As you are no doubt aware by now, Facebook’s previously secret cryptocurrency project is no longer secret. As it turns out, Facebook is not planning to issue its own currency but instead has provided the code and development necessary for a new currency to be issued in its own right. A new organisation will manage that currency, The Libra Association, that will be eventually made up of one hundred diverse organisations of which Facebook (or more particularly its subsidiary, Calibra) will be just one. Each member will have one vote in making critical decisions in the Libra Association. Amongst the 28 founding members and partners — including Mastercard, Visa, Uber, Lyft, Spotify, eBay, PayPal, Vodafone, Andreessen Horowitz and others — is one academic institution, the Creative Destruction Lab (or CDL as we like to call it).
What is the Creative Destruction Lab?
The CDL is a not-for-profit program that initially began at the Rotman School of Management, University of Toronto and has since expanded to sites at other universities including UBC (CDL-West), University of Calgary (CDL-Rockies), Dalhousie University in Halifax (CDL-Atlantic), HEC Montreal (CDL-Montreal) and, this fall, the Said School at Oxford University (CDL-Oxford). CDL takes science-based, seed-stage startups and through a nine-month program of mentorship by some hugely successful entrepreneurs, takes them to market. In particular, we have focussed in recent years on AI and Quantum computing technologies. Hundreds have graduated the program since 2012 with equity valued of $4.2 billion created to date by CDL ventures. I’m the Chief Economist of the CDL.
For my troubles, I also run an ‘incubator’ stream at CDL-Toronto that focusses on using the blockchain to generate new marketplaces, contract forms and other applications. We have 400 ventures a year in our program (including 25 in the Blockchain stream). Because the companies in our incubator stream are even earlier than our other streams, we provide ventures with economics and business training and soon, some essential technical training. It is because of this Blockchain stream that they approached us to become one of the Founding Partners of Libra. (Also available through our independent investment partners — not the University — is pre-seed financing of up to $100,000 for ventures who achieve a certain set of milestones and criteria.)
What is the Libra Association exactly?
Before explaining why we decided to be part of this, let me give you my broad understanding of what the Libra Association is all about.
At the heart of the Association is a new cryptocurrency called Libra. I don’t know exactly what we will call denominations — the variants on Libra weren’t apparent to me although maybe Libra itself works — but I am sure that will be worked out. But the important thing is that the cryptocurrency will not be like most of the others out there — it is designed to have a more stable value with an exchange rate pegged to a basket of currencies. That means that it will have a stable exchange rate unless those main currencies change in value against one another in which case, the bilateral exchange rate between Libra and those currencies will change. Of course, there will be fluctuations in the bilateral exchange rate between Libra and currencies not part of the peg, but in theory, volatility should be as low as you can practically get.
This pegged currency will be achieved in a strong way. Every token will be backed by low-risk assets (currency and Treasury bills) in the currency basket. And that management will be transparent, audited etc. The idea here is that Libra will be a store of value designed to ensure it is an accepted medium of exchange, but it will not be a security that is intended to change in value based on measures of success or otherwise. In other words, Libra tokens will be issued on-demand as people exchange low-risk assets to acquire them and then retired when the reverse happens.
All this is made possible by the Libra Blockchain which will store records of transactions and other relevant information. While this blockchain is permissioned (only those designated by the association can become nodes), it will be distributed amongst the hundred members (at least initially). It is expected that CDL will be one of the nodes. The job will be to run a server independently that ‘votes’ or ‘endorses’ blocks to form a consensus on the network — that is, that blocks are valid, and things have not been altered. It is precisely this feature that was the key innovation in Bitcoin a decade ago that allowed cryptocurrencies to be possible.
I guess that one of the more contentious issues that might be raised by the crypto community is that the Libra Blockchain is permissioned. This is in contrast to Bitcoin, Ethereum and many others that are permissionless. A permissionless blockchain means that anyone can operate a node. It has free entry. In the case, of Bitcoin, this also allows free entry in being able to compete to mint Bitcoins which is why mining has become a lucrative activity and why proof of work systems like Bitcoin, clever though they are, tend to end up being very costly to run — given that the outcome is something purely digital.
The idea of proof of work is to ensure that no one creates nodes for free. In other words, if you want to be part of voting for a consensus, then you have to show something for it. One way around that is to prove something else of value — the most common idea is a proof of stake system whereby you put something of value and make it illiquid, and that gives you voting rights. A final way of ensuring that bad actors won’t just populate nodes is to simply regulate who can run a node — this is what a permissioned system does — it gives permission. It is not a free for all, and some power likely comes from being part of the conversation. But this is also what you need to run an efficient network. Libra made a different choice between decentralisation and efficiency than other blockchains.
