The Internet, Blockchains, & Wealth Creation in Emerging Markets

One of the more altruistic motivations of the western business world is banking the unbanked 1.7 billion adults who don’t have bank accounts. This is noble, but the opportunity is far larger than financial services for poor countries. After all, what use is a bank account if you don’t have money? What we should really be thinking about is wealth creation in the developing world.

Economists have long talked about the theory of ‘convergence.’ There’s this idea that emerging economies, once they reach sufficient levels of freedom, will become societies that ‘catch up’ to developed countries by way of that freedom. This has started to pan out in some places, but much of the world has a long way to go. New global beliefs about the nature of work & technological breakthroughs in the internet & blockchains have a chance to accelerate growth in the ascending world.

There are 3 trends that could lead to wealth creation over the next 20-30 years in places that have traditionally been underdeveloped (places like Latin America, Africa, and SE Asia). We’ll hit on the macro trends first, then discuss the market & technical impacts:

3 Global Trends

1) Remote work

2) Open Information & Education

3) Adoption of cryptocurrencies.

Remote work

COVID forced the world to adopt remote work. Businesses in rich countries now realize that remote work is feasible – even for high skill jobs. If it’s capable of being done digitally, it can be done remotely. Many Americans see this as a huge win for both the labor & capital classes. Businesses need less commercial office space, and workers of a certain type can now work from anywhere.

What American businesses haven’t realized is that this means that their market for labor is far larger than the United States. There are capable people in every corner of the world, many of which are willing to work for lower wages than their American counterparts. The workforce will soon be much more competitive for many back office & digital-first functions.

An example: the average software engineer at Google does not need to come to the office to get work done. They can live anywhere. This person would typically command $100k-$200k per year in the San Fransisco Bay Area. Now, they have competition from thousands (if not millions) of engineers who live globally and could theoretically do the same work for $50k-$70k (and live very well in places like Africa or South America!).

Who is this amazing for? Business owners! They will have a much larger pool of talent to hire from, and the competition for roles that used to be hired out locally will drive labor prices down in America & Europe for back office & admin roles especially.

Open Information & Education

The United States is still under a collective trance around university credentialing, but many of the educational materials are available at low cost online. With the rise of new education platforms that offer university level educations at low cost, people all over the world will have an opportunity to upskill. This upskilling will make them competitive in the global labor market. While students in the US & Europe attend school & party for hundreds of thousands of dollars, people in poor parts of the world will be self educating to pull their family out of poverty.

Adoption of Cryptocurrencies

Crypto is a far easier method of payment for international work. They let you bypass traditional payment rails & international transfers. They also make it possible for people without bank accounts or access to sound financial infrastructure to receive payments. Cryptocurrencies also make micro tasking and micropayments possible. See Balaji Srinivasan’s 1729 newsletter for an example of how this is happening already.

These trends are made possible by 2 market forces, and one technical breakthrough:

Market Force #1 – Low cost & widely distributed phones

The lowest cost android phones run just over $50. As of 2021, 3.8 billion people have smartphones. There are people living in Africa & South America that have access to smartphones, even though they don’t have access to electricity. They have recently been connected to the rest of the world. 3.8 billion people is still less than 50% of the world’s population (7.8 billion). As smartphone adoption continues to rise due to falling costs & humanitarian efforts, we’ll see even more people come online.

Market Force #2 – Expected Growth In Internet Availability

Much of the emerging world is still coming online. Satellite internet services like SpaceX’s Starlink will slowly enable those in rural areas to access the internet. Many governments have worked to build internet infrastructure throughout the world as well.

The Technological Breakthrough – Blockchains

Low cost phones & widespread internet allow the ascending world to upskill & access Western labor markets. Blockchains allow for a huge increase in economic trust, and ultimately more trade & wealth creation. We’ll dive into blockchains some more below.

Why Are Blockchains So Important For the Developing World?

The short answer: smart contracts & state-free money.

State Free Money

The idea of money that isn’t controlled by a central bank is widely discussed. Hyperinflation is a real scenario (just ask Zimbabwae & Argentina), and it’s more likely in countries run by corrupt politicians. Essentially, cryptocurrencies now offer an alternative in a doomsday inflationary or deflationary scenario.

