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Blockchain and finance in 2019
The Libra protocol: A brief review and some predictions
In many ways, the release of the Libra protocol signifies a rupture with conventional finance. Today’s semi-sudden release of rich documentation and technical specification sent social media into a flurry of speculation and predictions on the implications of the combination of equipping Facebook’s billions of users with access to a blockchain based currency. In this blog post we provide a short technical and financial overview of the Libra protocol, and advance three predictions for how today’s historical events will impact the future.
Outside the introduction of a new “resource typed” domain-specific programming language for smart contracts, the underlying technology supporting the Libra blockchain confines to a general approach to distributed architecture. A selection of permissioned validators confirm transactions utilizing the novel HotStuff BFT replication protocol . The aptly named protocol is pioneered by researchers at Cornell University and functions through leader-based BFT replication, in which a leader is elected to drive the network towards consensus. With today’s release, Libra is introducing Move, a new resource-typed DSL for transaction scripts and modules which is similar to smart contracts. Considering recent events in the Ethereum community, it is hard to argue against the use of typesafe languages in blockchain technology.
According to the Libra white paper, Move is currently only available to developers as intermediate representation and byte-code format. The source language will be an ‘economic’ language designed to make it easier to write and verify safe code. Move is heavily influenced by Rust’s ownership model. By utilizing this, resources can be declared, which can only be created and moved around but never copied. Thus, it automatically eliminates bugs regarding double-spending and erroneous locked resources. Our estimation is that the high-level Move will be a Rust-inspired source language with emphasis on a functional paradigm in which developers can contribute modules or write transaction scripts. In this way, Libra will allow for significantly less complexity than today’s general purpose blockchains. However, this trade-off will mean that the Libra association can market themselves with verifiable security, equivalent to that expected in finance and aviation.
Perhaps one of the most fervently discussed aspects of the Libra release is the way in which the reserve collateral operates. Once again, the Libra association leans towards contemporary best-practices in the stablecoin industry. The Libra reserve is a basket of currencies put in place in order to fully back each coin with a set of stable and liquid assets. The design of this basket may ultimately be similar to that of the IMF SDR .
Easily among the most exciting news of the day, is that Libra coin will be tradeable on both conventional stock exchanges and cryptocurrency exchanges, a point that we will return to below. This may mean that users will be able to trade Libra against major cryptocurrencies such as Bitcoin or Ethereum. If so, this event is very likely to generate knock-on effects for the cryptocurrency markets, where investors will see increased volumes from curious retail investors. To bootstrap the ecosystem, the Libra association will pay out incentives in Libra coin to founding members, in the effort of encouraging adoption by users, merchants, and developers. The money in the reserve will be derived from two sources:
- Early investor funding through a separate Investment Token.
The funds for the coins that will be distributed as incentives will come from a private placement by selected investors. Currently, a prominent rooster of investors featuring Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital and Union Square Ventures has been announced, indicating that more are likely to follow. The Investment Token is likely to play a role in the Libra ecosystem equivalent to that of MKR in the Dai Protocol , or perhaps even the BNB tokens on the Binance exchange .
- Funding through Libra Purchasers
For every new Libra coin created, there must be an equivalent transfer of fiat to the reserve. Similar to the operation of Trust Token currencies  the indication is that users will be able to purchase the Libra coin directly through fiat gateways.
To generate operational revenue for the Libra team, the collateral reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first be used for funding the association. Subsequently, remaining profits will be paid back to investors in the form of a dividend, likely to be distributed through the separate investor token.
According to the Libra association, the reserve will be held by a decentralized network of institutions acting as verified custodians. Participating custodians will be selected as to prevent credit risk or liquidity issues or systemic risks that might arise from a concentrated pool of resources.
To create stable revenue stream, the association indicates a trading strategy in which liquid low-volatility instruments such as government issued securities or deposits are used to derive interest.
The choice of using liquid instruments is likely intended to allow the size of the reserve to be adjustable, as the number of Libra in circulation naturally expands or contracts with aggregate demand. In contrast to existing stable-coin projects such as MakerDAO, the Libra association does appear to institute any programmable fiscal or monetary policy, instead the float of available Libra coin will simply be taken in and out of circulation as traders by or return their Libra coins through authorized fiat gateways.
