Pascal Ntsama IV, the CEO and co-founder of Canza Finance—a payment infrastructure provider—told Cointelegraph that its new infinite-liquidity foreign exchange (FX), Baki, can solve Africa’s FX issues. Baki is designed to transform Africa’s FX market by addressing issues of slippages and dollar shortages.

Limited access to the dollar is one of the stumbling blocks currently affecting many individuals and businesses across Africa. The continent’s budding economic landscape may not reach its full potential if problems like this persist. This is because dollar shortages lead to inflated exchange rates and informal markets which are breeding grounds for exploitation. The inflated exchange rates and exploitative informal markets eventually drive up the costs of goods and services, reducing purchasing power across the continent.

Africa’s dollar shortage is a case of high demand and low supply (whether natural or artificial). This difference in demand and supply can present itself in different forms. For instance, in an economy operating with a fixed exchange rate—a situation where a hard currency anchors the national currency—a dollar shortage would be physical, that is, banks that offer the dollar have none to sell or have a limited supply. On the other hand, in countries with a flexible exchange rate where the Central Bank floats the currency, the dollar could be available but would be more expensive to buy.

Dollar shortages can arise for a variety of different reasons. To illustrate, a country may experience a dollar shortage if something happens to its source of dollar revenue like a famine affecting its dollar-earning agricultural sector. Shortages may also be a result of a higher need for important imports like food and medicine or a drop in remittances received from workers abroad.

This shortage is further compounded by another problem the industry desperately needs to solve—slippages. A slippage occurs when someone receives a different market price upon execution than when requested. Slippages make purchasing goods and services a stressful affair since they tend to lead to higher transaction costs. For instance, many businesses in Africa find themselves paying more than they were originally expecting to for particular goods.

How Does Baki Work to Solve?

As the first on-chain integration of African stable coins, Baki will allow users to deposit liquidity and conduct exchanges at central bank rates. It is also a decentralised network with no intermediaries enabling little to no downtime, ensuring users can control and swap assets seamlessly. In its initial version, Baki will allow users to exchange currencies, including USD, through Canza’s zUSD token. It also supports exchanges with various African currencies such as Nigerian Naira (zNGN), West African CFA (zCFA), and South African Rand (zZAR).

Users can generate zUSD by depositing USDC—a stablecoin pegged to the USD—at a minimum collateralisation rate of 150%. Simply put, if a user deposits 150 USDC, they can mint as much as 100 zUSD. The high collateralization rate provides a safety cushion for any slippages since there is more collateral than the amount of zUSD created. Also, users can receive a share of trading fees, once they mint their zUSD and will owe a share of the protocol debt. This debt is the total value of all zTokens in circulation multiplied by their respective reference prices in USD.

If a user's collateralization drops below the threshold (150%), a liquidator can step in to provide zUSD in exchange for the user's collateral plus a fee. If zUSD is below $1, users are encouraged to buy back zUSD and burn it for profit. If it's above $1, users are encouraged to mint more zUSD and sell it for profit.

While the 150% collateralization threshold in Baki acts like a safety net, it has its drawbacks. If currency fluctuations cause a user’s zUSD debt to outpace their USDC collateral, the ratio will inevitably dip below 150%. This will liquidate the user’s assets, allowing other users to buy the discounted collateral to restore the ratio, leaving just a portion of a user's initial deposit.

Baki also allows users to swap one type of zToken for another. Exchanging zTokens will not affect a user’s protocol debt if the collateralisation rate stays above 150%. To complete an exchange, a user has to burn the zToken they intend to swap to mint another. This burning process ensures continuous liquidity. Users will earn 50% of the trading fee (0.80% on each swap), which they can use to repay protocol debt or keep in their wallets.

To stop users from being subjected to unpredictable pricing by local traders, Baki uses CBN pricing, allowing users to exchange local currencies at more favourable rates.

What Baki Means for Africa’s Foreign Exchange Market

Baki’s use of innovative blockchain technology has the potential to transform Africa’s FX market. It could potentially address many long-standing issues the market currently faces. For instance, Baki looks to address the dollar shortage within Africa’s FX, allowing users to access the dollar anytime through its zToken. This will be good news for many Africans who have found it tedious to access the dollar. It would also boost intra-African trade since users can seamlessly swap between currencies within the zToken network.

Additionally, Baki’s introduction will reduce slippages African people and businesses often face when trading in the dollar. This can reduce the costs of business transactions, alleviating the burden on traders. It would also provide people with stable and competitive rates. Baki’s decentralised system will allow people to swap seamlessly between tokens, making intermediaries obsolete. This system improves on traditional FX exchanges, which feature lengthy settlement times and paperwork.

Furthermore, Baki can eliminate the informal markets known to exploit the failing system obsolete since Baki uses central bank rates as the benchmark for pricing zTokens, ensuring users consistently get the best rates available. This avoids the challenges associated with finding reliable and transparent pricing information in some African countries, where informal markets may offer unfavourable rates.

Baki’s technology is innovative, and its positives are undeniable. However, it will face challenges on its journey to reshape Africa's FX market. Building trust in a new platform, ensuring widespread adoption and internet access, and navigating regulatory hurdles are some of the obstacles that need to be overcome. Whether Baki will overcome these obstacles and be the product it promises to be is something we will have to see.