VENEZUELA, HYPERINFLATION, AND CRYPTOCURRENCIES

VENEZUELA, HYPERINFLATION, CRYPTOCURRENCIES

(This was written in 2017-08-31, but accidentally got stuck in Drafts until now...)

 

As you may have heard on the news, Venezuela is today a deeply troubled country. Lacking official statistics, inflation is estimated by the IMF at 700% for 2017 and expected to rise to 2000% in 2018 (http://www.imf.org/external/country/ven/). The government has imposed exchange controls, where the official “preferential” exchange rate is 1 USD - 10 VEF, the official “other uses” rate is 1 USD ~ 3,100 VEF, while the black market rate is 1 USD ~ 18,000 VEF (https://dolartoday.com/). 

With this rate of inflation, people’s savings have become, or are rapidly becoming, worthless. Salaries and pensions likewise. If you had the VEF equivalent of 100 USD saved last year, this year it will be worth 14 USD. Next year, you're lucky if they're worth a single dollar. 

Basic food and essential goods are price controlled, with retail prices fixed below the cost of production - leading to a sharp reduction in national production of these goods, and severe scarcity, with hunger, long food queues, and a lack of medicine as tangible consequences. The Swedish Foreign Ministry recently highlighted the grave situation, with a lack of respect for democracy and human rights, and severe scarcity. (https://www.facebook.com/margot.wallstrom/posts/1312912585424468). Numerous international voices have done the same for years.

EFFECTS OF HYPERINFLATION

In this environment, the basic salary is 97,531 VEF (http://money.cnn.com/2017/07/02/news/economy/venezuela-minimum-wage-hike/index.html). This is less than 6 USD at the black market rate, which is the most used rate. Taking into consideration subsidised food stamps, the total value reaches ~250,531 VEF, which even so is only worth ~14 USD. In July 2017, a basic family shopping basket cost more than 1,700,000 VEF (http://www.finanzasdigital.com/2017/07/cendas-fvm-canasta-basica-familiar-subio-1-738-15055-bolivares/). 

That’s right - the numbers don’t add up. If you’re single in Venezuela, earning minimum wage, including subsidies, you need seven monthly salaries to go buy one single family shopping basket.

During one year 2016-2017, 74% of the population lost an average of 8.7 kg. (http://www.economist.com/news/finance-and-economics/21720289-over-past-year-74-venezuelans-lost-average-87kg-weight-how) They simply don’t have enough food.

TURNING TO TECHNOLOGY

In this environment, it is not surprising to see desperate people searching for desperate solutions. Some search for food on trash heaps. Others turn to technology. Bitcoin and other cryptocurrencies provide such a solution. 

There are no official statistics on the number of bitcoin users in the country, but according to the brokerage website Surbitcoin.com – a platform allowing Venezuelans to buy and sell bitcoins in exchange for VEF – the number of users increased from 450 in August 2014 to more than 85,000 in November 2016. (https://www.theguardian.com/technology/2016/dec/16/venezuela-bitcoin-economy-digital-currency-bolivars). 

Since then, Surbitcoin was shut down by the Venezuelan government, even though Bitcoin formally isn’t illegal in Venezuela. Several Bitcoin miners have been arrested and jailed on charges such as “electricity theft”. (http://reason.com/blog/2017/02/03/venezuela-surbitcoin-arrests-mining)

The number of users will be sure to have risen even higher since then. We can look at Bitcoin trading volume over time on localbitcoin.com, expressed in VEF. A clear trend.

However, if we look at the trading volume expressed in BTC, we see a different story. Trading peaked 2017-04 and has since contracted though still significant.

(https://coin.dance/volume/localbitcoins/VEF)

THE ECONOMY OF A VENEZUELAN FAMILY

Lots of statistics and numbers - still doesn’t feel real, does it? So let me tell you about a friend of mine who lives in Venezuela with his parents, wife, and son. I will give no names, you will soon understand why.

