How BlockChain is disrupting the World Economy

How BlockChain is disrupting the World Economy 

The market size of blockchain is expanding at the speed of light (expected CAGR rate of over 69% between 2019 and 2025 according to Globe News Wire). If one takes the case of a country, Blockchain can have significant impacts on its overall economy whether directly through its applications or indirectly with cryptocurrencies.

Before explaining how, let’s go back quickly to what is blockchain.

Blockchain is a technology with some interesting properties: a quite high level of protection of data but also transparency and immutability regarding data added in the Blockchain.

At an economic scale, this means that companies would be able to protect their data in a better way. This will lead to cost savings as they won’t have to lose time nor money in case of cyber-attack. Eventually, money saved could be invested in companies’ projects that will generate higher returns.  Moreover, Blockchain could help to trace the origin of several kinds of things including money thanks to one of its core features: its immutability. 

In a blockchain, there are some people called minors whose jobs are to save and secure data at each new block creation. These data cannot be altered. Each block of information has its own hash value (a kind of code allowing people to identify each block) and when a new block is created part of its hash value retakes the hash value of the previous block. Blocks are therefore linked between them. Thus, a random guy won’t be able to add a blockchain between two existing blocks. This is the immutability of Blockchain. Let's illustrate this with an example of one of the main players in the economy: the banks. 

How Blockchain could serve the interest of banks and therefore the whole economy ?

Banks are an important actor in a country as they provide households and companies with funds for their projects. To do that, they need to know with whom they are trading (the famous Know Your Customer process) and the provenance and the use of funds. Thanks to blockchain, banks would be able to know all information about their clients and funds used without the risk of seeing them modified or deleted as everything added to the blockchain cannot be deleted as it has shown before. In France for example, some initiatives have already begun as the one launched by R3 and Caisse des dépôts in 2016. Through a common KYC, banks and insurance companies are able to complete each other with the relevant information regarding their clients. This mutual KYC is supposed to generate an average 65% gain for employees. 

Beyond banks, the State itself can use Blockchain to increase its revenues through taxes.  As you know, taxes aren’t always easy to levy as many people take money out of the country in case of high tax rates defined by countries. Panama papers and Paradise papers scandals are examples illustrating this phenomenon of tax evasion. A solution could be the creation of a state-owned blockchain. Stakeholders involved would include tax authorities like the Internal Revenue Service (IRS), companies, states or public authorities. All households revenues will be declared (respecting norms like the GDPR in Europe). Due to the traceability of network information, chances to see tax evasion would be therefore significantly reduced. According to a report made by the United Nations entitled Global distribution of revenue loss from tax avoidance (2017), the US is losing an estimated $188 billion every year because of tax evasion. This is money that won’t be collected and therefore can’t be used by governments in their planning of policies for education, defense or other areas.

As many digital applications, Blockchain is taking part in the transformation of mankind's way of life. For the next decade, 2020 - 2030, this technology will allow you to get a fastest, simplest and a low price way to get your product. The transformation goes through different stages and one of them is data collections. It will allow to automatise all the processes from the fabrication and transformation until the delivery to the final customer. Before doing that, the actors need to trust the data and its quality within different stages (chain of production, logistics and commercialization). 

Moreover, in addition to keeping information safe and transparent, new kinds of contracts have emerged: Smart Contracts. Since Data can now be trusted, contracts can be automated with auto triggered conditions. As soon as these conditions are fulfilled, the contract is triggered without any human actions. As for example, it is now possible to track wine from Bordeaux to Shanghai with the certainty that the good was transported in the correct temperature and corking conditions for the bottles. 

As per previous technologies, smart contracts will have impacts on major operational layers of the economy. 

For those who don’t know it, cryptocurrencies are virtual currencies secured by cryptography and used to make transactions in a decentralized network based on blockchain technology.

But before diving in them, let us go back to the mechanism of buying and selling products..

The law of supply and demand theorized by Adam Smith in The Wealth of Nations in 1776 is one of the oldest economy’s law. Even if buyers and sellers agree on the price, a means of payment is still needed. You would probably use either your credit card, cash or checks. But there is a path that is slowly making its way: cryptocurrencies.

Cryptos are being used by an increasing number of people for their daily needs like buying food or clothes. Here are the results of Visual Objects Digital Currency Survey on 121 people who have purchased items with cryptocurrency.

The rise of a new era already started

Besides, the recent announcement of PayPal last October sounds like a new chapter of history. For those who didn’t hear the news, Paypal announced that bitcoin and other cryptocurrencies (first of them will be Ethereum, Litecoin and bitcoin cash) could be used to buy products from the 26 million sellers who accept Paypal.  Cryptocurrencies would become a means of payment like a check or a fiat currency. But could they replace them?

The idea could be a possible solution in countries severely affected by inflation and hyperinflation like Venezuela nowadays (according to its central bank its inflation rate was about 9,586% in 2019). When a country is experiencing such phenomena, this means that the purchasing power of households and companies will decrease and worth nothing much (nearly nothing in the case of hyperinflation). Buying daily products becomes a real uphill battle. Using cryptocurrencies will avoid such problems as they are not subject to the traditional determinants of inflation like money supply and interest rate. Money supply can increase with the print of more paper money by central banks. But cryptocurrencies cannot be affected by such decisions as they are not related to central banks' decisions. Moreover, in the case of bitcoin, for example, there is a limited number of bitcoin that can exist. This partly determine their price (Satoshi Nakamoto, creator of bitcoin, fixed as a maximum 21 million). In the case of other cryptocurrencies, only their efficiency or massive adoption (fact that more and more people are using these cryptocurrencies) can shift their price . 

Thus, cryptos can be an interesting solution in case countries are facing huge inflation rates. Anyway, there are many aevolutions we can observe: Indian Rupee is now behind Bitcoin in terms of market capitalization. Will it one day overthrown the king of the currencies: the US Dollar?  

Lexical : 

• Compound Annual Growth Rate (CAGR): rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.
• Hyperinflation: According to Phillip Cagan, hyperinflation occurs when the monthly inflation rate exceeds 50%
• Fiat Currency: Name used to designate a currency used by a state such as the US dollar or the euro. 
• Hash value: A hash value is a numeric value of a fixed length that uniquely identifies data.

Sources :

https://techjury.net/blog/blockchain-statistics/#gref

http://www.revue-banque.fr/management-fonctions-supports/article/blockchain-pour-optimiser-kyc

https://www.journaldugeek.com/2020/05/02/gens-depensent-plus-cryptos-dans-vetements-que-dans-drogue

https://newsroom.paypal-corp.com/2020-10-21-PayPal-Launches-New-Service-Enabling-Users-to-Buy-Hold-and-Sell-Cryptocurrency

https://www.presse-citron.net/bitcoin-est-entre-dans-le-top-5-des-monnaies-mondiales/