This post was updated on May 29 2020. It is an excerpt of the book “Token Economy” and a revised version of the original chapter published in 2019. The new updated book chapter has the title “Libra & Celo” and outlines the newest developments around the Libra coalition and it’s new competitor “Celo.”
In June 2019, Facebook, a Web2-based social network with over 2 billion active users, announced a move into Web3. The media referred to this move as “Facebook launching a cryptocurrency.” The reality, however, is more complex, since Facebook is not only planning to launch a token but also a whole network, thereby creating their own infrastructure to manage that token. The white paper states that the Libra consortium will launch its own distributed ledger, which will manage a native token — Libra. The Calibra wallet will be the software with which users will be able to manage their Libra tokens, and potentially also other future tokens that the network or smart contracts in that network might issue. According to the white paper, Facebook users will be able to use Libra tokens for online payments using the Calibra wallet for “low to no” fees. The white paper indicates that Libra will be a stable token, which will be backed by a basket of various fiat currencies. Key elements of the Libra network, as announced in the 2019 white paper are:
Infrastructure, Consensus & Smart Contracts: Libra will run on a permissioned/federated distributed ledger that does not use a “chain of blocks” as a security mechanism. Only the members of the network can validate transactions. Security is provided by the fact that all members of the network are known and have entered legally binding contracts where bad actors can be prosecuted by law. The network can, therefore, use a more efficient consensus algorithm, LibraBFT, a fork of the “HotStuff” consensus protocol, which is a modified version of Practical Byzantine Fault Tolerance (BFT). The protocol offers smart contract capabilities. “Move” is the programming language that has been invented for the protocol. Similar to Ethereum, Libra smart contracts will require network payments (gas) for executing code. This means that all operations require payments of Libra tokens for network transaction fees, which will also be a source of income for validating nodes.
Governance of the Network: Initially the Libra Association, headquartered in Switzerland, had around 30 founding members, all established institutions ranging from traditional payment networks (Mastercard, Visa, Paypal) to Internet companies (Uber, Lyft, eBay) to blockchain companies (Xapo), VCs (Thrive Capital, Andreessen Horowitz), and NPO’s, such as Women’s World Banking and Mercy Corps. A supermajority of 2/3 would be required for protocol changes. The initial plan was to transition from a federated network (association) to a Proof-of-Stake–based public network within the first five years. Whether or not this roadmap is feasible remains to be seen.
On-chain Governance: Similar to Tezos, the protocol is subject to revision. Founding members of the Libra network will hold a second set of tokens, the Libra investment token, which grants voting rights in the network. Libra investment tokens are required to vote on governance changes of the protocol. Such governance changes, in the form of protocol updates, will be essential for (i) adding new members and (ii) transitioning from LibraBFT to a public Proof-of-Stake protocol.
Disposable Ledger: Similar to “Coda,” the ledger is disposable. Nodes only need to provide a proof of the last block to make sure they are interacting with a valid ledger. This is an important feature from a usability point of view, since historical data may, over time, grow beyond the amount that can be handled, in particular by small devices.
Collateralized Stable Token: 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 (read more: Part 3 — Token Economics). Interestingly, Libra is one of the very few stable token projects that has already announced what the reserve will do: invest into low-risk bonds to generate interest for costs and returns. The Calibra Wallet FAQ announced low transaction fees, but did not explain the economics of it. The question is whether they will be able to hold the promise at times of high load.
Privacy: 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 the same AML/KYC requirements.
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, and the fact that (ii) it will most likely have rigorous KYC/AML requirements. On the upside, the permissioned infrastructure allows for higher (i) scalability, and (ii) Facebook already has a user base of over 2 billion people, which will make tokens mass market compatible with what will likely be a user-friendly wallet, as Facebook has enough developer power to make much-needed wallet usability happen.
If implemented, the Libra network could become a fin-tech provider, and as such, a serious competitor for current financial service providers, which charge merchants and customers considerable remittance fees, as much as 2.5 percent or more on one transaction. Libra could furthermore threaten the existence of current money-transfer companies that charge even higher settlement fees, and which many immigrants all over the world use on a daily basis in order to send money to family members back in their home countries. 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 the network might not become as sovereign and decentralized as the Libra association claims that it will become in the long run. The Libra network is more likely an attempt of Facebook and the other federated members of the network to move into two new industries through the backdoor of Web3 wallets: digital identities and banking. Given the fact that 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 (read more: Part 4 — Basic Attention Token) or how Steemit is trying to incentivize contributions to the network (read more: Part 4 — Steemit).
The Libra announcements created a big media hype in 2019, but were not welcomed by most regulators worldwide and spurred considerable regulatory push back. In October 2019, PayPal, Visa, MasterCard, and Stripe dropped their support for the project, at least temporarily. Even Facebook announced that they would drop the development of the project if it failed to “make sufficient headway” with regulators, who seem to fear that the Libra token could be used for (i) illegal activities, (ii) become a shadow bank, (iii) privatize money, and also (iv) undermine user privacy.
