If you are following crypto news on Twitter, you might learn about the new and trendy NFT collection, how another VC fund raised millions of dollars for investing in crypto startups, the latest demise of a poorly designed web3 protocol or articles on how to survive a bear market. You might get the impression that web3 is all about investing, memes and rug pulls.
As a Latin American I’m acutely aware that these technologies that are seen almost as “toys” in North America, can actually have a profound impact on people’s lives in the sub continent where concepts like rule of law, transparent elections or stable economies are not a given. Having worked with people from West Africa in HubCityDAO I was able to learn that Africa and Latin America face similar challenges and that web3 could be a transformational technology for what it’s referred to as “the global south”. It’s no coincidence that the first two countries to embrace Bitcoin as legal tender were El Salvador and the Central African Republic.
In this article I’m going to explore 5 ways web3 technologies can have a deep impact on the global south.
1) Neutral International Currency
In Latin America, as is the case with most countries around the world, when two neighboring countries trade with each other, they use the US dollar instead of their local currency to settle the transaction. As a result, every country in the region has to hold a reserve of US dollars in their central banks that acts as a proxy of their credit worthiness in the international market.
Aside from the obvious risk of relying on a financial system controlled by a third country to pay for essential imports like food or medicine, there’s also the inherent risk of currency debasement by the central bank of the issuer. When the FED engages in an aggressive monetary policy, as it was the case shortly after the covid19 crisis, the purchasing power of those US dollars stored in Latin America’s central banks suddenly lose purchasing power making essential imported assets more expensive. In other words, when the FED decides to print money by the trillions the ensuing inflation is not only felt inside the United States but in the whole world. And that hits poor countries of the global south especially hard.
In Togo and West Africa in general, countries use a currency called CFA that’s pegged to the Euro and its exchange rate with the European currency is decided by… FRANCE! In 1994, France took the unilateral decision to devalue the CFA by 50%, automatically vanishing half of the wealth of West African countries.
Countries who want to free themselves up from the US, French or Chinese led monetary system can use Bitcoin as an alternative for international trade. Bitcoin is a digital currency and also a settlement layer that’s completely neutral as it’s not controlled by any single country. Bitcoin’s monetary policy is predictable and its money supply increases slowly over time which mitigates the risk of currency debasement by excessive money printing.
Bitcoin doesn’t need to completely replace the US dollar or the French CFA as the reserve currency of countries of the global south, it can become part of a basket of assets that a country can use to trade with each other.
2) Government Transparency
Corruption has become an endemic problem in the region and I can’t think of a better antidote to this disease than transparency. If governments were to adopt an open blockchain like Bitcoin or Ethereum for its operation, every citizen would be able to audit how the money from taxes and natural resource exploitation is being used. A government that is easy to audit is a government that stays accountable to its citizens and where corruption becomes easy to spot and stop.
One of the reasons direct investment is low in the region is because of lack of trust in the government. This mistrust by foreing investors could be curved by codifying agreements as smart contracts, using oracles for monitoring external KPIs and relying on decentralized arbitration to solve disputes.
Another area where web3 can make an impact is democracy. The results of national elections are sometimes contested due to lack of transparency and monitoring by trusted third parties. Here, a combination of soul bound tokens for identification, digital signatures for voting, zk-proofs for privacy and smart contracts for calculating results could make the process secure, auditable and uncontestable.
Instead of citizens voting for politicians to represent them for a fixed amount of time (representative democracy), people could either directly vote on every decision or, most likely, delegate their vote to another trusted person. The innovation here is that vote delegation can be revoked at any time so every politician is held accountable on every decision they make. No more voting for a politician that suddenly switches sides betraying their constituents. This is known as “liquid democracy” and it’s a common place in DAOs.
3) Inclusive Financial Services
To better understand the problem of lack of access to even basic financial services, think for a moment of all the prerequisites to just open a bank account. First you’ll need to travel to a physical branch of a bank which might not exist if you live in a remote location. You’ll then need to prove your legal status in the country which could be impossible for migrants who have been forced to leave their country to escape poverty or violence. Then you’ll have to provide proof of an address in a region where urbanization can be chaotic, property ownership is lacking and homelessness is rampant.
In web3, to open a “bank account” you only need to create a crypto wallet and for that you don’t have to go anywhere, you don’t need to have “papers” or even a place to call home. The only thing you need is a smartphone and that is surprisingly common in the region. With a smartphone and a crypto wallet you can have your very own point of sale. In a region where informal jobs can take a bigger share of the economy than formal jobs, the ability to pay and receive digital payments can supercharge the economy as this would open the door for complex interactions and more advanced financial services like loans.
