The rise of Libra casts light and shade (1/4) - the basic concepts

For years financial institutions have awaited and feared the attack of big techs as GAFA & Co. to their own domestic. Both technologically and financially it was assumed that big techs had capabilities to build much more advanced banks from the ground over night combined with an already large user base. Now with LibraCoin it is the first time that Facebook officially goes into financial services - but not with a classical account but with a cryptocurrency on their own. On Tuesday it was officially published with a website, a github incl. documentation and different whitepapers (Libra itself, technical whitepaper, „Move“ language and many more). 

Libra is finally public - but what do we know?

The rumors were out there for a while and we already see first comments from both financial and the crypto space. While there is rather curiosity in the financial service industry, I see a lot of negative comments from the crypto space. And I understand that as Facebook claims Libra to be a cryptocurrency, many people see technical design patterns that do not seem to fit that claim (while economical design patterns do fit it). Additionally there are still some rumors as most of the material isn’t studied or even clear yet. 

For this reason I tried to take a deeper look at all of those materials mentioned in order to provide a rather holistic view and analysis on Libra. As I started writing the article and dug deeper into Libra and its documentation, the article just got too long. So I will split it into four articles of which this is the first one covering the concept of Libra. In the second article I will cover the economic principles and implications of Libra. The third article will elaborate the technology behind it and its governance structure and in the last one i will provide a personal conclusion. So let's start with the basic concepts of Libra (out of my perspective).

1. Concept

The whitepaper presents some obvious facts that have to be acknowledged before going into detail. At first Libra will indeed be a crypto currency.

a) Libra wants to be a cryptocurrency within the existing financial system

You can like or dislike the structure etc. but it still is a crypto currency as we understand it today. While not stating that directly (as it wouldn't be good marketing) it is however not a stable coin (as it is not pegged directly to a currency, but rather a basket of assets - the libra reserve).

Different to most other cryptocurrencies Libra wants to be part within the existing regulatory environment:

„Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts to improve the effectiveness of anti-money laundering. We believe that collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, is the only way to ensure that a sustainable, secure and trusted framework underpins this new system.“

Additionally Libra also positions itself as a complement rather than a competitor to existing currencies (which ideologically differs from most other cryptocurrencies):

"Our goal is for Libra to exist alongside existing currencies. Since Libra will be global, the association decided not to develop its own monetary policy but to inherit the policies of the central banks represented in the basket. "

This may be what is already massively criticized by the crypto community. It is not an alternative to the financial system as cypher punks aimed at, but a disruption within the existing financial structure and also cooperating with it (in terms of the reserve). And when Satoshi read(s) that maybe the soon at most adapted cryptocurrency wants to "inherit" the policies of the central banks - he/they'd turn his/their (hopefully not yet existing) grave.

Can you combine such opposing ideas in one concept?

This in total is kind of an innovation within the industry: being part of the financial system (not as e.g. Bitcoin), but still not a stablecoin (as e.g. Tether). It is the wish to create something independent (own currency) while staying in the system (pegged to reserve). But with the latter it is still somehow dependent again. I will try to show where I see a logical conflict here:

• Libra wants to be independent as a own currency
• however, to provide stability the value of Libra is dependent on the reserve
• the reserve however consists of FIAT and low-risk securities
• so the value of Libra is directly connected to FIAT / securities
• So Libra after all is not so independent again

While Bitcoin is completely independent from central bank policy (that was actually the idea), our cash on ledger solution for example is completely dependent on central bank policy (as it is a currency, e.g. EUR, on DLT). Libra wants to be both somehow. This is a conflict that we will see later on again.

By imposing to be a new currency, Libra also depends on user acceptance as it cannot rely on the governmental driven acceptance of existing currencies, though:

„The unit of currency is called “Libra.” Libra will need to be accepted in many places and easy to access for those who want to use it. In other words, people need to have confidence that they can use Libra and that its value will remain relatively stable over time. “

And this is what they need the reserve for (again). The reserve will provide trust that it somehow is still connected to the existing financial world, to make it tradable independently of it. It is a nice idea and we will see if it works out, but it bears an internal conflict.

b) The technical "we can do it better" - Libra is a whole new infrastructure

As part of the publication of Libra everybody was very curious on which technological basis Facebook will put it. Know we know: they not only created a "new blockchain framework" (however no blocks but single transaction and no chain but tree, so again it's better to call it DLT).