In spite of this push back, the crypto space moved away from buzzwords like “blockchain” and “smart contracts” to the topic of tokens. The playground for super nerds, crypto-anarchists, and speculators officially took a big step toward tokenizing the economy. A study conducted by the Bank for International Settlements concluded that ever since the announcements of the Libra project, many central banks that were reluctant toward the issue of Central Bank Digital Currencies before are now investigating options of tokenizing their currencies, since Libra’s instant settlement would have been a considerable threat to the current global banking system. At the time of writing the second edition of this book, a few of the remaining members of the Libra federation, such as Anchorage, Bison Trails, Coinbase Ventures, Andreessen Horowitz, and Mercy Corps, announced that they would be part of “Celo Alliance.” With 50 founding members, Celo is a similar coalition to the Libra consortium, with the purpose to “deliver humanitarian aid, facilitate payments and enable microlending” with a token called “Celo Dollar” that is scheduled to launch in April 2020.
Roughly around the same time, in March 2020, Libra announced that the Calibra wallet would, at least temporarily, move away from the original idea of backing the Libra token with a basket of fiat currencies. Instead, the Libra federation announced that it is planning to launch different tokenized fiat currencies that can be managed with the Calibra wallet.
This post was updated on May 29 2020. It is an excerpt of the book “Token Economy” and a revised version of the original chapter published in 2019. The new updated book chapter has the title “Libra & Celo.”
References & Further Reading
- Castro, Miguel; Liskov, Barbara:“Practical Byzantine Fault Tolerance”, Proceedings of the Third Symposium on Operating Systems Design and Implementation, New Orleans, USA, February 1999: http://pmg.csail.mit.edu/papers/osdi99.pdf
- Dale, Brady: “This Blockchain Tosses Blocks: Naval, MetaStable Back Twist on Crypto ‘Cash’” May 9, 2018: https://www.coindesk.com/blockchain-tosses-blocks-naval-metastable-back-twist-crypto-cash
- Dale, Brady: “Libra White Paper Shows How Facebook Borrowed From Bitcoin and Ethereum”, Jun 18, 2019: https://www.coindesk.com/libra-white-paper-shows-how-facebook-borrowed-from-bitcoin-and-ethereum
- Kharif, Olga: “Members of Facebook’s Libra Are Making Contingency Plans,” Bloomberg, March, 11 2020, retrieved from: https://www.bloomberg.com/news/articles/2020-03-11/members-of-facebook-s-libra-are-making-contingency-plans
- Lopp, Jameson: “How Will Facebook’s Libra “Blockchain” Really Work? An expert guide to the social media company’s foray into cryptocurrency”, Jun 18, 2019: https://onezero.medium.com/thoughts-on-libra-blockchain-49b8f6c26372
- McConaghy, Trent: “Tokenize the Enterprise …And Melt It Into the Community. Rinse, Repeat”, Jun 6, 2017: https://medium.com/@trentmc0/tokenize-the-enterprise-23d51bafb536
- N.N.: “Ethereum Experts Share Their Facebook Libra Insights Developers on Facebook’s Libra blockchain, the white paper, and how to get testnet Libra coins”ConsenSys Jun 28 2019: https://media.consensys.net/ kauri-ethereum-experts-share-their-facebook-libra-experiences-8594b3d1239c
- N.N.: “Facebook’s Libra Token: What Blockchain Insiders are Saying Industry experts weigh in after Facebook announces entrance to blockchain space”, Cred, Jun 19, 2018: https://medium.com/@ihaveCred/facebooks-libra-token-what-blockchain-insiders-are-saying-f58e42fae412
- N.N.: “First Look: Libra An in-depth review of Facebook‘s long-anticipated entry into cryptocurrency”, Binance Research, June, 2019: https://info.binance.com/en/research/marketresearch/libra.htm
- N.N.: „Calibra: Customer Commitment“ https://scontent-ort2-1.xx.fbcdn.net/v/t39.2365-6/65083631_355528488499253_8415273665234468864_n.pdf?_nc_cat=106&_nc_ht=scontent-ort2-1.xx&oh=7385d8b3c1126ec3b5f76344a411a37f&oe=5D982AC3
- Spencer, Michael K.:,“Facebook Libra Backlash on Many Fronts”, Jun 19, 2019: https://medium.com/futuresin/facebook-libra-backlash-on-many-fronts-28fb75bf79e7
- Yin; Maofan; Malkhi, Dahlia; Reiter, Michael K.; Golan Gueta, Guy; Abraham, Ittai: “HotStuff: BFT Consensus in the Lens of Blockchain”, Submitted on 13 Mar 2018 (v1), last revised 5 Jun 2019: https://arxiv.org/abs/1803.05069
- Libra White Paper: https://developers.libra.org/docs/assets/papers/the-libra-blockchain.pdf
- Libra Code repository: https://github.com/libra/libra
- Celo: https://celo.org/alliance
- Coda: https://codaprotocol.com/
Token Economy, by Shermin Voshmgir, 2020
About the Author:Shermin Voshmgir is the Author of the Book “Token Economy“ the founder of Token Kitchen and BlockchainHub Berlin. In the past she was the director of the Research Institute for Cryptoeconomics at the Vienna University of Economics which she also co-founded. She was a curator of TheDAO (Decentralized Investment Fund), an advisor to Jolocom (Web3 Identity), Wunder (Tokenized Art) and the Estonian E-residency program. Shermin studied Information Systems Management at the Vienna University of Economics and film-making in Madrid. She is Austrian, with Iranian roots, and works on the intersection of technology, art & social science.
About the Book: This is the second edition of the book Token Economy originally published in June 2019. The basic structure of this second edition is the same as the first edition, with slightly updated content of existing chapters and four additional chapters: “User-Centric Identities,” “Privacy Tokens,” “Lending Tokens,” and How to Design a Token System and more focus on the Web3. 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. 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.