• His mother is retired. Her pension is a total of 84,000 VEF, or ~5 USD per month.
• His father has a small business, and is the main family provider, but even so has problems making ends meet every month, and is nearing retirement age. His income varies greatly but let’s put an average of 2M VEF, or ~111 USD per month.
• His wife earns near-minimum wage, a total of 320,000 VEF with food stamps, or ~18 USD per month.
• My friend is studying and earns no income.

In total, the family earns 2.4M VEF total, or ~133 USD per month. As you can imagine, the family has little or no savings - the hyperinflation would quickly have rendered them worthless.

Their monthly income is enough to buy 1.5 basic shopping baskets per month. They have survived so far thanks to the father being able to pass inflation on to his customers. In this way, this family is more fortunate than most. Salaried workers and retirees in Venezuela don’t have this option. 

They starve.

BLOCKCHAIN BEGINNINGS

I got interested in blockchain technology in 2015, in particular in the Ethereum blockchain, and proposed to my friend that he begin mining Ethereum about a year ago, in June 2016. I purchased a computer for him on Amazon, something that would have been prohibitively expensive for him to do inside the country. Fortunately, it wasn’t “confiscated” by corrupt customs officials just as poor as his family. He started mining Ether - an alternative to Bitcoin. (https://ethereum.org/)

Little more than a year later, in August 2017, at current Ether prices, his monthly mining income is ~1.8M VEF, or ~100 USD. No big amount by Swedish standards, but compare this to his mother’s pension or his wife’s minimum salary. 

That mining computer I sent him a year ago is now worth an entire family shopping basket a month - again not much by Swedish standards, but equal to seven minimum wages in Venezuela. A big deal.

WHAT SCARCITY REALLY FEELS LIKE

Now I want to stop for a second. Let’s do an exercise. I want you to visualise taking your entire monthly pay check, before you have paid rent or anything. You go to the supermarket. You fill up your shopping basket. Then you realise you can’t pay for it. Not even half. A fifth. So you put back deodorant, eggs, bread, fruit, vegetables, butter, detergent, …and more... on the shelves. Because you can’t afford them. When you’re done, your shopping basket contains only toilet paper, toothpaste, soap, corn flour, cheese, cooking oil, milk, salt, and a bony chicken. That’s what you will be bringing home to your family this month. 

You would need to save all of your salary for seven months to be able to buy one complete family shopping basket. In Sweden, assuming a low wage of 9000 SEK after taxes, this would be 63000 SEK, or ~7900 USD. 

How does that make you feel? Now imagine you’re part of a family, with a young child. You love them above anything. And you can’t feed them. How does that make you feel?

RISKS AND REWARDS

The value of my friend's mined Ether, part which he exchanges and stores in Bitcoin, is highly volatile since Ether and Bitcoin are volatile, and carries significant risk - but it's less volatile and risky than the hyper-inflated Venezuelan VEF. Using cryptocurrencies, 

• He has found a way to protect himself from the country’s rampant hyperinflation. 
• He has found a way to be able to save money in case someone in his family becomes ill. 
• He has found a way to have a reserve, to be able to buy food on the black market, to provision basic necessities for his 5-year-old son.

So far, he has used his mined income to - via a fairly long and convoluted series of transactions which I won’t go into here - purchase mobile phones for himself and his wife, pay daycare, repair house appliances, buy clothes for his son, and food. I’m so grateful he hasn’t, as of yet, needed to purchase medicine, and I hope with all my heart he never will.

HERO OR VILLAIN?

Without cryptocurrencies, without the blockchain technology spearheaded by Bitcoin, this would have been impossible. And while he is desperately trying to save money for his family, facing a very concrete situation of extreme scarcity, risks attracting the attention of an authoritarian government who’s cracking down on cryptocurrency mining even though there is no law forbidding it, risks being branded a criminal, risks going to jail without breaking any laws… 

...at the same time, he is also one of thousands who mine, and therefore provide cryptographic security, trust and consensus in the Ethereum network, helping to spread network's worldwide reach, crossing borders, connecting individuals directly as peers. As equals.

