“We are like dwarfs sitting on the shoulders of giants. We see more, and things that are more distant, than they did, not because our sight is superior or because we are taller than they, but because they raise us up, and by their great stature add to ours”
The above quote is widely attributed to the 12th century theologian and author, John of Salisbury, who wrote this in a treatise on logic called Metalogicon (although Isaac Newton’s use of this same metaphor later on is perhaps more famous). And, working my way through the various whitepapers yesterday outlining Facebook’s plans for its new cryptocurrency, Libra, I couldn’t shake the sense that this quote is simultaneously both very apt and also likely to become inverted.
Let me explain.
Throughout the Facebook whitepapers, there are constant references to learning from the experiences of existing blockchain systems. What has prevented mass adoption of cryptocurrencies and blockchain-based assets thus far, according to Facebook, is that they are too volatile and difficult to scale, meaning that they are poor stores of value and mediums of exchange. Plus, it claims that many of the projects have billed themselves as “disruptors” of the current financial system and have often tried to avoid regulation rather than embrace it.
Having identified these problems, Facebook’s solutions are: to build a more secure and scalable blockchain to underpin its cryptocurrency, back it by a reserve fund of assets to limit volatility and create a group tasked with managing the development of the blockchain ecosystem and work with regulators regarding its development.
I’ll get into some of the challenges associated with each of these in a minute, but this seems like a pretty fair assessment of the situation right now. I’ve written recently on these issues, and while it’s all well and good that bitcoin is on the up again (for now), the ongoing fluctuation in price means that it has little utility right now except as a speculative asset that is uncorrelated to the rest of investor’s portfolios. By contrast, Facebook is very clear where the utility of Libra lies: as a global payment mechanism that makes it quicker and easier to transfer assets than it is today, in both developed and emerging markets.
Lessons from the past
In terms of the underlying blockchain itself, Facebook says that through “the process of evaluating existing options, we decided to build a new blockchain” based on three requirements: the ability to scale with a high transaction input and low latency, security of funds and financial data and flexibility, so that it can continue adapting to ever-evolving financial markets.
“The Libra Blockchain is designed from the ground up to holistically address these requirements and build on the learnings from existing projects and research,” it adds in its whitepaper.
It is using a new programming language called “Move”, which Facebook says “takes insights from security incidents that have happened with smart contracts to date” and is therefore easier to write code in, lessening the risk of unintended bugs.
Presumably, having witnessed the debate that raged regarding what size the blocks on the bitcoin blockchain should be, Facebook says: “Unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra Blockchain is a single data structure that records the history of transactions and states over time.”
Elsewhere, Facebook confirms that Libra is indeed a cryptocurrency and as such, offers the same benefits as these assets, namely “the ability to send money quickly, the security of cryptography, and the freedom to easily transmit funds across borders”.
But while maintaining these benefits, Facebook also claims that its proposed reserve fund negates some of the existing problems with cryptocurrencies: “The assets behind Libra are the major difference between it and many existing cryptocurrencies that lack such intrinsic value and hence have prices that fluctuate significantly based on expectations.”
I could go on and on with examples, but you get the point. Conceptually, they are building on the existing knowledge regarding cryptocurrencies that has built up over the last decade in order to create something that surpasses what already exists. This is where the metaphor of standing on the shoulders of giants works.
Except that, clearly, in reality Facebook is the giant in this scenario and the implications of its scale are, to my mind, massively significant here.
Does size matter?
Although users will be able to access Libra through different sources, Facebook will be making it available through Facebook Messenger and WhatsApp. Just as a reminder, as of March 31, 2019, there were 2.38 billion monthly active Facebook users, while WhatsApp has 1.5 billion active users in more than 180 countries. These are incredibly powerful distribution channels and if even only a tiny fraction of these users adopts Libra as a payments mechanism, it would still make it the most widely used cryptocurrency in the world. Of course, these aren’t the only channels that Libra will be available through.
At last count, Facebook had 37,700 employees, meaning that it has a wealth of human resources to apply to the development of Libra that most firms could only dream of, not least a small army of skilled programmers and developers (there are 53 listed authors for the Libra Blockchain paper!).
With revenues of $55.8 billion in 2018 and a market cap of $529.4 billion, it also has the resources to really push this thing. And that’s not just thinking about development and marketing, Facebook employs various government relations staff and lobbyists around the world that it can deploy to help governments and regulators get on board with its proposed cryptocurrency.
