Libra, Libra Everywhere

The Facebook crypto dominates the crypto news

The biggest story of last week, the Facebook announcement of stablecoin Libra is an even bigger story now as details start to come to light. We looked at some initial details in last week’s report and now we know even more.

Go down to the technical details to get the link to the Libra Project Whitepaper. Here’s what we know so far, some of this is a repeat from last week:

  • Using a proof of stake model

  • Will be a stablecoin whose value is pegged to a basket of Western currencies and low risk securities like US Gov’t Bonds

  • They will issue a security token separate from the Libra coin called the Libra Investment token that the validators will purchase to help run the network (with their $10 million buy-in) and will be available to accredited investors too (eventually)

  • Many of the validators have been named already and they include NGOs like Kiva, who is not having to pay the $10 million but will be staking with a validator

  • Their wallet will be a custodial wallet, like when you leave your coins at Coinbase instead of moving them to a wallet and it’s called Calibra.

  • Libra will be open source under Apache 2.0 and its consensus is BFT (Byzantine Fault Tolerance) like Tendermint

Now we will dig a little deeper since we have much more information than we had a week ago……

Technical Features of Libra

I’m not technical although I try to understand at least some of the tech backbone of why Bitcoin is the way it is. Here are 2 of my go-to’s for the tech side of things.

Jameson Lopp, Bitcoin core contributor and CTO of CasaHODL is one of the best at explaining technical aspects of Bitcoin and blockchains. Here’s his tweet with a simple explanation that Libra is not a blockchain with a link to a more detailed Medium article about the project.

The Medium article outlines some other features of the project including

  • Why FB chose a Proof of Stake system

  • How they are starting as a permissioned system and hoping to move it to permissionless

  • FB’s development of their own language for smart contract protocols

  • How Libra’s data structure is more like Ripple or Ethereum than Bitcoin

  • What the Move language is and how validators will use it

  • Why Libra is not really a blockchain due to its different consensus algorithm (yes I know this is technical but some of you really like this stuff)

Another is Nic Carter of Castle Island Ventures, whose Medium article goes into trade-offs of cryptocurrency design.

Nic’s article addresses some of these trade-offs Bitcoin has made in its design, almost always opting for the more difficult short term but more stable long term choice. Nic believes Facebook will make many of the choices Bitcoin did not make which will make it very different in both its design and its use.

  • Managed/unmanaged exchange rates: Bitcoin is unmanaged and can be volatile. Central bankers around the world discount it as a ‘non-currency’ for this reason. As a stablecoin, price stability and an easily managed exchange rate will be important to Libra right out of the gate

  • Capped/uncapped supply: Bitcoin is capped at 21 million issued. No one expects a cap on Libra and, if FB follows through with its audit of assets, they will have to acquire more of their basket of currencies and securities to issue more Libra coins with no cap on the supply

  • Monetary policy management: Bitcoin has a predetermined monetary policy based on its supply (Litecoin does too). We expect FB to have a discretionary policy that benefits them and their validators

It’s a good article with some technicals and some economics in it and both this one and Lopp’s are worth a read.

Here are the technical papers if you want to read them for yourself:

  1. The Libra Blockchain WhitePaper

  2. The Libra BFT Consensus Algorithm

  3. The Move Language and Smart Contract Protocol

Does this kind of info help you make your crypto-investment decisions? You can get this every week in your email for much less than the cost of your favorite draft beer.

Libra’s Competition

Given all these differences from Bitcoin, is it really a competitor to Bitcoin? Most of us in the crypto-economy believe it isn’t.

One of Bitcoin’s biggest activists and educators, Andreas Antonopoulous describes who he thinks is threatened by Libra.

Banking has had the monopoly on holding onto our money and being the entryway into the financial system for centuries. Now that monopoly is on shakier ground. Especially in a country like Venezuela or Zimbabwe, FB is a more stable, more trusted resource than a local bank. For the West, that’s less true but banks have been doing such a bad job for customers that projects like Libra can try to come in and take what would have been bank deposits instead.

Larry Cermak of The Block outlines Libra’s goal.

These 2 issues mean that Ripple is a competitor for this coin. Retail and central banks are competitors for this coin. Some emerging market currencies are competitors for this coin and so is SWIFT, which is used for international bank transfers.

The Good and the Bad from the Cryptoeconomy

The Good

Erik Voorhees, CEO of Shapeshift, outlines a number of the project’s good qualities in an excellent thread. Here are 2 of the finer points.

I totally agree with this idea. It’s why I think this is so bullish for Bitcoin.

By backing with numerous assets, Voorhees argues Libra could be stronger than the USD since the USD is only one of the assets backing the stablecoin, making it a reserve currency candidate when the dollar falters.

Udi Wertheimer, prominent coder, podcaster and devil’s advocate for cryptocurrencies adds a couple of good things he sees from Libra including

I agree with this completely. Easier to comply if the exchange token and the security token are kept separate.

Use of existing exchanges is good for the cryptoeconomy and good for FB too.

This will ease education and adoption if key management is not necessary.

And as we covered last week, those in failed states, weak economies or with hyperinflated currencies will jump at the chance to buy this stablecoin. It can be huge for the unbanked.

The Bad

It seems like the bads are pretty obvious given the size and power of Facebook. Udi says it very plainly.

And as Udi and Lopp above have said, it’s not really a blockchain given that the data is not organized into blocks but organized using messaging from the BFT consensus algorithm.

Voorhees again…..

Definitely not censorship resistant.

Not decentralized if they can block transactions.

This is all about seigniorage, the claim that governments have to be only issuer of currency and to do so at a profit. It’s also about regulations at home and across borders.

Will Libra transactions be taxed like Bitcoin?

James Foust, research fellow at Coincenter is one of the first to address the taxable nature of Libra and if it will be similar here in the US to Bitcoin and other cryptocurrencies.

One of the more interesting things in this thread is that he believes Libra will be lumped in with Bitcoin and others as a CVC. This is convertible virtual currency meaning that all the same rules will apply. Foust believes that Libra, like Bitcoin, will NOT be eligible for the de minimis exemption that foreign currency transactions have meaning that even very small transactions will have to be documented, be taxable and monitored and paid by Libra users in the US.

It’s possible that Facebook’s influence on the taxing and compliance for cryptocurrencies can help OR hurt the crypto-economy. One thing is for certain. More people will be aware of what cryptocurrencies are and how they are regulated and this is a good thing.

Conclusion….for now

Based on what we’ve seen the last 2 weeks, we think for failed states, hyper-inflated currencies, and some other emerging markets that Facebook’s Libra coin can act like a quasi-bank account for them. They will be happy to have it and it will serve them well against the other options they have.

Convincing the West to use it will be more difficult. I expect FB to put lots of money and effort into education about cryptocurrencies as well as what money is and moving money across borders without the help of banks.

Separating the security from the Libra token is very smart. FB has made some other good decisions too, leading many of us to think like Erik Voorhees said above that FB will serve the mass market AND be a bridge to decentralized finance.

And like I thought before, even moreso now, this is tremendously bullish for Bitcoin. If anything, I would not buy FB stock and I’d buy more Bitcoin. FB will do more to educate people about crypto than the entire crypto-economy has been able to so far. Many will use and stay with Libra, and others will decide they want something better and we welcome them with open arms. FB = mass adoption.