From Tokens to Trust: What Is Collaborative Finance (CoFi)?
Bitcoin, lending with NFT collaterals, yield mining… Decentralized finance (DeFi) has enticed us with an ambitious vision of the future of finance. And yet, it’s something as straightforward as stablecoins (with daily trading volume of $102 billion) that is hailed as the single most impactful innovation born out of the web3 space.
Stablecoins boast widespread adoption, from Kenyan merchants employing them for smooth cross-border trade to Venezuelans using them to hedge against currency volatility. Their success reminds us that the triumph of web3 may not come from dazzling innovations but rather from the effective use of tools that embody its very core principles: decentralization, practicality, and community empowerment.
Those exact values also underpin the emerging concept of collaborative finance (CoFi). CoFi argues that in many contexts, the exchange of value doesn't have to be powered by the actual moving of tokens or fiat money but instead by altering the credit-debit amounts of the players, with tools designed for this purpose and a variety of configurations of "trust".
In small-scale settings, such systems are hardly new—think about taking turns to buy beers with friends—but scaling it up has been notoriously difficult. Now, with blockchain technology, CoFi stands as a promising avenue to forge more empowered, human-centric, and peer-to-peer interactions. Let’s explore how.
From 16th-century communities to Ethan Buchman
Traditional community lending and saving practices show that individuals and groups have pooled resources for mutual benefit for hundreds, perhaps thousands, of years.
Susu, a West African rotating savings and credit system, is a great example. Dating back to as early as the 16th century, Susu enables community members to regularly contribute to a common fund, which is then given in full to each participant in rotation. This continues until each member has had a turn to receive the full amount. Susu is entirely built on trust: There are no legal contracts; members rely on social pressure and the integrity of all participants to ensure everyone contributes and receives their share as agreed.
Another example from the same era comes from European cities like Florence and Venice. As banking epicenters of their time, they pioneered the concept of credit clearing, allowing merchants and banks to offset mutual debts and credits without the constant physical transfer of gold or silver. By settling debts on the books and only transacting the net balance, trade became more efficient and safer. This laid the foundation for modern financial systems, propelling a shift from medieval trade practices and setting the stage for sophisticated global economies of the future.
Big corporations and banks now use credit systems extensively among themselves. Instead of executing every single transaction, they offset credits and debts, effectively streamlining their processes. So, why can’t we do this on a smaller scale, too?
A few individuals, including Ethan Buchman, the co-founder of Cosmos, started wondering: What if we could bring techniques such as mutual credit, multilateral offsetting, mesh-credit networks, voucher and barter systems, and more to communities all around the world? This is how the meme (a unit carrying cultural ideas or practices) of collaborative finance was born, exploring how we can optimize how value moves in our society.
The blockchain piece of the puzzle
Collaborative finance is all about community, trust, and social agreements, showing great potential to bring a human touch back into the impersonal world of financial transactions. It relies on credit systems based on trust networks instead of conventional, slower, and costlier money transfers.
As Giulio Quarta from the Crypto Commons Association (behind the CoFi Map from their May event and the upcoming March CoFi event) points out, this is where CoFi diverges from the approaches of DeFi and even regenerative finance (ReFi). Both depend on “commodity money” like tokens or physical currency. CoFi, on the other hand, is all about scaling trust.
The way this works is that through blockchain-enabled trust networks, community members can extend credit, lend, borrow, and transact. The technology serves as a ledger enabling transparency and accountability—adding a much-needed trust layer to a fascinating age-old concept. On top of that, through smart contracts, blockchain introduces a level of automation and efficiency previously unattainable in traditional trust-based systems.
Opening up to new stakeholders, CoFi platforms naturally create opportunities for smaller players and individuals, with the potential to transform community-centric environments like cooperatives or even decentralized autonomous organizations (DAOs). The fusion of CoFi and mutual credit systems with blockchain globally could be critical for crypto adoption, similar to the impact of stablecoins, aligning well with web3's ethos.
Some projects working in the space include Grassroots Economics, Mutual Credit Services, Informal Systems, and Anoma, among others.
Enter the network view
When it comes to CoFi’s theoretical foundations, much can be attributed to researchers like Ethan Buchman, Tomaž Fleischman, Matthew Slater, Brett Scott, Paolo Dini, and others. Tomaž, in his pivotal paper on CoFi, discusses how Slovenia employs multi-lateral credit trade and credit clearing to address late payments. Similar to the influential Sardex model in Sardinia, these systems implement strict credit rules and active management to support community members, exemplifying CoFi in practice.
A key insight (shared by Ethan & Tomaž in this Blockchain Socialist episode) is CoFi's focus on network structures rather than individual actions. Traditional financial models often get bogged down in individual rationality and competition, missing the larger network dynamics. CoFi seeks to harness the collective potential within these networks, recognizing the power of understanding and sharing mutual obligations.
This collective process—sharing and understanding mutual obligation—is central to unlocking a network's full capacity. While individual perspectives provide only transactional insights, collaborative efforts reveal the broader structure of obligations. That information allows us to do much more, such as credit clearing (multilateral trade credit setoff).
Imagine Alice owes Bob $10, Bob owes Charlie $6, and Charlie owes Alice $4. Normally, they'd each just think about their own debts. But, if they look at the bigger picture together, they'll see a loop. Alice can reduce what she owes Bob by $4, and Bob can do the same with Charlie. So, now Alice only owes Bob $6, Bob owes Charlie $2, and Charlie doesn't owe Alice anything. They've settled $12 in debts without using any actual cash.
Moving credit on chain empowers us to better visualize and interact with the network. It makes the often-hidden structures visible, going beyond traditional bank balance sheets while still maintaining privacy. In such a collective environment, participants can efficiently resolve their debts and manage financial risks, achieving more with less actual money.
Since no physical money is moved, there are no bank fees, making transactions cheaper. Businesses have the agility to engage in transactions even without immediate cash flow. Significantly, CoFi enhances community solidarity, fostering a sense of belonging and trust within an interconnected network. It brings businesses and individuals together to regularly review and make the most of their financial connections, helping them get more from what they have. That’s how CoFi aims to build a more inclusive and practical financial world.
Tereza Bízková is a Colombia-based journalist, tech writer, and the co-founder of ReFi Medellin. Her passion for technology and a master's degree in Defence, Development, and Diplomacy fuels her exploration of how innovation can drive social change.
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