inamerrata

Hot-take on Facebook and friends’ cryptocurrency. Disclaimer: I work at Xapo, and Xapo’s a founding member of the Libra Association; thoughts are my own, and are only based on public information.

So, first, the stated goal is “Libra is a simple global currency and financial infrastructure that empowers billions of people”. That’s pretty similar to Xapo’s mission (“We created Xapo to give everyone the freedom and security to be more and do more with their money” eg). It’s also something that Bitcoin per-se isn’t really good at: the famous “7 transactions per second” limit means 220 million transactions per year, which doesn’t seem like it really scales to billions of people for instance. And likewise Libra’s monetary policy (backed by a basked of “bank deposits and short-term government securities”) isn’t very interesting compared to just holding funds in USD, EUR, AUD or similar; but probably is pretty compelling compared to holding Bolivars, Zimbabwe dollars or Argentinian pesos. That could make it a death-knell for badly managed central banks in just a few years, which could be pretty interesting.

It doesn’t sound very censorship resistant — if you want to use it to buy hookers or guns or support political causes unpopular with Silicon Valley, you’re probably out of luck. Likewise if you want to pay for a VPN out of China, or similar. It seems like all of the association members will have access to all the transactions, and there’ll only be at most a few hundred megacorps to lean on to fully deanonymise everyone, so while it’s not a positive for shady central banks, I think it’s totally compatible with fascist police states and oppressing freedom of association/speech/thought. Not sure if it’s better or worse than today with almost everything done via credit card or bank transfers. Certainly much worse than cash (or lightning).

The amazing thing about Bitcoin is that there wasn’t a baked in rule along the lines of “Satoshi gets all the moneys” — instead Satoshi just ran the software in the same way any other early adopter could, and all the early adopters benefited essentially equally. So one thing that’s always interesting to me is to see the ways in which new cryptocurrencies have their rules tilted to favour the founders. In this case it looks like there’s three ways: (1) founders get to run validators which means they get to see all the data, control access to it, and (presumably) be paid in “gas” for the privilege; (2) the backing funds are invested in interest-bearing instruments, and the founders collect the interest, while Libra holders bear the investment risk; (3) the backing funds aren’t accessible to most users, but instead only to “authorized resellers” who will presumably charge a spread; these resellers are authorised by the association, and presumably will charge the resellers a membership fee for the privilege.

The consensus model they use is Byzantine consensus, rather than proof-of-work. So it’s immediately final (in much the same way as the Liquid sidechain is), rather than forcing people to have to worry about reorgs of 6 blocks or 100 blocks or 1000 blocks, etc. But that assumes that more than 2/3rds or players are honest — with 28 initial validators, if you had 10 nodes under your control, and could split the remaining 18 honest nodes into two groups of 9, you could collaborate with one group to create one history, and the other group to create a different history, and induce double spends. Essentially the coin’s security becomes vulnerable to a 34% attack, rather than Bitcoin’s nominal 51% attack vulnerability. There’s nothing particularly wrong with that, it just means you need to be careful not to let more than a third of nodes be vulnerable to attack. Probably not good to suggest “For organizations that would like to run a validator node via a cloud service provider …” on your website though.

Unlike proof-of-work, Byzantine consensus doesn’t scale in the number of validators. From their whitepaper: “Our goal was to choose a protocol that would initially support at least 100 validators and would be able to evolve over time to support 500–1,000 validators”. But that’s a feature not a bug if you want to make a profit by being part of a small oligopoly, though. I’m a little dubious about how reliable you can realistically make it too — to have a transaction confirm, 2/3rds of the global set of validators have to see it, so losing links between countries means entire country’s ecommerce systems become unavailable, and if there’s breaks or even just slow-downs between significant subsets of validators, potentially the entire currency becomes unavailable. Bitcoin is small enough that you can route around this via satellite links or SMS or similar, but Libra needs to be able to reliably throw lots of data around.

