Continuing on from where we left off yesterday, we continue to explore facebook’s foray into crypto. Facebook’s ambitious launch of a global cryptocurrency can spark unprecedented broader adoption once it gets past initial execution and regulatory hurdles. For some more context, check out past posts here,here and here.
Today we look at the design, incentive structure and economics of the Libra coin, specifically nodes within Libra Coin.
Libra Token Design:
Libra is designed to be relatively stable in value (like a stablecoin). The value of Libra is not pegged to any one fiat currency, but to a basket of currencies (USD, GBP, Euro). Libra’s price will essentially be determined by market participants. As each Libra token will be backed by an equivalent amount of fiat money, the price of Libra is expected to closely track the value of fiat that backs the token. ‘Authorized resellers’ for Libra token can capture price discrepancies by buying and selling the Libra tokens depending on whether the price is higher or lower than the fair value. Libra tokens will have floating exchange rates against various fiat currencies, including the US dollar, and is expected to challenge the monopoly that the USD especially has as the default currency for global settlement. In addition to the ongoing tussles with regulators over data and privacy concerns, the launch of a new global currency will probably receive a lot of pushback from the US government, as well as other central banks, like the French.
Decentralization and Censorship Resistance:
Decentralization is the foundational tenet of Distributed Ledger Technology (DLT), Facebook has traded off decentralization for oligarchy, bringing onboard a clutch of major corporations, including payment giants (Mastercard and Visa), Valley majors (Uber, Spotify, ebay) and even a VC (A16Z). These initial Libra Association members are incentivized to driving users towards using Libra as their primary mode of payment. With Uber, Spotify, Visa, eBay, etc. as Libra Association members, they are heavily incentivized to offer rebates and discounts to users who use Libra to pay for a product/service. More on how these companies will eventually benefit from Libra’s growth as MoE (medium of exchange) will be explored in the following sections.
In a bid to perhaps appease crypto idealists, Facebook has left the Libra protocol layer open for developing applications that do not need KYC/AML checks, but users of proprietary applications such as Calibra wallet will require users to undergo KYC checks and comply with local regulations before they can use them. This definitely provides app developers a third option, other than App Store and Play Store, but the developers could be directly competing with Facebook for building applications on top of Libra. So, good luck with that!
One outcome of this effort, should it become a success, would be that Facebook would have managed to launch a parallel financial system to its users by leveraging the anonymized payments data on the blockchain. And this will end up supplanting or bypassing institutions that we take for granted today, such as banks, the SWIFT network, central banks’ hegemony on monetary policy etc. This is of course the crypto-maximalist view!
Two observations here on the initial list of 27 partners in the image above.
1. No banks. The one group that is probably slightly less popular than Facebook in the public conscience, at least as portrayed by mainstream media
2. Picture above is worth a thousand words. Or many millions of corporate lobbying dollars across geographies, to influence policies
Libra Investment Token:
Unlike the Libra token, which is practically available to everyone who can buy it, the Libra investment token is a security token issued to members of the consortia that governs the Libra blockchain and other accredited investors.
The opportunity to become a validator node and buy the Libra Investment Token is compelling, even if it is essentially a highly illiquid risk-on trade. USD 10m is the cost of a seat at the table that gets you a vote to influence future governance and policy, and another USD 280k is needed to actually exercise this vote. The payoffs, assuming one gets past the initial teething troubles, and the fairly onerous regulatory battles in various jurisdictions that will doubtless ensue, are pretty attractive. It is essentially the familiar stablecoin business model – every Libra token issued has to be mapped into a real fiat currency or equivalent treasury security held in reserve (Libra Reserve), and the interest on this float, which increases linearly with every Libra token issued is distributed among the Libra Association members.
One of the advantages of becoming a member of the highly-valued consortia is that these companies can offer an alternative mode of low-cost payment to their users in the form of Libra tokens and eliminate the high-fees that these companies pay to payment processors. Moreover, using Libra tokens these companies can tap into the significant user base of individuals without access to credit cards and offer them services that would be hard to offer otherwise.
There really is no cap to the stream of dividend income that these members receive if Libra grows exponentially, so there is going to be a fair bit of demand for membership into the Libra Association. There is a fairly detailed list of criteria, to ensure not anyone with USD 10m can just show up and become a validator. The highly selective criteria for becoming a holder of the investment token means that it is only available to high-value corporations with large user bases and investment funds with more than a billion dollars under management. The list is fuzzy enough to accommodate at least a cursory nod to decentralization and to let folks like this crew for instance, that is crowdfunding capital to bid for a node!
Unlike DAI, which is a decentralized stablecoin, Libra is therefore an attempt at creating a stablecoin using a DPOS-like design. You pay up to become a node, you are incentivized to grow the network, and you get rewards (interest income) with no real upside cap if the networks grows exponentially, proportional to your buy-in.
Effectively even if every FB user holds an average of one Libra token, which is a fairly conservative estimate, the yield is pretty lucrative at an annual 4.5%, in addition to the actual benefits of smoother payments and more customers that these businesses get.
If you have a network that you have access to, it is almost a no-brainer that you will want to launch your own coin, mint your own currency. Most ICOs were about raising capital, building a network by attracting users and driving up the value of the network, and of the coin minted to be the currency of the network. Of course, you kept a fair share of the tokens for yourselves and thus capture value. In the case of FB, they have the network effects in place, they have the capital, and they also have the talent. It was always going to be a question of when rather than if, with their coin. Given the flak they are receiving around using user data for advertising, creating a currency that can potentially be the currency for interactions across a vast swathe of humanity is completely in line with Facebook’s ambitions to be the infrastructure, rather than a player that uses the infrastructure. It is not going to be a binary outcome in the near term or even the medium term. It is going to be a fairly drawn out process with pushing and pulling and shifting consumer and partner loyalties and varying regulatory regimes, echoing how things are evolving in the broader crypto space. What is beyond doubt is that upon launch, this will truly unleash the potential of non-fiat currencies (including cryptocurrencies). So far crypto has been hamstrung by bad UI/UX, competing protocols and fragmented thinking. Its greatest strength has also been its greatest weakness. Facebook might just have opened up the era of network currencies! Expect other Valley majors to follow suit, either through organic or inorganic moves.
We will continue with the remaining themes in the next edition of this newsletter.