El Salvador became the first country to accept Bitcoin as legal tender. Over the next few years, We will witness a shift in adoption within developing countries towards embracing blockchain.
How will this all happen?
First, we will have to go over some Salvadorian facts.
Estimated 6.4 million citizens
Nominal GDP: $25.855 billion
According to the World Bank, 20.19% of GDP is collected in remittances from out-of-country relatives.
U.S. Dollar is the primary unit of settlement since 2001
These facts make a perfect breeding ground for the utilization of Bitcoin mining.
Remote Locations
There are many obstacles to overcome when deploying renewable energy infrastructure. For example, current solar farms are roughly 10-12% efficient in the collection of energy. While this efficiency is projected to increase, the ability to store that energy is the choke point. Transmission is also not feasible as energy dissipates over longer distances.
One day after passing the bitcoin law, Nayib Bukele, the president of El Salvador, had engineers working on a geothermal well. Previously, these remote locations were too far from civilization and had no reason to harvest the potential energy they store. Instead of wasting all of this potential energy, El Salvador now harnesses it to create a substantial sum of money for their government to direct.
The projected output from the geothermal well is 95 megawatts of power, which is enough power to produce an estimated 600 bitcoin a year. In addition, the small country is home to 22 volcanos which, if each volcano were a viable opportunity for mining, would produce 13,200 bitcoins a year.
Bankless Nation
Since the inception of the U.S. dollar in 2001, El Salvador’s economy has been lackluster. The average yearly wage was USD 4,303 in a 2016 study. The study also showed that 47% of households received remittances from relatives in other countries, and 71% of the population did not have access to a bank account.
The entire system runs primarily on physical U.S. dollar bills. The lack of supportive financial regulations and infrastructure will keep the country stagnant.
Currently, sending money from the U.S. using legacy companies like Western Union is very inefficient and expensive. For example, the process involves someone in the U.S. driving to a Western Union office and paying upwards of 20% in fees to send money to El Salvador. Bitcoin can allow for commerce to happen and settled for cheaper transaction fees by integrating lightning network nodes. The US-based company Strike is leading this possibility. They went live with a Dapp allowing users to receive payments from U.S. relatives for reduced fees over the lightning network.
Financial Inclusion
While this change is against IMF wishes and El Salvador may come under scrutiny, small countries would be wise to utilize their potential remote energy sources in the long term. Similar to current exported resources, Bitcoin can become an export commodity. This increased revenue source can change the landscape of countries and reduce the migration of families away. Reducing the remittances of out-of-country relatives and illegal immigration could be a long-term goal of this financial inclusion.
The Central American Bank for Economic Integration has already commended Nayib Bukele on the decision, which they believe many surrounding countries will follow suit. The interest being shown by other neighboring countries such as Argentina, Brazil, Nicaragua, Panama, or Paraguay points to a dimensional shift that could lead to further inclusion, despite the objection from governments of more powerful economies. The decentralized nature of cryptocurrencies makes it impossible for any country to prevent the adoption of bitcoin by another country. Furthermore, the opportunity cost of exporting mined cryptocurrencies dissolves; countries can now build renewable resources to create value. As a byproduct, their electricity grid may ultimately employ 100% renewable energy.
All in all, El Salvador has excellent potential to bolster its economic growth with Bitcoin. With other countries potentially jumping on the bandwagon, the precedent has been set. We will see how this all plays out over the next few years as a social experiment and possibly a blueprint for other disenfranchised countries to prosper.
“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”
― Buckminster Fuller
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