This is a sneak-peak into the book Token Economy, written by Shermin Voshmgir, 2019
It seems that gloves are off for established companies to enter the “Token Economy”. What has so far been a playground for super nerds, crypto-anarchists, and speculators has now officially taken its next big step. We have finally moved away from buzzwords like “blockchain” and “smart contracts” with companies and governments playing around sandboxes with prototypes. The game is becoming more serious as tech giants like Facebook are starting to tokenize the economy.
Facebook, a Web2 based social network with almost 2.4 billion active users, has recently announced a move into the Web3. The media is referring to this move as “Facebook launching a cryptocurrency”. The reality is more complex. Facebook is planning to launch its own distributed ledger, which will manage a native token — Libra — and the Calibra wallet. It is to be assumed that through the backdoor of this wallet the company is making a move to rule the future of providing global “sovereign digital identities”. Facebook users will be able to use Libra Tokens for online purchases and P2P remittances through that wallet for “low to no” fees. The whitepaper indicates that Libra, a stable token, which is backed by various fiat currencies.
The token could be a serious competition for fin-tech providers and credit card companies, which charge merchants as much as 2.5 percent or more on purchases. It could furthermore compete with money transfer companies that many immigrants all over the world use to send funds to friends and family in their home countries. Key elements of the Libra Network:
Libra runs on a permissioned aka federated distributed ledger, which does not use a “chain of blocks” as a security mechanism. Security is provided by legal contracts between known actors of that federated network. A time-stamped chain of blocks, however, is very important with permissionless networks like Bitcoin or Ethereum, where validators can join and leave the network any time, in a permissionless fashion.
Since Libra runs a permissioned system, it can use a more efficient consensus algorithm that doesn’t need to batch transactions because the transaction history is much less likely to be manipulated in a setup of trusted network actors. Libra uses a tweaked version of Practical Byzantine Fault Tolerance (BFT), a seasoned and well-known algorithm. LibraBFT seems to be a fork of the HotStuff consensus protocol.
- Smart Contracts
The Libra network is designed with smart contract capabilities. “Move” is the native smart contracting language. The question of whether it makes sense to create a new language is unresolved. It is still unclear how feature-rich and developer-friendly the language is. Both aspects would influence issues of smart contract security and network resilience. Similar to Ethereum, Libra smart contracts will require network payments for running code. This means that all operations require payment of Libra as network transaction fees.
- Governance of the Network
As a permissioned ledger, only members of the network can validate transactions. “Founding Members are organizations with established reputations, making it unlikely that they would act maliciously,” the white paper states. These entities range from traditional payment networks (Mastercard, Visa) to internet and gig-economy giants (eBay, Lyft) to blockchain natives (Xapo) to VCs (Andreessen Horowitz, Thrive Capital)”. Other participating node range from NPOs to Paypal, Uber, Women’s World Banking, Mercy Corps, etc. The Libra Association, headquartered in Geneva, Switzerland with almost 30 stakeholders so far. A supermajority of 2/3 is required to make changes. If validators vote on changes to the validator set, this could potentially result in “long-range attacks”. The question is whether an attacker could write a new ledger history, if a sufficient threshold of founding members’ private keys is compromised, and if other nodes would accept it. Apparently, there is the plan to transition from Association (federation) to a Proof-of-Stake based public network within the first 5 years.
The Calibra Wallet FAQ announces low transaction fees. The question is whether they can hold the promise at times of high load.
- Will Libra really be open to developers?
In their plan to transition to a permissionless network they are planning to make the network open to everyone: “any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers”.
- Collateralized Stable Token — Libra
The Libra token is not a “purpose-driven token” minted upon proof-of-contribution to the network. It is a simple asset-collateralized stable token. Similar to other asset-collateralized stable tokens like Tether, tokens will be issued and burned on a regular basis, to respond to demand shifts for its reserve, and keep the exchange rate stable. This is a prerequisite for any token to be useful as a medium of exchange, and a big upside to other tokens like Bitcoin, that do not have inbuilt price-stability mechanisms.
In the white paper it is stated that “The Libra protocol does not link accounts to a real-world identity. A user is free to create multiple accounts by generating multiple key-pairs. Accounts controlled by the same user have no inherent link to each other.” This pseudonymity for users is similar to how Bitcoin and Ethereum work. The Calibra wallet, however, requires that all users will be verified via government-issued ID. It is unclear if one can run other wallet applications on the Libra network that don’t abide by same AML/KYC requirements.
- On-chain Governance
Similar to Tezos the protocol it is subject to revision. Founding members hold Libra investment tokens, which give them voting rights on the network. They can use them to vote on governance changes. Updates will be essential for adding new members and transitioning from LibraBFT to Proof-of-Stake.
- Disposable Ledger
Similar to Coda the ledger is disposable. Users only need to hold a proof of the last block, which they can easily check on a lean device like a smartphone, to make sure they are interacting with a valid ledger. This is an important feature from a usability pov, since historical data may over time grow beyond the amount that can be handled by an individual server, or small device. From a security pov, this is a very different issue.
