When it comes to sending tokens overseas, it is much harder to learn how to calculate crypto profit and business owners may struggle at first. However, it takes just a couple of days of regular practice to understand the math behind the transactions and start adjusting prices for their globally offered goods and services accordingly.
How cryptocurrencies are changing payments
Remember that when John from London wants to send a couple of bucks to Paolo in Rio, they are engaging in a process that is quite important for the global economy. They generate activity allowing for relatively easy trade and supply chain building to be an actual reality. The volume of global remittances was close to $715 billion in 2019. Despite the growing volume, the price of each operation is still quite high averaging at 6.8% internationally with some regions experiencing much higher costs.
At the same time, existing systems are very slow and complicated with multiple intermediaries involved to connect senders and receivers. Banks, clearinghouses, and currency exchange services participate in the process further complicating a seemingly easy task. The whole system also feels cumbersome and clunky to use because of working hours in different time zones that may prolong any operation to a week or more.
Blockchains operate around the clock and can settle a transaction within minutes even during periods of peak activity. While prices for conducting this monetary wiring when the demand is high also soar, it is still a better alternative than many other existing options. Employing this method of conducting international money wiring can reduce expenses related to these operations by 50% on average according to the research conducted by the Bank for International Settlements.
Lower prices make decentralization quite useful for when you have to send money abroad. A sum of money transferred from one individual to another across the ocean may be subjected to 80% lower fees if contemporary DeFi solutions are used instead of traditional methods. Even volatility is less of an issue since the common method for the DeFi landscape to settle is to use various stablecoins like USDT and DAI to ensure that prices remain the same during periods required to settle a transfer.
Also, cross-border payments with Bitcoin and other tokens come with an added benefit of full transparency. It allows the participants of the global economy to collaborate efficiently in an environment of trust and truthful communication. Fraud and errors can be completely removed from the equation with a single truth referenced across all documents. Since many processes are automated thanks to the use of smart contracts, the system operates efficiently and remains trustworthy due to the immutability of recorded data.
The only real reason why the traditional financial system still dominates this sector of the global economy is the anonymity of operations making it easy for bad actors to finance criminal activity and launder money. It will take a collective effort from various institutions and governments to come up with a set of internationally accepted regulations for the sophisticated decentralized finance doomain to be taken seriously in the juridical level. Some experts estimate the global volume of illicit cash flow using anonymous features of decentralization at $14 billion annually.
Lastly, traditional systems still outperform many networks due to scalability issues experienced by the latter. The increased popularity will lead to skyrocketing numbers of cash flow operations which can congest networks and overwhelm even optimized layer 2 solutions leading to higher fees and much slower processing times. Many old school enthusiasts remember times when sending ETH reached $60 per operation completely preventing holders of smaller capital from participating in trade.
The last factor is hugely important and must be addressed within the next several years as some DeFi applications already act as a crypto bot trading platform conducting thousands of operations using automated market making tools.
How blockchain improves remittances
Making payments and simply sending money from one country to another can be a challenge even when banking systems are closely related like in case with the US and Canada. Different types of settlement infrastructures make it possible to conduct operations internationally, but many have similar frameworks and limitations. On the other hand, various cryptocurrency solutions for remittances can work independently from each other while maintaining a high level of interoperability and transparency.
Here are some types of DeFi designs that allow for effortless transfer of capital using different approaches:
1. The blockchain is fully independent and operates using its native tokens like Ripple.
2. The chain is independent but the issued currency used for operations is compatible with other networks like Stellar.
3. The chain is highly interoperable and operates using its native tokens like in case with USD Coin.
4. Both the chain and its token of preference are highly interoperable like in case with BVNK.
The variety of architectures allows users to choose the most convenient option and quickly finalize the addition of a new block. Note that all designs are suitable for international use since the only thing required from senders and receivers is to have an internet connection. Everything else can be setup on an individual basis and without contacting with centralized institutions and authorities.
The flexibility of crypto remittances allows people to access the interconnected web of resource movement channels even if they do not have sufficient resources for banking services. In theory, the involvement of new people makes room for accelerated economic growth and invites more activity to the cryptocurrency ecosystem.
