Blockchain 101: Why Blockchains Cut Costs

Remember “Blockchain technology represents a potential 3%-10% cost savings on every good that uses it as a medium of exchange”

In all of my articles in this series, I cite a quote from the first article of 3%-10% cost savings on each good that is transacted using blockchain as a medium of exchange. People have been asking how those numbers are calculated. Here’s where I explain how I got to those numbers.

The first major cost savings comes from the last entity to touch the product being bought. Most products today are purchased using a credit or debit card from a store. When accepting a purchase from a credit or debit card the store agrees to pay visa – or whomever the trusted third party is – roughly 3% of the total transaction. This accounts for the low end, 3% figure I posted. However there is so much more that goes on that is unseen. Sidenote: If you haven’t read “That which is Seen and Unseen” by Bastiat, Pick it up. It will really help you understand basic economics especially applied to crypto, even though it was written 150 years ago.

Most products have many stages of production. The product passes from one company to the next and from country to country. Think of a computer. First a silicon miner must send silicon to a refinery, which then gets processed into the pieces that can be used in computers. Then another company integrates the pieces into each computer. Very basic but you get the point. Each of these stages have transactions which have associated costs, often taking form of an escrow company, banking fees, and/or an accounting department. These extra trusted third parties become obsolete in a blockchain based economy. Instead of having an escrow company, one could have a distributed oracle network (See https://cryptomarket360.com/blockchain-101-what-is-a-smart-contract/) that confirms all conditions of the smart contract have been met. This confirmation will then automatically disburse funds and goods. Instead of having a dedicated accounting department, transactions would be entirely visible to parties with access to public keys. Projects like these are currently being implemented by companies like OwlTing USA, ShipChain, and VeChain.

A tertiary way in which cost savings happens is through trade finance which can be seen as analogous to an insurance contract on the safety of the transaction as a whole. This quasi-insurance contract often takes form of a line of credit that the trading company can take out. This line of credit usually cost’s a flat fee of around 1% of the transaction volume. In a blockchain based supply chain you would still potentially need to take out this insurance contract, but with so much more automation/visibility due to blockchain, the insurance contract would inevitably be much cheaper.

In summation, these unseen costs add up in the life cycle of a good. The middle men that touch all of the goods throughout their flow in the economy lead to more expensive goods for the end user. They are becoming obsolete. Blockchain tech promises to eliminate most of these costs outright in a direct way. We haven’t seen a direct cost savings like this across all industries ever. We are truly entering a period of ‘free’ value transfer for all goods.