Smart Contracts: An Innovation in Trust

What blockchains and smart contracts do is allow us to trust each other without the need of a centralized third party (whom we would need to trust instead). The traditional financial system we have in the developed world allows us to outsource trust to brand named, singular institutions. We can do business with each other because we trust each other via legal and financial guarantees made by these institutions. We trust our government to enforce contracts & property rights. The system lets us do business with one another – at least when things are going well (see the Robinhood/GameStop saga to see what happens when they don’t go well). Smart contracts will enable us to trust each other at scale. With them, we can trust code & math, rather than a judicial system.

What is a smart contract? It’s a piece of code that lives and runs on a blockchain (such as Ethereum). This code is immutable and open. We can see what it will do with full clarity, and we’re unable to change it once it’s been deployed. These contracts will allow us to encode the terms of agreements into a digital form, and use the blockchain to automatically execute transactions based on those initial parameters.

A common example used by people in the blockchain industry is that of crop insurance. Crop insurance allows farmers to receive a payout if weather conditions prevent them from realizing a full harvest for that year. Today, many farmers in the developing world are unable to access crop insurance because they live in areas of economic & political instability. Their local environment prevents them from being able to insure their yield. However, if they can’t cover their expenses & feed their families in any particular season, they have no recourse. They’re forced to go hungry or leave their farm behind in search of other work.

Insurance companies don’t want to bear the risk that would be required to enter those markets. Even if they did, most would have to charge unreasonably high premiums to compensate for the risk.

In theory, the terms of these insurance agreements could be codified into a smart contract. Terms could be written that would automatically pay out a claim if it didn’t rain or rained too much during the season. The contract could receive data from previously agreed upon weather feeds. Then, it could reliably transfer money from the insurer to the policyholder if the weather was within a specific range that deemed farming unprofitable for that season.

Notice that there are no disputed claims, no insurance agents, and no court dates present in this example. Technology allows us to bypass all of this. Our smart contract can provide a level of economic trust which was previously impossible.

Blockchains provide digital verifiability that does not require a middleman. The code is the arbiter. Unlike human judgement, you cannot game or influence the code once the smart contract has been written.

Instead of having to trust a government to not inflate a currency, you can use a currency that has an unchangeable limit on how many coins may be minted. Instead of having to trust a centralized exchange to trade cryptocurrencies, you can use smart contract enabled exchanges like Uniswap. Instead of needing a bank to store your currency, you can anonymously hold coins in a bitcoin wallet.

Some of the largest innovations in e-commerce and internet-enabled services happened because of innovations in trust. This trust is a prerequisite for trade. And trade leads to greater economic activity. For example:

We can buy things from strangers because we have Amazon reviews.

We can get into cars with strangers because we trust uber reviews.

We stay in strangers homes because we trust AirBnb ratings.

Society will trust decentralized financial products because we can trust the nature of a blockchain’s open, distributed ledger. We can see the code, and we have greater certainty that things are going to go how we think they’re going to go. You can place your faith in code & math, not just brands.

The result of this is just now being felt with decentralized finance. Early DeFi applications have been focused on decentralized versions of our current financial system, but they’ll soon expand to new places. Early versions of the internet were mostly filled with newspapers and the equivalent of printed materials that went online. Eventually we got things that weren’t predictable. Things like remote work & elections won and lost by social media strategies. Smart contracts will have a similar impact. It will be felt globally, especially by those who live in parts of the world with trust issues.

The developing world has access to mobile phones and the internet, even though the rest of their lives still look the same way they did a decade ago. Billions of people lack access to basic amenities, but can connect to anyone on earth.

This will be a multi-decade long process, but it will be amazing for billions of people around the world. While it makes sense to be somewhat bearish on traditional western institutions, it’s equally sensible to be incredibly bullish on the future.

We’re going to see an explosion of wealth creation driven by technology & billions of people who will be able to participate in wealth creation games for the first time.

Sources & Further Reading:

https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017 Findex full report_chapter2.pdf

Pula, a company working on crop insurance: https://www.pula-advisors.com/about/

http://analytics.dkv.global/data/pdf/Financial-Inclusion-Developing-World.pdf

Global smartphone adoption