Benefits of cryptocurrency in cross-border payments
The advantages of using decentralized solutions for international monetary activities are apparent to any individual who tried to send money across the ocean at least once. Fees are exorbitant and the service is very slow with costs per mistake exceeding all reasonable limits. The worldwide adoption of cross border payments in crypto will make it easier for all of us to send and receive money.
This freedom to do whatever you want with available capital is quite important for the future of the human civilization. The grip of centralization prevents us from building an environment that provides equal access to resources, products, services, raw material, and even moral goods like education, healthcare, information, entertainment, etc. it is hugely beneficial for underbanked and underprivileged people to have the opportunity to be relevant participants of the global economy.
On top of these advantages, there are many technological and ethical improvements that can be applied to the existing system where the initiation of cash flow is increasingly expensive. We simply have to adopt better and more flexible solutions to promote growth everywhere instead of concentrating everything from bread to luxury vehicles in certain regions that soon become isolated and removed from other territories not only geographically but also socially and economically.
Here are some factors that make this emerging approach so useful for everyone:
- Decentralization means democratization. Without central authorities dictating and controlling the flow of assets, the very infrastructure allowing for the cash flow to happen is permissible in nature. Gatekeepers do not force you to pay fees and commissions just to use the network which is one of the biggest issues with centralized institutions that often charge merchants enormous fees. On the other hand, anyone can start using tokens without asking for permission from a bank.
- Trust and confidence exist by default. Fiat economies operate well when participants believe in credibility, solvency, and trustworthiness of centralized institutions and authorities. Blockchain is designed to ensure that consensus mechanisms provide the necessary integrity and security. This approach makes it irrelevant whether individual participants trust others or not, everything is recorded on a single public ledger.
- Absolute transparency. All operations are recorded for eternity making it easy to track asset movements, prove validity, and conduct audits. Cross border payments on blockchain can be made without any additional manual control and still be set in stone for everyone to refer it when asked to provide context for any flow of funds by senders and receivers.
- Outstanding security. Since personal information is encrypted, all operations are anonymous and allow people to interact with the blockchain without compromising their privacy and safety. In a system where participants do not have to identify themselves for anything to happen, international transfers of capital become simple and require way less processing and management to be smooth and convenient.
- Low costs and high speeds. $BTC flow usually costs anywhere from $1 to $5 with prices soaring higher only during periods of extreme congestion which, unfortunately, still happen more often than desirable. Compare it to up to 15% per remittance when using banks and payment systems. At the same time, blockchains do not stop working around the clock making all transactions much faster compared to traditional channels. For example, Ripple can process an operation in under 5 seconds.
- Fixed exchange rates. In many cases, when you send money via banks and payment systems, you are subjected to unfavorable currency exchange rates making each operation even less compelling in terms of raw numbers. Since blockchains do not use intermediaries, peers can be connected directly to each other and use established market rates to ensure that prices are fair for senders and receivers at all times.
Even from the ethical point of view, the idea of using inclusive financial systems that allow people to equally access useful instruments just sounds right. Cross-border cryptocurrency payments allow businesses to reach customers across the globe without worrying about banking fees, commissions charged by intermediaries, and chaotic exchange rates. The simple ability to use this infrastructure without additional costs can create economic opportunities and maybe even pull some people out of poverty.
Is it all somehow relevant to a retail investor?
The growth of international collaboration within the DeFi ecosystem creates the necessary foundation for the appreciation of most popular digital assets. Contemporary retail traders use all sorts of tools to make their activities profitable yet their efforts will be futile if prices never go up. You can run the best crypto grid bot in the world and never see a dime of profit if the market is depressed.
At the same time, the increased use of DeFi platforms will provide even more liquidity to the market allowing for much more dynamic market conditions. Using blockchain for cross-border payments is one of the best ways to ensure that the whole industry enjoys higher rates of adoption and asset appreciation.
You can also start focusing on tokens that are commonly used for international economic activities. Tether, USDC, MakerDAO, and Ripple all look like prime candidates for a portfolio that needs additional diversification.