Facebook Libra: Bear-hugging blockchain and banking

Crypto maximalism, the sweet spot, and disruption obstruction

Anthony Bardaro
Jul 10, 2019 · 32 min read
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Founding members of the Libra consortium (prima facie)

The Endogenous Transaction Loophole and maximalism

That all said, I need to inject a bit of important nuance here. “Know Your Customer” (KYC) and “Anti Money Laundering” (AML) are two key regulatory policies in the bedrock of financial services compliance. However, KYC and AML would require that Libra’s overlords monitor and report activity for only the on-ramps and off-ramps into and out of Libra exchanges. As for the Libra-denominated transactions that occur endogenously among holders — a closed loop within Libra’s blockchain — the activities of pseudonymous counterparties therein would be really difficult to track. (Goes without saying that there will always be blockchain audit services, like Chainalysis, who can try and bootstrap transaction data to ascribe identity, but more on that later.) Let’s call this the “Endogenous Transaction Loophole”, which adds to the sweetness of the sweet spot Libra’s trying to occupy.

Libra’s incentive problem and tax solution

One of the bigger challenges standing between Libra and its maximalist vision is the opportunity cost for individuals/entities to keep cash denominated in Libra over the long term, without repatriating back to their local currencies.

Cash under-the-table
Can’t put this genie back into the bottle

Incumbents and the status quo

Inertia is another challenge. The credit card infrastructure throughout much of the developed world is ubiquitous, familiar, and, frankly, good enough. This presents a problem known as “leapfrogging”: A new technology has to overcome the challenge of changing both consumer habits and supply chain infrastructure.

Bear-hugging disruptive innovations

To wit, back in 2018, Ben Thompson published a succinct analysis of blockchain’s implications for tech’s super aggregators:

  1. The Innovator’s Dilemma:
    Incumbents fundamentally don’t want to decentralize, as their business models require centralization;
  2. Superior user experience:
    Cryptonetworks still need to “10x” the user experience in order to overcome incumbents, who already have maximum economies of scale/network effects
  1. By launching as a distributed network, Libra is relying on the vulnerability of true cryptonetworks to radical decentralization’s bureaucratic inefficiencies — a half-measure that side-steps Facebook’s Innovator’s Dilemma (#2);
  2. By virtue of its combined scale and efficiency, Libra will not only achieve a great user experience for itself, but also foreclose on rivals achieving a 10x improvement over-and-above Libra (#3)

The Prisoner’s Dilemma Wedge

For Facebook, at worst, Libra’s bear-hug strategy promises to increase both the efficiency of their ads business and possibly the depth of their user engagement. While Libra isn’t fully decentralized/trustless/incentivized in such a way that crypto purists had envisioned, it does promise to be a compelling successor to today’s P2P platforms, in particular. That’s key, as discussed in “The Prisoner’s Dilemma Wedge”:

Question: “Who is the direct competitor in your own horizontal who makes your value proposition look strongest in a head-to-head comparison?

Answer: “PayPal

In juxtaposition to the PayPals of the world, who are still scrapping to add more merchants and more consumers to their platforms, Facebook has already added everyone on both sides of the two-sided marketplace. Today’s fintech paragons have great businesses here in the US, with a lot of growth still ahead, but they’re also the incumbents most vulnerable to Libra proliferation.

The zero marginal cost flow state

So, Facebook is well-endowed to gatecrash this competitive landscape. But, that said, Facebook’s large, captive audience does not guarantee Libra adoption. In fact, its mass could actively work against it. From “The Killer App and the App Killer”:

Stablecoin tradeoffs and false narratives

Honestly, other than having a seat at the table, it doesn’t look like there’s a whole lot in it for Libra’s members.

Percent of global sovereign debt with negative yield

The business of Libra wallets

That’s all about Libra itself — the currency and its consortium. Separately, there are questions about how Libra wallets will monetize for themselves and how they’ll compete for new users. So, let’s talk about wallets for a moment…

Fractional reserve banking

The “Libra Day” airdrop op

Albeit a higher-ROI/higher-LTV proposition than paying interest on deposits, due to retention rates, airdropping a lump sum into FB users’ wallets is a viable option to seed adoption — a la the early days of PayPal.

Operation Airdrop

The Fat Wallets/Protocols/Dapps Trilemma

Assuming this all works, nobody really knows where the most value will accrue. Will the key choke-point be the Libra currency, the Calibra wallet, or the apps built atop both of them?

  1. Dapps (e.g. Cryptokitties):
    An aggregator for each major use case, which users subscribe to based upon each dapp’s scalable governance model (kind of like Mastodon instances but not as innumerable).
  2. Wallets (e.g. Calibra, Coinbase):
    A trusted clearing house for user data — like keys, passwords, currency, tokens, reputation, social graphs, and interest graphs — which is not only an aggregator allowing users to control their own privacy and port their own data, but also a platform letting developers tap into a wealth of user-permissioned data.
Live look at Libra bear-hugging disruption

En brief

In sum, this all whittles down the laundry list of Libra’s professed value propositions until it’s reduced to a mere sustaining innovation — an incremental improvement in remittances and micropayments. Yet, Libra may also gives rise to some unintended consequences, like tax avoidance, that could predicate more of a disruptive innovation. The only real known-known here is that Facebook & Co are trying to bear-hug disruption. Beyond that, as with most innovations and disruptions, whether or not Libra is desirable really depends on who you are 😉

A working example of mutually-assured incentives

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Adventures in Consumer Technology

No IT Dept: You're On Your Own

Adventures in Consumer Technology

No IT Dept: You're On Your Own

Anthony Bardaro

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“Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away...” 👉 http://annotote.launchrock.com

Adventures in Consumer Technology

No IT Dept: You're On Your Own