Solana Pay Aiding Solopreneurs in Tackling the PPP Challenges
This post is the fourth instalment of my 8-week series of research about the failing economic system, solopreneurship trend, blockchain, and Solana Pay.
This research wouldn’t have been possible without the support of Superteam UK so follow them on X.
If you miss the previous posts:
Week 1: The Mighty Have Fallen
Week 2: A Society Without Jobs
Week 3: Solopreneurship as the Modern Form of Distributism Where Decentralisation is Supported by Technology
How many Big Macs can you buy with a ten-pound note in the UK, the US, or Germany? (Well, of course, the ten-pound note needs conversion to the local currency, first). Or, let’s take this example further. How many hours do you have to work so that your cumulative hourly wage can buy the latest iPhone in the market?
This idea of measuring whether a currency is at par, overvalued, or undervalued against a baseline currency based on its purchasing power is the notion surrounding the Purchasing Power Parity. We are familiar with the exchange rates of foreign currency pairs (at least I am, since I’m regular at international remittance). If not, you can just go to the foreign exchanges at your local supermarkets to see how much EUR you can get from your GBP or vice versa. But that foreign exchange rate is only a little part of the story, because even though it gives you the idea of how your currency fares to others, you don’t know whether you can afford the same lifestyle having a certain sum of money in another country. Enter PPP for a more complex explanation.
So, how does it work and how can we use this concept?
What is PPP?
Purchasing Power Parity (PPP) refers to an economic theory and a method used to compare the relative value of currencies in different countries. It suggests that in the absence of transportation costs and trade barriers, identical goods or services should have the same price when expressed in a common currency. The basic idea behind PPP is that exchange rates should adjust over time so that the cost of a basket of goods and services becomes the same across different countries.
PPP was initiated by the International Comparison Program (ICP). They classified expenditure into >150 categories, such as poultry.
According to Investopedia [1], two currencies are at par, or at equilibrium, if one basket of goods is priced the same in these two currencies, taking into account the exchange rate.
In other words, if the same basket of goods (e.g., food, clothing, housing) costs $100 in the United States and €80 in Europe, then according to PPP, the exchange rate between the US dollar and the euro should be such that $1 equals €0.80. This equilibrium exchange rate would ensure that consumers have equal purchasing power in both countries.
Conversely, you can measure how expensive the cost of living in one country is if you know the PPP exchange rate, which is calculated with this formula:
PPP = P1 / P2
Where P1 is the cost of goods in currency 1 converted to the base currency, and similarly for P and currency 2, which is usually the base currency. The conversion is common to the USD currency, which serves as the baseline.
Therefore, say the basket of an adult man’s basic clothing costs $500 in the United States, but £800 in the United Kingdom, and the exchange rate is $1.3 per £1, then the PPP of the UK against the USD is calculated by first converting that £800 into USD. So, the PPP is $615 / $500, or 1.23. Therefore, both currencies are not at par, and living in the UK is more expensive based on this exercise.
PPP is often used to make international comparisons of living standards and to assess the real value of currencies. It helps economists and policymakers understand whether currencies are overvalued or undervalued relative to each other. If the actual exchange rate diverges significantly from the PPP exchange rate, it may indicate that one currency is overvalued or undervalued compared to another. From the example above, the pound sterling is overvalued because the market exchange rate is higher than the PPP against the dollar.
There’s this popular paper called Burgernomics, which serves as the inspiration for the case study in the first paragraph of this article.
I read the Burgernomics analysis paper which was published in 2003 by The Federal Reserve Bank of St. Louis [2]. It discusses how the Big Mac Index, initially a humourous take by The Economist magazine in the 1960s, has become a popular way to understand PPP and the relative value of currencies. The study highlights that while the Big Mac Index simplifies the concept of PPP, it also demonstrates the complexities and limitations of using PPP to compare economies due to factors such as taxation, transportation costs, and local economic conditions. The paper reviews the fundamental theories of PPP, its empirical challenges, and the reasons why PPP might not always hold in practice, using the global prices of the Big Mac as an illustrative example.
As for the starting question of how many hours of your hourly wage to buy the latest iPhone, the paper also did a study on the hourly wage to buy a BigMac. Seriously, though, I’m not an avid fan of fast food chains, and I try to (with a 10% chance of diverting from) mostly eat clean, whole foods. And I read journals and watch enough content by the experts about the danger of UPFs (ultra-processed foods) and I can rant the entire day about how the food industry is stacked against our health, but that’s going to be a topic for another paper.
