Blockchain and cryptocurrencies: Prospects for African trade (1)
In its simplest form, blockchain is a new database architecture. Its major distinction is decentralization. As opposed to having databases in centralized servers, blockchain allows for data to be stored across a global network of computers. Consequently, no single entity, computer, or administrator has control over the databases. This is essentially what distributed ledger technology is about. A technology that allows ledgers to be distributed across a network of computers instead of a central server. Blockchain is a distributed ledger technology.
The potential applications of blockchain technology for more efficient supply chains and trade processes are writ large. And while the blockchain trend is global, potential gains are likely to be more expansive and impactful on the African continent, where current processes are inefficient and not transparent.
Cryptocurrencies, which rely on blockchain technology, have also been facilitating international African trade, especially with Asia. Hard currency shortages and Covid-19 travel restrictions have been weighing on international trade in many of the continent’s markets. Cryptocurrencies have enabled traders to overcome these constraints by facilitating payments for international trade transactions.
Incidentally, paying for international trade transactions with cryptocurrencies like Bitcoin is proving to be faster and cheaper than through the conventional foreign exchange markets. International African traders have also found cryptocurrencies to be more liberating, as there are no bank limits.
Clearly, blockchain and cryptocurrencies have huge potential for facilitating African international trade. But there are challenges. Some central banks have banned commercial banks from facilitating cryptocurrency transactions, for instance. And it may be quite daunting to wean countries of currently cumbersome paper-based trade processes.
With a bias for African use-cases, we explore the evolution of blockchain technology and cryptocurrencies thus far. Thereafter, we assess their potential for enhancing African international trade. In this regard, we focus on three key aspects: (1) supply-chain tracing (2) trade facilitation and (3) cross-border payments.
Hard currency shortages and Covid-19 travel restrictions have been weighing on international trade in many of the continent’s markets. Cryptocurrencies have enabled traders to overcome these constraints by facilitating payments for international trade transactions.
The African block chain ecosystem
A ledger is simply a book of records. With technology, ledgers became digitized in spreadsheets and databases in centralized locations. The innovation blockchain technology brings is how these records are kept and validated. Blockchain “is a continuously growing list of records, which are combined in ‘blocks’ that are then ‘chained’ to each other using cryptography (Ganne, 2018).” In a blockchain, a decentralised peer-to-peer (P2P) network of computers processes, verifies and validates all data entries into the digital ledger.
Instead of a centralized location, blockchain allows for these digital ledgers to be distributed across a network of computers. In other words, blockchain is a distributed ledger technology (DLT). Through a consensus mechanism, a ledger entry (or transaction)is broadcasted to all the members of the computer network (or nodes) for validation. If validated, the transaction is added to similarly validated transactions in a block. Once the block is full, it is added to an existing chain of blocks or blockchain. Once on the blockchain, the blocks and their constituent transactions cannot be edited or altered. This immutability is made possible by cryptography.
Blockchain is not hardware or software. It is an architecture, protocol or system of rules. The technologies that underpin blockchain are database or ledger technologies, P2P networks and cryptography. The P2P networks serve as storage and validation utilities. To make it worth their while, members of the network are rewarded for these functions. In a bitcoin blockchain, for instance, nodes are rewarded with bitcoin for successful validation of transactions. The incentive mechanism takes other forms in other blockchains.
For all its vaunted potential, blockchain technology has a number of drawbacks. Smart Africa (2020) identifies the drawbacks as (1) scaling (2) privacy (3) interoperability and (4) irreversibility. Because the size of blocks is fixed, scaling to accommodate larger numbers of transactions more quickly is limited. Since every node is privy to every transaction, there is little or no privacy. And since different blockchains do not necessarily recognise one another, interoperability is an issue. Immutability or irreversibility also mean erroneous transactions cannot be corrected once on the blockchain.
An edited version of this article was first published by Nanyang Business School’s NTU-SBF Centre for African Studies, Singapore. References, figures and tables are in the original article.linkviz.https://www.ntu.edu.sg/cas/news-events/news/details/can-blockchain-and-cryptocurrencies-facilitate-african-trade