But it is critical to note that it is distributed. There are a hundred nodes and, moreover, they have, at least from where I sit, pretty diverse interests. Some care about payments. Some care about startup innovation. Some care about social goals. And some care about a mixture of these things — like CDL. So Facebook chose not to make this a Facebook thing, which makes it an exciting development in this space.
I should add my guess is that Facebook’s clear push for having Libra be more open and independent of it squares well with my expectation that Facebook’s interest is not in payments per se but, instead, in activities that will enhance its platform objectives based on connections and interactions. Hanna Halaburda and I wrote a paper about this back in 2012 when the big topic of the day was the, now defunct, Facebook Credits. My guess is that Facebook’s interest is in laying down base infrastructure that will allow transactions to be conducted at low cost (even for tiny transactions) and especially around the globe. They have worked to develop their own wallet for this purpose that will be integrated into Messenger and WhatsApp and elsewhere. If others build use cases for the currency that only helps in the currency’s popularity and usefulness as a medium of exchange. Moreover, as it is digital first, that means it can be integrated into code in a way that makes it a new open platform (like TCP-IP) to seed all manner of other digital applications.
The code is the opportunity
Which brings me to what is essential here — the code. The advantage of having a digitised currency is that it can be easily transferred with a rich codebase. To be sure, banks and other financial institutions have digitised money but, to the extent there is code, it is not something that anyone would describe as interoperable with what is, these days, some surprising distance from the rest of the economy. This has happened because security and money are not tied to one another. But with cryptocurrency, security is, literally, there and in the name. That means that more can potentially be done.
One example of this potential is, of course, what has come to be known as ‘smart contracting.’ As I explained earlier this year, there is an excellent potential to use a code layer integrated with a payments mechanism to solve the “fundamental smart contract challenge” that arises because contracts interact with human decision-making. (See here for a technical paper). Other examples include voting mechanisms such as quadratic voting or token reputation registries. These latter mechanisms also require a means of identity verification that is something that the Libra infrastructure could potentially support.
Alongside this, a new programming language, ‘Move,’ has been developed. It will be launched with the Libra Blockchain. Unlike Ethereum, that pioneered this idea, initially, the code will be restricted to a set of templates until it can be proven to work in the wild. So while the promise of the code will be there, there will be some caution in the roll-out. It will be up to the association to manage that process. In my mind, this will be a critically important set of decisions.
What does CDL hope to gain from this?
CDL does not have a financial interest in this association or in ventures that come through our program. Our mission is purely social. We are in the business of creating startup ecosystems that do not require a fixed physical location. (See here for a full outline). In that regard, we see Libra as innovation infrastructure that can support just that — taking digital payments to the next level to allow an application layer that could transform economic transactions and more.
While we believe that there is an opportunity for startups going through our program — and especially our Blockchain stream — in the near term as the CDL community are close to the process, in the longer-term, the real opportunity is for all startups and so it is that potential that is our focus. In creating better startup ecosystems, we will be fulfilling our mission.
Where do you think this will all lead?
We take the ‘Lab’ part of Creative Destruction Lab very seriously. For that reason, we believe that everything we do is an experiment and Libra is no different. While there have been 18 months of technical development on the part of Facebook into this, as we know from our experience with entrepreneurial ventures until something hits the market, you cannot truly obtain signals as to its potential. There is too much uncertainty associated with innovation.
The range of outcomes is broad. Libra could be simply a new payments mechanism that improves financial access for many people in the world. Or we might look back in a few decades and see this the seed of a new wave of global connectivity not seen since the establishment of the modern monetary economy post-World War II with the Bretton Woods system. Or this may be the first of several new monetary platforms to emerge that began with Bitcoin, Ethereum to Libra and maybe others that are still in or to be developed.
So the short answer is that I don’t know where this will lead, but I am very excited that it is happening.
What is happening next?
Post-announcement, there will be six months or more whereby the Founding Members and Partners of the Libra Association meet and work out the by-laws. My expectation is there will be a series of meetings that will work similarly to a Constitutional Convention. How those will operate is anyone’s guess at this stage. However, I will be leading the CDL contingent in that endeavour.
The voice we expect to bring to the table is one that is squarely focussed on promoting startup innovation. Moreover, where possible, we will be driven by the principles of open science so that discussions, consultation and data will be transparent and available. I do not expect everyone will share these views, which makes it all the more important to have this voice present.
Those who know me know that I like to write about issues. I will continue to do so as much as I can. Watch this space.
The views expressed here are solely those of Joshua Gans and should not be construed as representing the opinion of the Creative Destruction Lab, its ventures, affiliates, University partners or the founding members of the Libra Association.