How I Learned To Stop Worrying And Love Libra
By Josh Arteaga on ALTCOIN MAGAZINE
Facebook recently published their Libra white paper to much criticism, fear, trolling and hype. Much of this has centered around the lack of decentralization in their initial design. Contrary to many of the more popular startups Libra will be a permissioned network tightly controlled by a group of 100 participants each contributing at least $10M to play. The white paper proposed this mission for the organization:
Libra’s mission is to enable simple global currency and financial infrastructure that empowers billions of people.
This is the end goal. The project has not started with the features and philosophy to meet this goal day one, nor does the white paper imply that it does. This article will review the genesis state and analyze what must happen for Libra to meet its mission.
The Consortium
First in most people’s mind is the control over Libra. Libra is being spun out from Facebook into the Libra Association, a not-for-profit organization. As anyone who follows politics will tell you simple NFP status does not make an organization altruistic. This association will be governed by up to 100 organizations in the next year. So far they are:
Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
Telecommunications: Iliad, Vodafone Group
Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
A quick perusal has alarmed much of the crypto community with control over this entity being given to large tech companies not known for their inclusion and diversity. The rest of the list reads like a who’s who of venture capitalists, telecoms and financial services companies. There is some representation of organizations whose sole mission is increasing the social welfare of different communities, but it is a minority.
These are all valid concerns, but a capitalist parent doesn't require the child to capture all available consumer welfare. Many of our technical success stories are companies that lowered the per transaction expense of information or services and gave consumers a greater surplus while making greater profits by scale. That is exactly how the mission statement aligns with the capitalist backers. The future is a global scale unlike anything we’ve seen and it will provide a greater consumer surplus than the naysayers predict.
Calibra Requires KYC
Like most solutions in the market, the Calibra wallet requires to know your customer validation when signing up. This is a problem for much of the 1.7 billion unbanked. Banks and other institutions that must abide by KYC have developed a mechanism to exclude many of the world’s poor from financial services. Often leading to higher fees for those consumers to cash checks, make purchases, and perform other financial transactions. At launch, Calibra will be no different.
However, the white paper clearly states that they believe identity management will be a large part of their future. Libra will launch serving primarily upper and upper-middle class consumers, but plans to build out enough identity tools that previously excluded consumers are able to meet KYC. This is possible precisely because of prominent companies running the association. These are big companies with big contributions to their respective economies and even bigger data. There may be a lot of skepticism at their intent, but one must agree that they have influence, a lot of influence.
Transition To Permissionless
At launch, Libra will run a variant of Byzantine Fault Tolerance. This will be governed by the trusted companies listed above. This has met the most criticism. It flies in the face of all our decentralized psyches. However, let's imagine the network launching as a single token¹ delegated Proof of Stake. Each company above gets some portion of the tokens and locks them up. Then they put some tokens in the market. These are gobbled up by investors and locked. Now there is some portion of tokens that go into the market. These likely represent just a sliver of tokens minted, each one 100% backed by capital. It doesn’t work.
If one goal is to provide is generally stable cryptocurrency there are two real options.
1 — Create a reserve where each token can be traded for fiat or other assets
2 — Require over capitalization from consumers, like MakerDAO
Algorithmic mechanisms simply haven’t worked to provide reasonable stability and could easily be ruled security by the SEC. Libra needs to be used and not held. They couldn’t launch with a proof of stake model. They will scale with permissioned BFT and once at a scale they will fork to a permissionless model. In fact, the smaller consortium could make this transition easier than with Ethereum.
Fees On Users
A major roadblock for most consumers to acquiring crypto is the rather onerous process of going through an exchange. Often these require a significant fee. If users are expected to transact in Libra they’ll have to find a way around this. Otherwise, we’d be paying a fee to acquire our Libra and then make a payment we could otherwise make with a credit card and no fee. This becomes even more difficult for an unbanked individual that typically transacts in fiat. Libra is targeting users willing to pay some fees and go through these processes in order to get a user base.
Once they lobby our governments and find a workable KYC solution we’ll see a greater way to onboard users. By this time, expect that Libra will have a banking partner. This partner will accept deposits and exchange directly into Libra. The banks are shying away because there’s too great of a risk with KYC and AML (anti-money laundering). If the Libra Association has made headway in compliance, a bank will be there. This will be the inflection moment where Libra goes from servicing the privileged to a global currency.
Conclusion
There’s a lot to dislike about Libra. The consortium of companies. The centralized control. The permissioned blockchain. Only supporting the Calibra wallet and its KYC requirement. The apparent gap between the mission and reality. Put simply, they had to start somewhere. Unlike a startup, many of these companies still have to report to shareholders. A noble but failed initiative could have severe repercussions for them. Also unlike a startup, these companies have deep global connections and deep pockets to scale and change.
Launching Libra is a step forward. If they keep their eyes on the mission statement, it could truly scale globally and deliver a huge amount of consumer welfare. We’ve seen this with open source software. We could see it again with Libra.
1 — The current design is a two token system with the cryptocurrency Libra and the Libra Investment Token. This complicates matters because the Libra Investment Token gives the owner rights to a share of fiat based interest. I assume to go permissionless they’ll have to go to a single token with an inflation mechanism to generate additional Libra for the stakers.
Thanks to Justine Humenansky for feedback and thoughts.
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