Having reviewed the technical specification and financial structure of the Libra protocol and association, we turn towards a few predictions on the potential economic impact of the Libra project. While the Libra project has already seen regulatory resistance from European governments , it is likely that the team is well prepared for regulatory hurdles and will be dedicating a significant resources towards lobbying and promoting their agenda for extra-national currency. If successful, we see a number of potential events unfolding in the coming years:
Prediction 1: Libra will promote adoption of cryptocurrency among retail investors
While the Libra protocol faced early criticisms from crypto-proponents, the pending release in 2020 is more likely to advance global adoption of cryptocurrencies and related instruments. Early detractors are likely to have overestimated the probability that Facebook would pursue a strategy informed directly by financial dominance and surveillance capitalism. While the release of Libra is likely a part of a long-term strategy of dominating e-commerce in developing economies, the technical specification is generally compliant with a number of core design choices made by existing blockchain projects:
- The use of standard PKI enables anyone to open multiple pseudonymous accounts, only associating the official Calibra wallet with a given identity or Facebook profile will require a government issued ID. Seemingly, any user in possession of a key-account pair can issue modules or transactions scripts in the Move IR already.
- Neither the Libra association nor any member thereof has the ability to retrofit the hashed transaction history, as this would break the Merkle-proof based state verification mechanism.
- The development team clearly indicates a move towards permission-less verification, once this can be achieved at scale.
Prediction 2: The Libra initiative will advance the Gig-economy
While the gig-economy no longer commands the explicit attention of the media, the rising tendency for freelance or non-contractual labor in and outside developed economies remains present. Nevertheless, a persistent barrier for adoption of P2P services remains payment gateways. Historically, consumers tend to react negatively to requirements of online credit card payments as this typically involves several rounds of verification and or challenge codes sent to external devices. The introduction of digital payments, directly embedded in the Facebook and WhatsApp UX, is likely to break down remaining barriers towards traditionally minded consumers, weary of purchasing online services. This may introduce a second-wave for the online service economy, as Facebook is likely to encroach on markets currently dominated UpWork and Fiverr surrounded by a myriad of associated niche service sites. Even incumbents such as Uber or AirBnb may see direct competition from Facebook, seeking direct integration of all online service providers.
Prediction 3: Libra will contribute towards a more open financial ecosystem in which fiscal stimulus programs will operate at a global scale
While the Libra validation and reserve systems are dependent on financial service providers and feature a number of institutional players as governing parties, the 2020 release will effectively open financial opportunities for the 2.4bn Facebook users of which upwards of 1.7bn allegedly remain unbanked, with little access to financial services. Not only will the introduction of reliable financial infrastructure promote economic activity, the supposed openness and transactability may introduce consumers in unbanked regions to already existing solutions for microfinancing or local development loans. By collecting data on the pseudo-transparent transaction history on Libra and related protocols, researchers will be able to gain reliable insights into fiscal development in underbanked regions, enabling them to target fiscal stimulus programs directly within regions with slow or negligent economic development.
We project that this development is likely to contribute fundamental support for global fiscal stimulus programs, currently pioneered by the Open-UBI movement. Here, entrepreneurs and innovators explore the possibility of delivering economic impact at scale, unconstrained by nation-states or coercive local influences. At eToro, we are proud to lead the advancement of the Global UBI movement with our support of the GoodDollar project , originally conceived by Yoni Assia in 2008 . The GoodDollar project is a series of economic experiments with the purpose of reducing wealth inequality through the development of decentralized and co-owned fiscal distribution mechanisms. GoodDollar is a 100% not-for-profit program, supported by a network of academics, NGOs, ethical investors and early crypto-currency enthusiasts, to whom reducing wealth inequality through broad fiscal stimulus is a central issue.
We thank Johannes Jensen, Iqbal V. Gandham, Mati Greenspan, and Amy Butler for useful comments and reviewing the text.