Robert Steinadler, 2 months ago

Celo explained: How to include the world’s unbanked people on a global scale?

Blockchain technology is facing serious hurdles. Those chains that are highly secure and decentralized like Bitcoin are slow to scale. Others can serve more users and transactions but are less secure or less decentralized. When taking mobile communications into account, then these problems are even more severe. Smartphones usually don’t have the capacity to run full nodes and internet connectivity might not be available in all places.

At the same time, it is estimated that about 20 % of the world’s population is still unbanked and lacks access to basic financial services. This is often the case where people also have no or little access to the internet and the local infrastructure is also limited.

This creates a special need for blockchain technology that addresses both problems. Celo is trying to be that solution and in this article, we are going to explore its features.

What is Celo?

Celo is an open-source project that was founded by Marek Olszewski, Rene Reinsberg, and Sep Kamvar in 2017. Its goal is to bring financial services to regions with little or no infrastructure. The vision of Celo is to bring financial inclusion to billions of people worldwide.

One thing that is available in most of these troubled regions despite the many obstacles is mobile phones. While cryptocurrencies traditionally involve wallets that need internet connections and complex public keys, Celo is working with cell phone numbers. This is not only easier for humans to read, but also builds an interface to already existing infrastructure. With Celo, there is no need for constant access to an internet connection.

Celos blockchain is fully EVM compatible and is based on an algorithm called EigenTrust that was developed by Sep Kamvar for Google. It allows address-based encryption which enables Celo to connect a cell phone number with a hexadecimal cryptographic address that is commonly used by all types of cryptocurrencies and wallets.

Celo staking and reputation system

Like Ethereum, Celo is based on proof of stake and uses a reputation system to establish trust in the network. Block production is done by validators who need to lock up a stake in order to take part. The idea is that these validators need to have skin in the game for them to be trusted. Should they choose to do something corrupt, then they would hurt their own investments. Running a validator requires a stake of 10.000 CELO and like with other proof of stake cryptos, retail investors can also delegate their funds to a validator. This allows them to earn passive income through staking without the need for a bigger investment.

Interestingly enough, the reputation system of EigenTrust is the same that is used by Google PageRank. Generally speaking, the trust value of a phone number in Celo is defined by the number of other phones that trust that particular network participant.

In order to connect a phone number to an address, users have to go through a verification system that requires them to prove that they own the number by signing messages. Once the phone number is attached, it can be used to transact in the network the same way as with a wallet address. Coins are not transferred to the phone or smartphone, but to the blockchain address that is connected to the phone number.

Crypto assets on Celo

There is more than one use case for the CELO token. It is needed to run a validator and to take part in governance. Both are very common for proof of stake cryptocurrencies, but there is also a more unique element to Celos token economy. Celo is a so-called two-way token system, which defines its third application. The first asset in this context is CELO and the second is CeloUSD or cUSD.

The cUSD token is a stablecoin that is pegged by the amount of Celo bound in the so-called Celo reserve. This reserve system demands that users need to burn CELO in order to create and receive cUSD. They can also redeem their cUSD for CELO by reversing the process and burning the stablecoins and receiving CELO in return. This seignorage system is very similar to other solutions, but it is noteworthy that cUSD is not only backed by CELO, but also by other assets to keep the peg stable. The Celo Dollar is therefore considered to be overcollateralized.

This is especially important when comparing cUSD to TerraUSD and the collapse that happened in 2022. While we cannot predict the future, the reserve system of Celo provided a stable peg that kept cUSD somewhere between 0,98 US-Dollars and 1,015 US-Dollar in the past. Therefore, the safety of CELO, as well as cUSD, is higher even though such a system always comes with a risk even though it's relatively small when compared to the risks that were involved with Terra.

Since Celo aims to revolutionize payments globally, a stablecoin is simply the way to go, because most merchants and service providers would like to cut out the volatility that cryptocurrencies like Bitcoin or others are facing on a daily basis.

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