The whitepaper claims “The association does not set a monetary policy.” which seems a bit disingenuous to me. They’ll need to decide what will make up the basket that backs each Libra coin, and that’s a monetary policy. They also note they’ll have “The ability to customize the Libra coin contract using Move” which “allows the definition of this scheme without any modifications to the underlying protocol or the software that implements it. Additional functionality can be created, such as requiring multiple signatures to mint currency and creating limited-quantity keys to increase security”. There’s a few interesting cases bound up somewhere in there: what happens when the backing reserve loses value — eg, a country renegs on its bonds, or there’s a huge loss in value in one of the currencies, or one of the banks fails and can’t redeem its deposits? They’ve already covered what happens if the reserve gains value: the founders take it as profit. If that works out okay once it happens by accident, that opens up the option of “going off the fiat standard” and just having the coin be issued in its own right, rather than due to changes in a bank balance somewhere. It seems unlikely to me that the economists and MBAs that’ll be running the foundation eventually will be able to resist that temptation once it arises, and their shareholders may even consider them legal beholden to succumb to it.

The Move language doesn’t seem very interesting; it uses accounts rather than coins, will include a “standard library” for things like sha3 rather than having them as opcodes, and generally seems like an incremental simplification from where Ethereum is. Having a smallish group of validators means that upgrades to the language should be relatively easy to coordinate, so I’d expect it to seem cheap and powerful compared to Bitcoin script or Ethereum.

Like I said, I think the macroeconomic impact on bad central banks is probably pretty positive — it either forces them to match world best practices, or be obsoleted. For central banks that are in the basket, it’s not clear to me what the consequences are: if, say, Australians are holding Libra coins instead of AUD, and the Reserve Bank wants to stimulate the economy by printing money/dropping rates to make everyone feel richer, then it seems like there’s two possibilities: if goods remain priced in AUD, despite people holding their spending money in Libra, then prices immediately seem cheaper, and people buy more stuff, and the Reserve Bank is happy; or, what seems more likely, goods become priced in Libra coin as well because that’s what people have in their accounts, and it’s stable and international and cool, and the Reserve Bank loses the ability to counteract recessions. But that assumes Libra is used a lot by people with first-world currencies, rather than the target audience of the unbanked. And it’s not clear that makes sense: it doesn’t pay interest (the founders collect that), it’s vulnerable to foreign currency shocks, and there’s maybe other drawbacks (reliability, privacy concerns, cost/speed, hassles of KYC/AML procedures). You could trivially get around this by having actual stable coins on the Libre platform, ie having an “AUD” coin instead of a Libracoin, but still on the Libra blockchain, with the stable coin backed by a single-currency reserve, rather than a basket reserve.

Good for Bitcoin? I don’t think Libra really competes with Bitcoin — Bitcoin’s a scarce store of value with peer-to-peer validation and permissionless ledger additions; Libra isn’t scarce, its decentralisation is limited to the association members which is in turn limited due to the technology in use, and it’s got permissions at every layer. It seems like, in a world where Bitcoin is wildly successful, that Libra could easily add Bitcoin to its reserve basket, and perhaps that could bridge the gap between the two feature sets: Bitcoin ensures that there’s no hidden inflation where central banks give free money to their cronies, while Libra gives access to Bitcoin as a store of value to billions of people. If Libra takes the fight for sounder-money to third-world governments, that perhaps just makes it easier for Bitcoin to be the next step after that. If Libra looks like the bigger immediate threat, being both new and having well known people to subpoena, while Bitcoin looks like old news that’s reasonably well understood, maybe that means good things for “permissionless innovation” in the Bitcoin space over the next little while. Will be interesting to see how India and Turkey and similar places react — places where the local currency looks precarious but isn’t already a basketcase. If they either don’t try to block Libra, or try but can’t, that’s a really good sign for people being better able to save and control their wealth globally in future, which is definitely good for Bitcoin, while if it does get blocked, that’s probably not a good sign for Libra’s mission.

Better than the alternatives? If you consider this as just an industry association trying to enter underserviced markets to make more moneys, does it make sense? “Decentralised consensus” is a useful organising principle to let the association keep each other honest, and in finance you probably want to keep a permanent audit trail anyway, and the “blockchain” they’ve specified doesn’t seem like it’s much more than that. So that point of view seems to work to me. Seems kind of a weird thing for Facebook to be leading, though.

So yeah; kind of interesting, but not for any of the reasons Bitcoin is interesting. Potential positives for adoption in the third-world; but just another payment method for the first-world. Lots of rent-seeking opportunities, but less harmful seeming than that of third-world central banks. The tech seems fine, but isn’t crazy interesting.