To get a loan from a bank you typically need to have formal employment, a track record for your business or own an asset that can be used as collateral. For those working in the informal sector a letter of employment or a track record are not feasible. For the poor, access to collateralized loans are also an impossibility as they might not own assets or if they do, they might not have a proof that a bank considers valid. In web3 you can use your digital assets (coins, tokens and NFTs) as collateral and get instant approval for a loan. You can also lend your crypto to someone else for a fee using a DeFi protocol. Reputation based loans are not yet available but with advances in digital identity with soul bound tokens this could be possible in the future.
Another advantage of web3 is that people in the global south can more easily participate in the global economy by getting paid in crypto, a faster, cheaper and frictionless alternative to fiat currencies and the clunky global financial system. With the popularization of layer 2 solutions like the Lightning Network on Bitcoin and zk-rollups on Ethereum, people can decide to get paid by the hour using a payment streaming mechanism or use a crypto escrow to eliminate the risk of working and not getting paid for their effort.
The ability to send money around the world in a frictionless way can also have a positive impact on migrants living abroad and sending money every month to support their families back home. One of the biggest reasons for El Salvador to make Bitcoin legal tender was to help Salvadoreans living in the United States to save millions of dollars in remittance fees. This translates into more money getting into the pockets of their families instead of being lost paying to intermediaries like Western Union.
4) Self Organized Communities
When communities self organize they can tackle problems more effectively than a central government can. DAOs present a clear example of how even large web3 communities are able to collaborate to achieve a common goal. A local community could self organize as a DAO to elect their leaders, raise funds and decide on how to invest the money collectively owned to better serve their people. Soul bound tokens in combination with a vouching system similar to Proof of Humanity could allow for the creation of a local identity mechanism that keeps participation in the DAO limited to members of the local community.
Another feature enabled by web3 is the creation of a community currency, a currency that can only ever be used within members of the same neighborhood or town with the goal of promoting trade and the creation of a more diverse and self-sustained economy. A community currency would also prevent companies and individuals from extracting value from the geographical area where it exists; the system incentivizes reinvesting any profit back into the community. This type of currency is not a replacement of the national currency, it’s only a complement at the local level.
For any currency, even a local one, an important decision has to be made. How is money created and injected into the system? Similar again to how Proof of Humanity works with the UBI token, members of the local community could be assigned every day a set amount of the community tokens as a way to incentivize participation, inject money into the economy and prevent the Cantillon Effect.
5) New Job Opportunities
Much in the same way that web2 created a new digital economy and gave way to new types of jobs like web developer, community manager or content creator, web3 will usher in completely new kinds of job opportunities, some of them impossible to foresee. Of special importance is the role that NFTs are playing in the creation of a new category of games known as “play & earn”.
NFT games have the unique characteristics that players are able to earn crypto currency while playing and the items they use for playing are defined as NFTs that can be lent or sold to other players for a profit. During the covid19 pandemic Axie Infinity showed what’s possible with this new type of games as thousands of poor families in the Philippines and Venezuela were able to make a living playing a video game on their smartphones.
Other types of jobs might arise beyond the “scholarship” model pioneered by Axie Infinity. The emergence of the metaverse and digital land is creating new jobs as property developers in the digital space. The need to have a sustainable ecosystem within an NFT game will require the help from economists and probably other connected professions like sociologists.
Digital artists, musicians and filmmakers are also discovering new business models that allow them to capitalize their work in NFT marketplaces, define ongoing royalties on their art and to create a more direct relationship with their audience.
Younger generations are the ones best positioned to take advantage of these new job opportunities as they have grown seeing video games as a tool for entertainment and socialization. Africa is specially well positioned to take advantage of this as it’s considered to be the last region in the world where the young will outnumber the old for years to come, all the while the rest of the world is aging at a rapid pace as a consequence of falling birth rates.
Conclusion
Crypto and web3 are still in their early stages of adoption but they are already showing the potential of what’s possible. Layer 2s and zero knowledge proofs can take web3 to another level and unlock capabilities that are yet hard to imagine. Countries in the global south are best positioned to use these tools to transform their societies if nothing else because the current system already failed them. When you have nothing to lose you have to take chances. Web3 could be that chance.