Let’s go back to that visualisation, of being there in the supermarket, of buying food. If you were there, even knowing you risked unwanted attention from an authoritarian government, what would you have done?

THE FUTURE

How many people like my friend do you think there are in the world today? In Venezuela? In Zimbabwe? In India? In Russia? In China? What would they have done? What will they do?

When they grow numerous, from thousands to millions - then no corrupt government will be able to enforce scarcity for its people anymore through currency controls, and citizens everywhere will always have an alternative to inflation-stricken national currencies. It's not a perfect alternative, it's volatile, it's high risk, it's immature - but it is an alternative. These people will have a way to start saving that is completely decentralised. No bank or government is required. All they need is the Internet and a computer. 

It will be a bumpy ride at times and there will be speculation - which is why I’m personally more interested in actually contributing. There are many things you can do: Mine, or teach others how to mine. Contribute to the open source blockchain ecosystem. Write smart contracts. Create new businesses. Do research. Transfer money. Promote clean energy (https://theworldenergyfoundation.org/). Donate to auditable charity (http://giveth.io/, http://www.charity-dao.org/). All these things will lay the real foundations for long-term adoption.   

Can you imagine the potential this has to improve life so much, for so many? I can, and it makes me full of hope for the future - on a grand scale, but just as much on a small scale, for my friend and his family. I hope you can imagine it too, and I invite you to join the growing blockchain movement.

(All links in this text were referenced 2017-08-31 unless otherwise noted).

Post-protein

First, fat was dangerous, while carbohydrates were great. Fibers and vitamins were great too.

Then, we discovered that carbohydrates make us fat, too. It's not difficult to picture the board meetings at companies like Nestle and Kraft foods, and a number of dairy producers across the world. "Ok, so we can sell low-fat, and we can sell low-carb, but those are both negatives, we need a more positive message... Oh wait, I got it: Let's sell high-protein!!!"

Fast-forward a few years and we see high protein products everywhere, from bread to pasta to dairy, where carbohydrats used to roam freely. Now, let's consider for a minute: Did normal office workers who only exercise moderately eat too little protein? Is the high-protein campaign in any way designed to give us additional health benefits? Or is it simply where marketing had to go? With the exception of athletes and body builders, sorry to say, for the rest of us it's just marketing. And as usual we're falling for it. Because protein doesn't make us fat, and we don't want to be fat. At least that's the current theory. I'm guessing that, since proteins contain calories, and we eat more of those than we burn, eventually eating lots of protein will also make us fat.

Prediction: By 2030, several credible scientific studies will show that over-consumption of protein has adverse health effects on people in the developed world. Accordingly, by 2035, the marketing will have shifted to something else. How about "balanced" or "unprocessed"?

Political crisis due to debt - and a way out

When debt serving exceeds cash flow for a nation, the only solutions will be either to print money to create inflation to reduce the debt in relative terms, or to stop servicing the debt.

We've already seen lots and lots of money printing since the financial crisis of 2008. It's ending up in the hands of asset owners, though, and not reaching into the overall economy. Thus there has been inflation but only in very specific sectors. Housing, stocks, luxury goods, collectibles, etc. Automation and globalization are pushing prices down for many other goods.

This causes increased inequality. This causes loss of belief in a better future for the bottom of the pyramid. This is fertile ground for populism. The best way to get rid of populism is to inspire hope for the future in the population. Without it, populism is almost sure to win eventually when people tire of "traditional" politicians failing to make their lives better, and "want to try something else". That's where our dictators come from. That's where racism and chauvinism come from. That's where social violence comes from. That's where wars come from.

In the end, those at the top of the pyramid must take care to protect their consumers. If nobody buys all their goods and services, they too will ultimately suffer. This already exists today; it's called salary. Everyone who works creating a good or service, gets their wage, and then consumes that entire wage on goods and services is in fact serving as a source of recurring income for the owners of the good sand service companies. To get out of that hamster wheel, people need to improve their cash flow, go plus every month, and create savings. There is no other way.

