last round, because otherwise you split the same amount later in the final round. So you might as well accept that number earlier. If your opponent underbids you, then you will receive more on the final round. However if you do not bid that low, then your opponent can bid slightly higher than that, diminishing your rewards on the final round. Similar logic applies to the preceding rounds, giving the optimal strategy for an investor is to bid <math>$\Bigl(Np+\tfrac{F-Np}{T-i+1}\Bigr) </math> at stage <math>i</math>.

For example, if everyone is going to save money the entire time, it's better to get out of the chit fund if you are planning on investing, in order to join another fund that has members who ''are'' seeking loan opportunities. So you should always bid <math>$Np</math> on the first round and get out if no one bids low.
=== Web3 improvements ===
Web3 technology can greatly improve the efficiency and security of the traditional chit fund scheme. 

First, a smart contract replaces the organizer, eliminating the risk that the organizer can abscond with the fund. Further, the decreased overhead from automation should typically reduce the 5% organizer commission. 

Second, by implementing a subscriber reputational system, honest participation can be tracked across many different chit funds, as people will earn reputation each time they pay their required monthly fee, and lose reputation if they default. The more often they participate honestly, the larger their reputation will grow. Then participation in larger and more complex chit funds can be dependent on reputation, which will incentivize healthy collaboration.  

One major source of overhead that makes this subscriber reputation scheme less efficient, is the inevitable possibility of subscribers defaulting on paying the premia. It’s been estimated that 35% of chit fund subscribers have defaulted at least once recently and 24% have defaulted after winning an auction. If a subscriber defaults, their underwriter suffers. If the system which gives subscribers reputation becomes the major reason an underwriter supports their subscribers, then the system will eventually punish underwriters randomly. Because a market for subscriber REP tokens will eventually emerge, and then people will use the tokens to default and make better profit than can be made participating honestly. This suggests that there will always be a need for the current legacy system of KYC rules and legal rules preventing insurance fraud. However, these rules are at the level of the subscriber-underwriter relationship. Not on the level of the DAO, which is supranational.  

The advantage of a supranational DAO is that it enhances the core value proposition of banking and insurance--distributing risk across a deep and diverse market. A supranational DAO has a larger, and therefore more stable, capital reserve of equity tokens (underwriter REP) which are measurably valuable according to the market. This decreases the need for cash reserves, making the system more efficient.   

If the default risk can be managed at scale, then another advantage is that larger groups dilute the risk of individual default. A chit fund with a large number of people with high reputation can pay smaller premia for insurance. One million people investing $1 daily for 50 years allows 50 people per day to immediately begin taking an average payout of roughly $20,000. More investors investing smaller amounts in shorter increments, means more people can withdraw at any point. By monitoring and analyzing the performance of a fund, programs can suggest values that can be withdrawn at any given time. By automatically bidding when the fund rises above expected levels (as described in the previous section), the fund can be stabilized to give predictable returns. This prediction become more accurate if multiple funds are connected.

With no initial reserve backing, this allows people to bootstrap their way to greater financial security and stability, assuming the reputation system is sufficiently strong to guarantee a low percentage of defaults. 

Like other overhead costs (the appeals process, policing, etc.), insurance is cheaper when the system is running well. The more automated the decentralized economy becomes (thanks to smart contracts and optimized UIs, for instance) the less costly insurance is. The purpose of insurance is to decentralize risk. The new tools of information technology and architectures of P2P distributed computing create more effectively decentralized organizations. Decentralizing risk makes insurance more stable and efficient, which improves the  function of the economy.