That’s why my example includes an iPhone, although those of you who are against the Mac products for ideological opposition will still disagree with my choice of item. A writer can’t win here.
Obviously, for the ten-pound bill, I can’t use the gadget example there because of how expensive anything coming from Apple is, but hey, at least I mentioned the Big Mac. Because, as much as I don’t like fast-food chains, Burgernomics won the attention of the world over for 2 reasons:
- It’s a commodity sold in the majority part of the world (over 100 countries), ideal for explaining a concept like PPP
- Talking about food is more interesting than stocks, it is debatable, though. But the common audience who are not involved in stock trading finds it easier to relate to the sandwich you can buy at the nearest McD than the concept of an order book or spread and depth.
Anyhow, the local Big Mac price is compared to the local hourly wage, and we can see the discrepancy already in the chart presented in the paper. It was 2003 data, but it shows that for some countries, even though the Big Mac price is lower in USD compared to the local American Big Mac price, it is already ¾ of a worker’s hourly wage.
Similar to the iPhone case above. Say, an iPhone costs $1,000. For a day worker in the US, it probably takes them 125 hours to afford a new one. However, for a day worker in Indonesia, for instance, it takes 500 hours of work to purchase a new iPhone. Hence, the PPP is very nuanced with the country’s productivity level as well.
Issues with PPP as a Measurement
PPP is still a relative measure and is barred from nuances surrounding the measure of justice and equality. Consequently, it has problems. It’s important to note that PPP is a theoretical concept and it doesn’t always hold in the real world due to various factors such as transportation costs, trade barriers, differences in taxes, and non-tradable goods and services. Additionally, PPP calculations can be influenced by factors like inflation rates, productivity differences, and government policies.
The transportation costs, for example, have been shown in this 1984 paper [3] through the method of regression analysis that the PPP cannot be tested satisfactorily without factoring in these costs and other forms of arbitrage.
The method to categorise the items faces a challenge, which this paper [4] outlines as:
- The usage of the average price of the items in one heading on the left-hand side of the equation, instead of the result or the right-hand side. This causes the loss of the variance between outlets in the country
- The lack of a method to substitute items that are not available in other countries, or less than ideal replacements are being used, which are not comparable
The improved version of PPP is called Relative PPP, which accounts for the inflation effect. This is because inflation lowers the purchasing power of your money over time. With the same cash amount, say £100 can buy a new basket of clothes this year, but perhaps only three-quarters next year. Therefore, it can measure better a pair of two currencies, which might result in different purchasing power once we incorporate the different inflation rates in each country.
However, this doesn’t help with the non-inflation variables.
Moreover, the paper by Ford and Horioka [5] shows further through several scenarios that the global financial market cannot achieve net transfers of capital and equalise interest rates across countries unless the global financial market is integrated with the global goods market. This is explained by the friction in one or both markets blocking the net transfer.
Despite its limitations, PPP remains a valuable tool for economists and policymakers to understand long-term trends in currency valuation and to make informed decisions regarding international trade, investment, and monetary policy.
PPP can also be used to adjust the GDP to get a better picture of how countries compare to each other, taking into account the goods and services affordability. Like in the chart below taken from Investopedia, the ranks of countries if using GDP alone are different from the PPP-adjusted GDP.
So, how does the PPP interfere with the solopreneur’s aspiration for growth?
PPP to the Solopreneurs
The problem with limiting the scope of a solopreneur, especially offering the goods or services that are capable of being sold outside the geographical boundaries, to be bound to a country or region is the limited growth.
1/ Capital
Solopreneurs are different from startups, in a way that those specialising in freelancing or content creation find it difficult to raise capital.
As a startup, there are incubators or accelerators where they can be connected with VCs and all sorts of investors. But as a solopreneur, your options, should you want to raise money, are limited to:
- Personal loan from the bank or relatives
- Crowdfunding from the patronage websites
- Revenue-generating activities, such as putting up the content behind a paywall
In the global market thanks to the aid from the internet, solopreneurs living in a country with a weaker PPP rate are at a disadvantage. When the business offered, scope of responsibilities, and target clients are similar to their international competitors, having only limited access to capital from the same currency inhibits their growth.
Moreover, back to the scarcity mindset, when our minds are pressed due to lacking something, we don’t know what we are capable of. The solo or micropreneurs in countries with weaker PPP might not get exposed to clients who are able to pay them in stronger currencies.
