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Could Countries Use Blockchain as a Tool Against Inflation?

The blockchain has been advertised multiple times as an alternative currency to use in the global markets, but at this point, there are very few avenues where traders could use their digital assets to purchase goods online.

There have been rumours that Litecoin will soon partner up with Flexa, potentially opening up one of the largest e-commerce stores for crypto enthusiasts.

However, cryptos have much more potential than just providing the best shopping experience online. They have capabilities that could help an entire nation survive hyperinflation thanks to decentralised transactions and the digital economy.

There are multiple cases where people have either completely or partially moved to make crypto payments via mobile phones in order to somehow survive the onslaught that their national currencies have endured.

One of the best examples for this is Venezuela. Let’s take a look at how the local population handles its economic crisis.

Venezuela hyperinflation

Venezuela’s hyperinflation problem has been going on for years now, leading up to a point where people can not get their hands on goods for basic needs, or they simply cannot afford it due to how low the salaries are there.

“cryptos have much more potential than just providing the best shopping experience online.”

The only way most Venezuelan families have managed to survive such a recession was through payments from family members abroad. For example, there used to be millions of USD being funnelled into Venezuela from immigrants in the United States, but after political tensions flared up, it’s become much harder.

Therefore, the local population had to find an alternative method to somehow survive. That was around when Dash first entered the market. Having already developed their mobile transaction system, Venezuela was the ideal market they could have tapped into.

To this day, a large portion of Venezuelan consumers and even merchants use Dash as their daily currency.

In response to the blockchain pretty much hi-jacking their economy, the Venezuelan government introduced its own cryptocurrency called Petro.

However, the thing about cryptocurrencies is that they’re not as trustworthy or reliable if they’re in the hands of the government. Multiple companies like Dash have proven to be much more capable of sustaining their currency than the Venezuelan government, therefore the local population simply ignored Petro, as if it never existed.

But what exactly was the Venezuelan government aiming at when they introduced Petro? Why would it have been a benefit to the local economy?

How cryptos are much more manageable

There’s this useful feature that cryptocurrencies possess, which is “burning”. This means that when a company sees that their product is performing well enough but needs that extra push to truly kick it off or help it remain stable, they buy back large quantities of the cryptocurrency and then burn them.

Burning means that the coins are simply taken out of the equation. The supply decreases pretty much overnight, hitting the prices exponentially and supporting its exchange rate.

Although this resembles a frozen exchange rate system for a country, it needs to be mentioned that it’s much cheaper, simply due to the fact that the currency’s performance is not based on another country’s or currency’s state of affairs.

This was the problem for Thailand in the past when they had pegged their currency to USD and failed to keep up with it, ultimately reducing the country’s economy to an extremely low level.

With cryptocurrency, its price reacts to the local as well as global supply and demand, much like regular currencies. But the government or the company involved in emitting these currencies can take drastic measures when they’re needed to either buy back some cryptos from the community or burn some of their reserves.

This helps alleviate the extreme volatility of the blockchain in its infancy, while still maintaining a relatively hands-off monetary policy.

“blockchain can provide an alternative payment system for those willing to do international business when there is no such opportunity.”

Protection against sanctions

Another reason that countries like Venezuela are looking at mass integration of the blockchain is due to economic sanctions imposed by other countries. In this case, Venezuela is suffering from US sanctions, which is preventing the Bolivar from ever recovering, but considering the state it is in now, it’s highly unlikely that it ever will even if there were no sanctions.

If we want to look at a good example of sanctions affecting inflation, we need to look no further than the country of Georgia, which recently had a massive depreciation of its national currency due to potential sanctions from Russia.

The anticipation of the sanctions caused as much as a 10% decrease relative to the dollar, but has reverted. This was due to potential sanctions on transactions, and they’re usually the ones targeted when the political scene gets a little distorted.

Having a comprehensive blockchain platform on a national level removes the risks of being cut off from a major market, like most countries that can afford sanctions are usually important clients of the “victim”.

In Georgia’s case, Russia is one of the biggest markets for wine exports and tourists. Having it cut off, would damage the economy to unimaginable proportions, hence the depreciation.

Overall benefits against inflation

In the end, we boil down the benefits of the blockchain to a few key points for countries.

One is that they’re able to cut supply without having to tie their currency against a foreign one, which usually damages the economy much more than it helps it.

And the second one is that the blockchain can provide an alternative payment system for those willing to do international business when there is no such opportunity.

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