Today, automation and low wage pressures are higher than ever. It makes it harder to create those savings. Less skilled human brains and bodies are left behind by the inexorable progress of technology.

Like so many other things the US have exported, they will also export an increased fixation on money, at the cost of culture, history, arts and traditions that aren't economically "efficient".

And eventually, those in the hamster wheel will meet the populists and hit it off big time. When that happens, we will have protectionism, reduced world trade, falling GNBs, layoffs, and perhaps resource wars.

Now there's another way to view all this: If automation were sufficiently simple to achieve that most people could do it... Then why couldn't this turn into a scenario of careless abundance instead? We replicate our food and goods, there is housing with VR+AR for everyone, autonomous cars zip us around freely, we educate ourselves wherever we like, we spend our time pursuing our passions. If it were so simple to PRODUCE what we want that we ourselves could do it. It won't work as long as production is in the hands of a few, unless they share their income drastically more than is done today, e.g. with basic income-like schemes.

I'm rambling. Anyway, prediction: By 2025, three EU countries or more will have become dictatorships. 10 countries or more will have defaulted on sovereign debt. But, by 2030, at least two highly developed countries will have implemented basic income schemes in a way that doesn't inhibit their ability as a nation to provide welfare for its citizens and wealth for its people.

Obesity and VR

It will just keep growing. Literally. Why? We're sitting down more now, and that's BEFORE the entire VR/AR revolution! Imagine what it will be like once we have immersive experiences. So geared towards hammering our brains' rewards systems that most people won't stand a chance resisting it. Live life like on Facebook, but better, all the time! We already have water and drains in our homes, it's just a question of adding a nutrition soup type which can be fed without distracting from the virtual environment and we're done. Matrix, but with fat people.

Prediction: 5 years after VR/AR becomes mainstream (let's predict that doesn't happen until 2025), obesity will have risen sharply in the US by over 25%.

Mobile processing

Today, we still tend to move data to processing, though in the datacenter the trend is in the other direction: We move processing to the data.

I see it as highly likely that as smartphones become ever more powerful, the nodes of smartphones and their mostly idle capacity will eventually become available for crowdprocessing of problems, like SETI for PCs long ago. The main counter-argument is that it will cost battery life, and that the energy-per-computation cost will remain prohibitively high compared to transporting data to a data center and computing there instead. Depending on battery tech evolution, this may well be a killer counter-argument.

The other trend is that it will be expensive to send lots of data to clouds, so data processing will be done closer to the source in order to reduce transmission footprint. The best, most wide-spread sensors in the world are the one in your smartphone. The smartphones will get packed with more and more sensors over time. It would make perfect sense to create docking interfaces in the smartphones to allow additional sensors to be attached, as long as the sensors are small and don't cause discomfort.

The key question is then, how should the request/allow/deny protocol for on-smartphone processing work? It wouldn't make sense to bother the user every single time, there has to be a policy with opt-ins. This already exists today in the App installation permissions. What about security concerns? Eating battery life doesn't hurt your integrity, so as long as permissions are kept low, this can be overcome.

It is likely the best incentive would be crowdsourcing (already happening on a massive scale, e.g. for traffic applications like Waze) or crowdcharity. What else might convince users to give up their battery life? There would need to be a way to identify a simple and direct connection between compute cycles for a distributed problem, and value (to somebody). Bitcoin or other cryptocurrency farming might be an option, though it raises hairy security issues and it's also not near economically viable (see e.g. http://securitywatch.pcmag.com/mobile-security/325365-it-takes-14-million-android-phones-to-earn-one-bitcoin). Something along the lines of, "Every hour a child in the Amazonas receives a smartphone thanks to your use of app X thanks to the contributed computation of N users".