More importantly, the business landscape that enables solopreneurs in a certain country or region is limited to the benchmark payment of the currencies, limiting the available options to reach higher payment possibilities. For example, I was a web novel writer. Because the platform was established in Asia and the majority of the writers resided in a certain geographical region, the rate at which the platform paid the writers was sufficient for the minimum or part-time common wage in that region. The platform company had done justice by benchmarking the competitive rate, so they were not at fault. However, compared to the international competitors, such as another big writing platform, their rate was subpar.
Think about it, when people decide to be solopreneurs for more freedom, both in time and type of work to achieve their financial goals, online work is preferred as it can offer the rate leap. However, since benchmarks and platforms are still executed with PPP baked in their data and assumptions, the envisioned financial growth is still limited.
2/ Talent or Technology Pool
Consequently, those living in a stronger PPP rate country are at an advantage. Solopreneurs can also amass better capital and talents in the decentralised scheme of connected entrepreneurs where they can support each other. A coach paid in a stronger currency can afford to attract better talents in his or her network, such as virtual assistants, software developers, or social media specialists, supposedly because this coach can pay them better. Again, this is due to globalisation, now that you can hire talents with just a few clicks on your social media accounts. This perpetuates the huge discrepancy in the bargaining power of solopreneurs lacking access and capital. Essentially, despite the noble contribution of the tools, which is the technology, the business practice is still arranged in a somewhat centralised system. This is inevitable because of the economic systems in place that have been staying and evolving with our civilisation since we started bartering in 10,000 BC.
Another example. I’m on a monthly plan of Open AI GPT-4, which is $20/month. Let’s say it’s 1.5 to 2-hour worth of minimum wage in the UK or the US, but 4 hours worth of Hong Kong’s minimum wage [6]. It’s a similar case to the iPhone affordability thought experiment above. A solopreneur might still hold their day jobs, hence, holding this business as a side hustle before making good money and leaving their employment scheme. So, to afford the technology stack–AI which can speed up or make more efficient entrepreneurship activities–the same labouring activity might have to be doubled in certain regions of the world.
Without diverting too far from the topic of this essay, take another example of the off-ramping procedure if you get paid in crypto-assets. Following the regulation of the central banks respective to each country, you might find different “affordability” of off-ramp services by different providers. This cuts directly into your margin if you have to lower your price to undercut the restrictions.
I agree that distributism must allow a certain degree of market competition in order to survive as an economic system. Therefore, the parity in purchasing power among countries does not always translate into a challenge to solve with the decentralised system. The way we can see PPP is a form of systemic injustice that distributism seeks to alleviate. The distributive justice we discussed in the last article is far from achieved if the parity is immortalised in economic practice.
For example, if you’re a software engineer, and your hourly rate is 10x the minimum hourly wage in your country because it should take into account the hours you’ve put in to study and practise, ceteris paribus, your idea of how much your charged rate could be will differ if you don’t benchmark your competitor price. In a way, it’s a good thing that you can undercut your competitors if you live with an undervalued currency. But for the distributive justice idea, the same work — the same job scope — should not be paid less just because one is constrained within geographical boundaries.
To put it simply, the same software development activity could be paid more equally across the world. You shouldn’t be paid lower in the equal workload just because you hold an undervalued currency which limits your growth mindset.
Therefore, this PPP is still a piece of evidence that decentralisation still has its dark side of inequality. Unless we want to address the inequality, the decentralisation utopia vision is still partial to those with the capital and resources pool access.
Solana Pay as a Payment Tool to Bridge the PPP
Okay, so how does Solana Pay seek to partially resolve these systemic problems?
(There’s no panacea, and I’m a believer in the slow fix. There are multiple angles to address the injustice in the economy, so there’s no one magical cure for all)
Cryptocurrency is acknowledged as a payment method that is lower in intermediary fees because the smart contracts record the transactions directly to the decentralised ledgers. Moreover, it’s not bound geographically. The crypto used for international remittance yields theoretically better exchange rates. Even in the domestic payment, the merchant could enjoy less cut, causing more competitive prices that the customers can enjoy.
However, using cryptocurrency still poses a few problems, for example:
1/ Volatility
Some crypto-assets are used mainly in speculative trading. Therefore, it’s not the best idea to accept or make payment with those assets. You want safe, fiat-pegged stablecoins, of which the values can be correlated to real-world fiat currencies.
