Many of us saw a tontine in action before we even had a bank account. Ten people, a fixed amount each month, and in turn, someone takes the whole pot. Economists call it a ROSCA, a rotating savings and credit association. We call it a tontine, njangi, susu, esusu, depending on the country.
Decentralized finance (DeFi) claims to have invented something new with lending protocols like $AAVE. In reality, the basic idea is a cousin: pooling money so some people can benefit from it now. What changes is the machine that holds it all together. I asked both the same five questions.
1. Who keeps the money?
Tontine: one person, often the treasurer, or the recipient for that month directly.
DeFi: a smart contract—that is, a public program on the blockchain that runs by itself. No one can “run off with the cash”… unless there’s a flaw in the code.
2. Why do people trust you?
Tontine: because people know you. Your family, your neighborhood, and your reputation serve as a guarantee.
DeFi: no one knows you, so you have to provide collateral worth more than what you borrow. For example, you deposit the equivalent of 150 in crypto to borrow 100 in a stablecoin like $USDT. That’s overcollateralization.
3. What happens if someone doesn’t pay?
Tontine: social pressure, discussions, and sometimes a total loss for the group. The person who receives the pot last is the most exposed.
DeFi: if the value of your collateral drops too much, the protocol automatically sells it to repay the loan. This is called liquidation. No negotiation, no grace period.
4. How much does it earn?
Tontine: generally, no interest. The benefit is access to a large sum all at once, and the discipline of saving.
DeFi: people who deposit funds earn variable interest. It rises when lots of people borrow and falls when funds sit idle. This return is never guaranteed.
5. Where’s the real risk?
Tontine: people. A member who disappears, or a poorly managed fund.
DeFi: technology and the market. A bug in the code, a manipulated price oracle, a stablecoin losing its peg, a wrong address, network fees.
My take: DeFi hasn’t “replaced” the tontine; it has replaced trust with collateral. That’s powerful for strangers on the other side of the world. But it also excludes those who have nothing to put up as collateral, whereas a tontine lends on the strength of a person’s word. They’re two tools for two different situations, not an old one and a modern one.
If you ever try a lending protocol, start small, understand at what price you’d be liquidated, and never use as collateral money you need this month.
A question for you: in your tontine, what really stops someone from running off with the pot, and could code do a better job?
Educational content, not personalized financial advice.