Alice defines a new chit scheme which has the subscription amount of 1k DAI for 5 months i.e. for a total chit value of 10K which has an agreed start date of 1st of September. A simple formula helps us readily notice the working of chits: Premium for each term × No. of terms = Gross Amount
Bob, Carol, Dave, Eve and Frank agrees to join the above scheme where each have given consent to the protocol to maintain a recurring payment of 1000 DAI per month for the next 5 months starting from 1st of Sep 2021.
Starting from 2nd term (1st of October in our case), all the subscribers come together for the auction/lot.
The minimum prize money of an auction is limited to 70% of the gross sum assured that is 3.5k in the above example.If there is no person is willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 5,000 >> 4,900 >> 4,800, DAI and so on. During auction, subscribers in need, who are interested, bid by allowing percentage of subscription to be forgone.
Suppose Dave who considers this as a good opportunity of borrowing based on the current market situation bids the lowest @3,900 DAI. Dave receives access to a lump sum of 3900 DAI in this auction. Chit fund acts as a borrowing scheme here
Dave has already pre-agreed to allocate the fund at an agreed % to different predefined set of yield generation strategies across DeFi while joining to this chit scheme. The received 3900 DAI will be allocated as per his agreed portfolio split.
Dave continues to contribute his monthly instalments for the rest of the terms.
Whatever money is accrued by way of the auction discount is passed on to the remaining members. In our case as Dave is settled on 3900 DAI, 1100 DAI is divided by the 4 remaining participants (total -1) here) and everyone gets 275 DAI.
Every participant can pre-agree to either have the discount deducted from their next monthly instalment or allocate to some yield generation strategies.
Alice, Carol and Eve have pre-agreed to have their discount deducted from next monthly instalment and because of that their next monthly instalment is reduced to 725 DAI.
Bob and Frank have agreed to allocate the fund to yield generation strategies and will be allocated to that.
Starting from 2nd term (October in this case), all the members starts to earn good returns on the amount they invested. Chit fund acts as a saving instrument here
The process repeats with each member getting the opportunity to take the auction amount each month while all the other subscribers, including the previous month’s winning bidder, continue to contribute their monthly instalments.
During the next auction, Mark because of some urgent fund requirement agreed for the minimum sum that is limited to 70% of the gross sum. In our case it becomes 3500 DAI.
As always the amount foregone by Mark (1500 DAI) is then distributed among the other members equally.
Mark needs to pull out the fund outside our protocol without investing in yield generation strategies. Protocol only allows to withdraw money outside based on personal sureties or collateral.
DeChitFund can support credit delegation from Aave where the surety/collateral can be provided by someone else having enough fund through credit delegation.