Worth thinking about. Hard to make a prediction. It all boils down to using unused capacity, same underlying mechanics as replacing owned (non-moving 95% of the time) cars with fleets of autonomous cars constantly in motion. The difference being that there is no natural recharge point for the mobile phone. Inductive charging surfaces might be a long-term solution to that problem, but feels far-fetched.

Oh well. Prediction: By 2020, there is at least one well-known mobile processing app used by more than 5M people, whose purpose is to only do this (unlike the already-existing multitude of apps that among other things also compute and collect sensor data).

Electric Cars

I heard of Tesla Motors for the first time in 2011. Now they're the new Apple in terms of follower loyalty.

I really, really WANT to believe that cars will become electric ASAP, but it's going to take a while yet. But I believe Tesla will be the Bredbandsbolaget of Electric Cars, the catalyst of the change.

Trends:
- Battery prices are going down steadily.
- Battery supply capacity is increasing fast (Gigafactory).
- Manufacturing automation and 3D printing is advancing fast.
- Cars will be our first robots, not humanoid robots.
- Cars are learning to drive autonomously.
- Companies like Uber are ready to kill the owned car paradigm completely, replacing it with autonomous car fleets in urban areas (no parking, no maintenance, no commute time spent holding the wheel - it's so convenient it's inevitable).
- Environmentalism is spreading, either voluntarily like in Sweden, or forced by smog and health issues like in China.

Negative trends:
- Regulation is slow regarding autonomous cars.
- The ethics question isn't resolved yet, though Volvo as a first claimed that the manufacturer should be responsible for accidents caused by autonomous cars.
- It will take time to build out the charging ecosystem for electric cars.
- The charging of the car takes much longer than tanking gasoline - this one isn't so easily overcome.

Even so, I predict an exponential electric car growth once the price reaches the tipping point and electric cars become cheaper. Forward-looking countries are subsidizing today (Norway in particular stands out).

By 2020, 1% of new cars sold in Sweden will be electric. By 2030, 20%. By 2040, 50%. Will this happen?

By 2020, no autonomous car will have a driver's permit yet. By 2030, Google and one other company will have a permit. By 2040, autonomous cars will represent over 33% of all cars in Sweden.

Data-only telecom operator with revenue sharing for "telco" services

Internet applications develop much faster than Telecom standards and adoption via social networks is extremely fast, millions of users in weeks.

It seems likely that to cut infrastructure costs, future telecom operators will build LTE-data-only networks, and simply skip providing voice calls, SMS, MMS, USSD etc via traditional telecom protocols and core network services. Just provide data. Good, fast, reliable data with good coverage and understandable tariff models and reasonable usage limits. Nothing else. No frills.

Why not just pre-install all their phones with nice, customized apps for:
- Skype
- WhatsApp
- Facebook
- Gmail

And then of course negotiate a small revenue share deal with each of these providers for the service of gaining them new users, to capitalize in some way of the value "lost" by not providing the traditional telco cash cow services of voice and SMS.

These are really ridiculously priced and the only reason they continue to be so is due to the fact that telcos have a global well-known addressing mode: The phone number. But the e-mail address, or Facebook account, works just as well and the number of users is rapidly increasing. Also, the phone number is hard to remember.

We should be seeing such operators within the next few years, but of course all legacy operators will do whatever they can to block their entry.

Prediction: By 2015, Europe will have several (>= 5) minor operators using this business model. By 2020, most (> 50%) European operators will use this business model.

Update 2016: LTE is growing rapidly (see e.g. https://gsmaintelligence.com/research/2015/02/4g-deployments-and-connections-gather-pace/476/) but the network building cost is so high that new entrants are few and far between. The existing operators have extended their existing networks to also include LTE. We still don't see GSM shutdowns, but they will come. VoLTE will preserve voice as a special telco service for the foreseeable future. P2P SMS is nearly dead in developed countries, but SMS for A2P keeps growing. I think the prediction was too bold and has met with too much resistance from operators struggling to not become bitpipes. I no longer believe that this will happen by 2020. Maybe by 2030.