2/ Merchant acceptance
This is an issue in itself since merchants, either offline or online, are mostly still in the web2 fintech world. They accept various methods like cash or cards, but how many merchants around you show that they accept USDC as well? Part of the pain points is the settlement process that might take considerably longer latency than the web2 competitors.
3/ More use cases for customer and merchant stickiness left unhandled
This is a less important issue but discourages merchant adoption, nonetheless. Blockchain’s one prominent advantage, which is anonymity, means there are naturally fewer ways to create customer stickiness for a merchant. Identified with wallet addresses so far, how can a merchant create a loyalty programme for their blockchain-paying customers?
Solana Pay’s vision relies on direct interactions between a customer and a merchant. Also, Solana Pay provides access to easier international payment, which addresses the inequality in PPP above. Let me explain why it’s not just a simple “paying in dollars”.
The creation of the foundational elements for a decentralised, open, and truly peer-to-peer payment protocol is the essence of Solana Pay. This will forge a path where digital money flows through the internet like data — uncensored and without intermediaries levying a tax on every transaction [7].
From being a necessary service utility, Solana Pay provides a way to be a genuine peer-to-peer communication channel between the merchant and consumer.
The protocol offers a specification that enables the consumer to transmit digital dollar currencies, such as USDC, from their wallet directly into the merchant’s account, settling immediately with costs measured in fractions of a penny. Its tech stack allows the payment message to incorporate loyalty, offers, and rewards within the same messaging scheme, becoming true foundational elements for the future of commerce. This in turn leverages deep engagement with their customers.
When a customer makes a purchase, it’s a vote of support. A merchant should reciprocate that support with personalised offers, on-chain loyalty programmes, and distinctive virtual goods to complement physical purchases. The possibilities are boundless, but only with a novel approach to payments.
Now, with the on-chain payment, the merchants can unlock the financial benefits that come with it. For instance, the payment can enjoy:
1/ network cost savings
2/ DeFi yield generation
3/ zero fraud liability
4/ instant settlement
5/ ownership of the customer relationship
Also, as a Shopify merchant, you can enjoy Solana Pay directly embedded as your payment method, thanks to its integration with Shopify [8].
The further phase of the protocol’s development will allow merchants to send digital assets back to the consumers, which will unveil new capabilities in commerce previously unattainable.
A Closing Thought
Economic inequalities represented by the PPP stem from different factors. Solana Pay addresses one part of the systemic injustice by allowing the customers and merchants to have more say in the commerce transactions. It’s become easier to accept international payment, so the solopreneurs previously bound by geographical limitations can have better access to pricing, talent, and technology pools.
Thank you for reading till the end.
If this article sparks your interest and you want to discuss it further with me, leave comments below, or reach out to me on the following:
✅ Me on X
Until then,
References
[1] ‘What Is Purchasing Power Parity (PPP), and How Is It Calculated?’, Investopedia. Accessed: Feb. 29, 2024. [Online]. Available: https://www.investopedia.com/updates/purchasing-power-parity-ppp/
[2] M. R. Pakko and P. S. Pollard, ‘Burgernomics: A Big MacTM Guide to Purchasing Power Parity’, r, vol. 85, no. 6, 2003, doi: 10.20955/r.85.9–28.
[3] J. Aizenman, ‘Testing Deviations From Purchasing Power Parity (PPP)’, National Bureau of Economic Research, Cambridge, MA, w1475, Oct. 1984. doi: 10.3386/w1475.
[4] M. Silver, Hedonic Country Product Dummy Method and Quality Adjustments for Purchasing Power Parity Calculations. Washington, UNITED STATES: International Monetary Fund, 2009. Accessed: Feb. 29, 2024. [Online]. Available: http://ebookcentral.proquest.com/lib/ed/detail.action?docID=1605983
[5] N. Ford and C. Y. Horioka, ‘The “Real” Explanation of the PPP Puzzle’.
[6] J. Yeung, ‘One of the world’s most expensive cities raises minimum wage … by 32 cents | CNN Business’, CNN. Accessed: Mar. 02, 2024. [Online]. Available: https://www.cnn.com/2023/05/02/business/hong-kong-minimum-wage-cost-of-living-intl-hnk/index.html
[7] ‘Solana Pay ushers in new payments era’, Solana. Accessed: Mar. 02, 2024. [Online]. Available: https://solana.com/news/solana-pay-announcement
[8] ‘A decentralized, permissionless, and open-source payments protocol | Solana Pay’. Accessed: Mar. 02, 2024. [Online]. Available: https://solanapay.com/?ref=solana.ghost.io
