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Benefits of Cryptocurrency and Smart Contracts in the International Trade Environment

By June 11, 2018 No Comments

Since we have covered the basics of Blockchain, Bitcoin and Smart Contracts on a previous post, let’s get down to business: how can all this new technology work in real life, to boost international trade? Here’s a glimpse.

Weak Economic Policies

First, take a look at Bitcoin. It can be considered rather unstable to the common investor – let aside people who are not devoted to buying bonds or working with stock markets at all. Here we can see its value fluctuation over one day’s period (February 21 to February 22, 2018):[1]

From the chart, a fair point can be made: Bitcoin’s value is not steady. Thus, if you live in a country where the official currency is doing well, maybe it would be better to wait until Bitcoin reaches a ‘trustworthy’ exchange rate. That is what conservative investors will do – that, if they join the cryptocurrency markets at all.

But what happens if you cannot depend on your government’s economic policy? What if you cannot thrust the economy of another country, but still want to trade with it? Here comes an extreme – yet valid – example: Venezuela. They possess a commodity that the whole word wants: oil. Lots of it. Venezuela sits on top of the biggest oil reserves in the world.[2] Knowing that, take a look into Venezuela’s recent economic performance:[3]

It is no surprise that they decided to join the cryptocurrency world, by launching ‘Petro’, which is supposedly supported by the country’s oil reserves.[4] ‘Bolivar’, the Venezuelan currency, hit such a low value that it is not being accepted as a means of payment by many companies, making people lives harder – this is, until they started adopting Bitcoin and altcoins. Bitcoin is even being called a ‘lifesaving’ currency by some in Venezuela.[5]

Other countries have suffered from bad economic decisions as well… Brazil being one of them. Even though things are more or less stable in the country, it is impossible to forget the decades of double-digit inflation rates and freezing of Brazilians’ savings accounts in the early 90’s. Of course: when the economy is dragged down, everyone is to blame: the market, the people, greedy traders; everyone, except the controllers of the money printing machine.

Therefore, cryptocurrencies are an alternative for people who trade but cannot trust their own currency.

Smart Contracts

Another interesting characteristic of Blockchain-based technologies is the use of ‘smart contracts’. Ethereum, which is the biggest platform for smart contracts, describes itself as ‘a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.’[6]

Smart Contracts are self-run; once their parameters are inputted, there is no way to temper with them. While this idea may seem uncomfortable at first, it delivers something that is rarely obtained through the traditional way of doing business: thrust. Worries about legal action, courts, legal fees and litigation are considerably reduced.

This opens virtually infinite paths: people can crowdfund a project with any amount of money; if it does not work, their money is automatically refunded. Small producers can trade with more liberty. Tokens can be created and traded between parties in a very specific situation.

Ethereum allows for the creation of decentralized apps – known as dapps. These applications are being used to create thousands of different utilities based on smart contracts: from delayed flights refunds to lotteries that are 100% random (which may seem redundant, but it is not always the case).

Since almost every negotiation can be suited to a Smart Contract, it is easy to imagine countries adopting them to prevent defaults. All the trade conditions are inputted before it happens, giving the parties a safer environment to conduct business. Don’t forget that the parties can make use of clauses that softens any unpredicted developments to the negotiation.

Smart Contracts are not just ‘automatic’ or ‘virtual’ contracts; they guarantee that agreed conditions will be met. There is no person to decide, to be persuaded, bribed or politically inclined towards a decision; the majority of the system validates the contract by consensus.

Technical Advantages to the Use of Blockchain-Based Technologies

International trades are tricky. There are many conditions to be met for everything to work out. Even then, when the deal is closed, the goods are shipped and travel a long distance to arrive at their destination, they must go through customs. Countries have problems with them all the time: sometimes, a sanitary requirement was not met; some tax was not collected in time; there was an error when filling the documents.

Blockchain helps solving those problems. Since it is decentralized, it would be relatively easy for the countries to agree on trading policies and submit them to a decentralized platform. Every requirement would be instantly sent from one party to another: all the documents, certificates and requirements. Customs would be able to go to the platform and check them: if a sanitary measure was not adopted by the exporter, they could be warned right away.

Of course, this requires most countries to join and agree on thousands of terms for different areas of commerce. They already do that:  conventions on protocols are held every year. What changes with Blockchain is that the exchange of information and the absence of a central controlling party makes things go much faster.

That adds up with all the before mentioned benefits of cryptocurrency: anonymity, low fees, independence of Central Banks, lack of censorship. Once again: Bitcoin does not care about the size of your transaction; it just makes sure to transfer ownership from one party to another, independently of the size of their wallets or their political influence. All it cares is the data; may it contain a cent or a thousand dollars.

Certainly, a lot must be done before all of this happens. Nonetheless, the first step is imminent: to believe that the Blockchain technology is here to stay, and it is going to improve international transactions and trades.

For more on the subject, stay tuned to Sidera’s posts!

[1] Available at: https://www.coindesk.com/price/

[2] Available at: http://comunicacao.fflch.usp.br/node/1618

[3] Available at: http://www.visualcapitalist.com/the-demise-of-the-venezuelan-bolivar-continues-chart/

[4] Available at: https://www.washingtonpost.com/news/worldviews/wp/2018/02/20/venezuela-launches-the-petro-its-cryptocurrency/?utm_term=.fec9c82e3247

[5] Available at: https://cointelegraph.com/news/adoption-of-bitcoin-picking-up-speed-in-venezuela-called-lifesaving-currency

[6] Available at: https://www.ethereum.org/

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