Given all this, it rather feels like the giant is standing on the dwarfs’ shoulders in this scenario, which one imagines doesn’t work out so well for the dwarfs……
Except that there remain some significant question marks around Libra and, predictably, many in the cryptocurrency community have been quick to pour scorn on it.
About that blockchain…..
For starters, Facebook insists that the Libra Blockchain needs to be permissionless to be “truly open and operate in the interests of its users”, but warns that currently it is impossible for permissionless blockchains to “deliver the scale, stability and security needed to support billions of people and transactions across the globe”. Its solution is to make the Libra Blockchain permissioned to begin with and then at some point over the next five years transition it to being a permissionless one.
So, having admitted that there’s no solution right now that will allow for a permissionless blockchain with the characteristics and functionality that it wants, Facebook is kicking the can down the road and hoping that one shows up in the next five years. Also, it doesn’t seem at all clear to me how this transition from a permissioned to permissionless blockchain would actually work.
Moreover, the idea of Facebook assuring everyone that all the data associated with Libra will be completely safe and secure seems certain to raise a few eyebrows from people following on the Cambridge Analytica scandal and recent revelations about Facebook’s handling of individuals’ data.
I also noticed that the details of the Libra Reserve Fund were rather light, specifically in terms of which assets will compose the fund that backs each Libra coin and ensures that it has value.
From one of the whitepapers: “The actual assets will be a collection of low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks.”
Expanding on this, it says that the reserve is designed to mitigate fluctuations in value and therefore has been structured with capital preservation in mind. This means it will only include debt from “stable governments with low default probability that are unlikely to experience high inflation” and will be diversified by selecting multiple governments. In terms of liquidity, the reserve will consist of “short-dated securities issued by these governments, that are all traded in liquid markets that regularly accommodate daily trading volume in the tens or even hundreds of billions”. This, says Facebook, “allows the size of the reserve to be easily adjusted as the number of Libra in circulation expands or contracts”.
While specific details regarding the exact make-up of the reserve will probably emerge in due course, right now we only have this high-level information and, given the importance of the reserve fund to the cryptocurrency, this will be a crucial area to watch going forward.
Also worth highlighting is that Libra coins can only be created or destroyed when “authorised resellers” either purchase coins with fiat money from the Libra Association or sell them to the reserve at a price equal to the value of the basket. However you slice it, this suggests that a lot of power in this ecosystem will potentially be concentrated in a relatively small number of hands, something that is supposedly anathema to the whole concept of cryptocurrencies as a truly decentralised asset.
Watch this space
I think that another big, big question mark is how governments around the world will feel about the possibility of a global currency that is based on a blockchain and reserve fund that is governed by an association currently weighted towards technology and venture capital firms. For example, the operations of big technology firms have been attracting increasing scrutiny (and not in a good way) from politicians in the US – will these same politicians really feel comfortable watching the mass adoption of a new type of currency that has firms like Uber, Lyft, Spotify, eBay, PayPal and Facebook forming part of a group that in some regards will function like a central bank for that currency?
A brief scroll through my social media also highlights criticisms that the Libra Blockchain isn’t really a blockchain, given its structure. Many of the people levelling this criticism will have had the technical skillset to break down the whitepaper regarding the blockchain better than me, but ultimately I’m not sure if this is that important. Whether it’s technically a blockchain or something else feels somewhat like semantics to me, as long as it works (which is, of course, still in question). However, I did see a number of sceptical comments suggesting that, if this isn’t really a blockchain, this is just really Facebook trying to do what WeChat already did but differentiating by grabbing the blockchain label. They might have a point.
Oh, and of course there were plenty of snide comments about Switzerland being the base for the Libra Association. While Facebook asserts it chose this location because it is a famously neutral one, others have pointed out that it’s also famously a tax haven.
Indeed, the Internet is already becoming a rabbit hole that you can fall down regarding Libra and I really could go on for days about various aspects of the proposal but, for the sake of brevity (which, granted I might have already exhausted at this point), I’ll just leave you with a few final thoughts.
Firstly, there has been much speculation about when and how Big Tech might start muscling into finance and it very much feels like that moment is here. First with Apple Pay and now with Libra, payments is clearly seen as an area where these firms can come in and leverage the increasing ubiquity of their technology to gain a foothold in the market.
Following on from this, I suspect that there are some executives at Amazon and Google right now being asked some fairly pointed questions about how their own blockchain or cryptocurrency-related projects are coming along. It seems inevitable that there will be more whitepapers for me to chew through soon enough.