- Developer Team
The Libra white paper is signed by over fifty people from all over the world, among others from the field of computer science and artificial intelligence: Christian Catalini, Ben Maurer, George Danezis, François Garillot, Ramnik Arora, and many more.
The Libra token cannot be compared to Bitcoin or other native protocol tokens of permissionless blockchain networks as it (i) builds on a federated solution, which means that it is not permissionless; (ii) most likely will have rigorous KYC/AML requirements. On an upside, the permissioned infrastructure allows for higher (i) scalability; (ii) facebook already has a user base of over 2 billion people, which will make tokens mass-market compatible with probably a user-friendly wallet, as Facebook has enough developer power to make much-needed wallet usability happen. Furthermore, for better or worse, Libra has the potential to become a shadow bank, at least to the 2 Billion unbanked worldwide. The problem is that it might not be as sovereign as the libra association pretends it will become in the long run. This is more likely an attempt to move into two new industries through the backdoor of Web3 wallets — identities and banking. Given the fact the Facebook, next to Google, is the biggest ad-tech provider, the Libra token could furthermore be used to incentivize future advertising consumption, similar to what the Basic Attention Token (BAT) is trying to do, reversing the roles in a highly intermediated advertising industry.
- Libra White Paper: https://developers.libra.org/docs/assets/papers/the-libra-blockchain.pdf
- Code repository: https://github.com/libra/libra
- “Tokenize the Enterprise …And Melt It Into the Community. Rinse, Repeat”, Trent McConaghy, Jun 6, 2017: https://medium.com/@trentmc0/tokenize-the-enterprise-23d51bafb536
- “How Will Facebook’s Libra “Blockchain” Really Work? An expert guide to the social media company’s foray into cryptocurrency”, Jameson Lopp, Jun 18, 2019: https://onezero.medium.com/thoughts-on-libra-blockchain-49b8f6c26372
- “Libra White Paper Shows How Facebook Borrowed From Bitcoin and Ethereum”, Brady Dale, Jun 18, 2019: https://www.coindesk.com/libra-white-paper-shows-how-facebook-borrowed-from-bitcoin-and-ethereum
- “Facebook’s Libra Token: What Blockchain Insiders are Saying Industry experts weigh in after Facebook announces entrance to blockchain space”, Jun 19, 2018: https://medium.com/@ihaveCred/facebooks-libra-token-what-blockchain-insiders-are-saying-f58e42fae412
- Facebook’s Libra – the Question of Decentralisation – https://blog.kalinoff.com/facebooks-libra-the-question-of-decentralisation/
- “Facebook Libra Backlash on Many Fronts”, Michael K. Spencer, Jun 19, 2019: https://medium.com/futuresin/facebook-libra-backlash-on-many-fronts-28fb75bf79e7
- Binance Research, June, 2019: https://info.binance.com/en/research/marketresearch/libra.html
- “Democratic Rep. Maxine Waters”, June 19th, 2019: https://www.cnbc.com/2019/06/18/rep-maxine-waters-facebook-should-stop-work-on-libra-cryptocurrency.html
Full text and high resultion graphics available as paperback & ebook: Token Economy, by Shermin Voshmgir, 2019
About the Author: Shermin Voshmgir is the Author of the Book “Token Economy“. She is the director of the Research Institute for Cryptoconomics at the Vienna University of Economics, and the founder of BlockchainHub Berlin. In the past, she was a curator of TheDAO, and advisor to various startups like Jolocom, Wunder and the Estonian E-residency program. In addition to her studies at the Vienna University of Economics, she studied film and drama in Madrid. Her past work experience ranges from Internet startups, research & art. She is Austrian, with Iranian roots, and lives between Vienna and Berlin.
About the Book: Blockchains & smart contracts have made it easy for anyone to create a token with just a few lines of code. They can represent anything from an asset to an access right, like gold, diamonds, a fraction of a Picasso painting or an entry ticket to a concert. Tokens could also be used to reward social media contributions, incentivize the reduction of CO2 emissions, or even ones attention for watching an ad. While it has become easy to create a token, which is collectively managed by a public infrastructure like a blockchain, the understanding of how to apply these tokens is still vague. The book refers to tokens, instead of cryptocurrencies, and explains why the term “token” is the more accurate term, as many of the tokens have never been designed with the purpose to represent a currency. However, since tokens do have similarities to fiat currencies, the role of money as a medium of exchange is analyzed at length in this book. This book gives an overview of the mechanisms and state of blockchain, the socio-economic implications of tokens, and deep dives into selected tokens use cases: Basic Attention Token, Steemit, Token Curated Registries (TCRs), purpose-driven tokens, stable tokens, asset tokens, fractional ownership tokens, Libra & Calibra (Facebook), and many more.