It seems that it does depend on previous implementations of other framework (as quorum relies on Ethereum), but it seems there seem to be some architectural parallels to Ethereum, somehow Corda and maybe even Sovrin (however I don't see not much parallels to Bitcoin while lot of people do drawings about that).

The new framework uses an own newly created script language for smart contracts called "Move". It has a stateless design that does not allow assets to be copied or cloned (which is quite important within a DLT world). Additionally it seems to be a language that focuses on prevention of unintended issues within smart contracts as one has to specifically declare which variables are influenced by the contract:

„[...] and creates a language that makes it inherently easier to write code that fulfills the author’s intent“

This seems to be a good approach using the experiences made with solidity and the lot of issues due to being (out of my perspective) an unsuitable language for highly scaled smart contracts.

I won't go into detail here, because this will be part of the technical analysis, but the concept behind here is that Libra/Facebook did not want to integrate into an existing technical infrastructure / ecosystem. Libra claims that the need for another framework comes from the technical need for scalability, low-latency and security which current frameworks could not provide in the quality they wanted. But I am not sure if there may be no other rationale behind this. At least the libraries etc. are open source and development is governed by the Libra Foundation (interesting approach).

c) A permissioned system that aims to get permissionless

As Libra bases on an own new DLT framework, one main point is that Libra will use validators that do a BFT (Byzantine Fault Tolerant) consensus with a resilience to ⅓ being malicious or failing:

In a “permissioned blockchain,” access is granted to run a validator node. In that sense, Libra will start as a permissioned blockchain. To ensure that Libra is truly open and always operates in the best interest of its users, our ambition is for the Libra network to become permissionless. 

Right now, I would agree that (amongst other issues) this is the only solution to provide massive transactions at high speed with low costs.

Libra claims that it will aim to get permissionless. For this move (get it? 😁) Libra will have to implement another consensus mechanism, as BFT needs validators (or call them as you like). Libra here aims at moving to a proof of stake where the foundation members due to their high investments still validate somehow (a compromise again). However the shift from BFT within a permissioned system to a permissionless system with proof-of-stake seems very difficult and a long way to go (for this reasons they talk of 5 years maybe).

d) Everything at Libra cries out at integration

The marketing or maybe the vision, as well, of Libra is financial inclusion. This can only work if you integrate into both the lives of the people as well as into existing financial systems. People will have to be easily abled to register and use Libra. For this reason they are integrating it via Calibra (see below) and Facebook has proven to provide good usability and lay foundations for mass adoption. Integrating into existing financial and also legal systems may be harder. They want to do proper KYC and AML within countries with high financial exclusion - that will be difficult (I go deeper into that in the financial part). But then you also need to integrate technically and here I see a logical flaw. Right now I don't see an institutionalized way of integrating into existing DLT infrastructure. The marketing / business concept of integration does not really match with the technical idea of building one's one.

e) Governance is separated from operations but still Facebook is in the lead

As in all permissioned chains need a doorman, somebody to give access - call it as you like. Here it is called validator and there are many of them which are also part of the Libra foundation and provide a backing to the reserve of USD 10m minimum.

„The association’s membership is formed from the network of validator nodes that operate the Libra Blockchain.“

But in the current setting, Facebook is still in the lead at Libra. This means that the distributed company approach is a goal, not something achieved yet - especially for the governance structure and not only for the technical validation.

For operations Facebook has build an own daughter company Calibra which will build the wallet infrastructure and integrate into WhatsApp and Facebook Messenger. Again this of course is 100% driven by Facebook. So even if you try to split up the power within the Libra Foundation, if Calibra is the implementor right now and 100% Facebook owned, it still has some central power.

So much about the most important and most basic concepts of Libra in my opinion. In the following article I will take a deeper look at the economics of Libra and especially what unintended implications it might have on monetary stability and why access to digital money in unstable states might lead to economic discrimination within one economy.

Feel free to share & discuss! And stay tuned.