Thoughts on Facebook’s Libra Coin

Permissioned blockchains: where it all began

Facebook’s Libra coin is to be built on a thing called a “permissioned blockchain.”

Permissioned blockchains – i.e., blockchains that are designed not to be decentralized cryptocurrencies but rather are designed to be databases with approved validators, administrators and granular write permissions  – have long been some of the more misunderstood critters in blockchain-land. They have been derided as slow databases, cheap knock-offs of Bitcoin or easy innovation wins for lazy bank tech people with budgets to spend.

The first permissioned chain prototype, however, had nothing to do with money. I should know; my team built it.** It was designed to be a distributed decision-making platform, with a UI like Reddit’s. We called this product Eris. And at the time we described it as follows:

Current free-to-use internet services, from search to e-mail to social networking, are dependent on advertising revenue to fund their operations. As a result, companies offering these services must – to paraphrase Satoshi Nakamoto – ‘hassle their users for considerably more information than they would otherwise need.’ This necessity has skewed the internet toward a more centralized infrastructure and usability system than it was intended….

Where Bitcoin was designed to solve this problem in relation to point-of-sale and banking transactions, [we are] working on solving this issue for internet-based communications, social networking and community governance — bearing in mind that for free internet services such as e-mail, social networking, search and “open data,” intrusion into users’ private lives and the accumulation and centralisation of vast quantities of personal information in centralised silos is not some minor and ancillary nuisance — this is a design imperative for everything that [we are] engaged in. As such, Eris is not another web service; Eris is significantly different because it has been designed and implemented specifically to not use servers.

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The Prototype

Put another way, back in 2014, the “permissioned blockchain” was conceived as a tool of liberation from centralized architecture that would allow disparate groups of people in different parts of the world to spin up distributed cryptosystems for discrete processes, arrive at consensus as to the outcome of those processes, and have a cryptographically verifiable record of the means though which those outcomes were reached.

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Andreas Olofsson’s People’s Republic of Doug, another early prototype of blockchain permissioning in a non-monetary usecase

Building a big, clunky, global, one-chain-to-rule-them-all permissioned blockchain system is dumb. Such a system will be unscalable and doesn’t accommodate the kind of granular read permissions that you need to implement when you’re trying to maintain even a semblance of user privacy. Private chains obviate the need to use third party services like AWS to run a program for users in different locations. With a chain, a group of users can run a program simultaneously and easily, and can verify proper execution, on their own consumer-grade hardware even if they’re far apart. But in exchange for not using AWS, the people running the program among themselves have to be comfortable showing each other all of their cards.

Put another way, in exchange for getting privacy vis a vis the outside world, you’re required to have radical transparency among your counterparties. If that trade off doesn’t make sense, chances are it wasn’t (and isn’t) a good use case for a permissioned blockchain.

After we released the code for the first permissioned blockchain client in late 2014, I spent the better part of Q4 2014/Q12015 (the pre-Blythe Masters era) pounding pavement in London – literally traipsing around on foot from one bank to the next  – to explain what, exactly, this newfangled blockchain thing was and why it was going to be relevant for financial services business going forward. We managed to pick up one design and build contract here, another one there, but at the time scalable business models in enterprise chains were hard to come by and, to a certain extent, they still are.

Enter Libra

That was a long time and another career ago. Now I practice law in the countryside and occupy my free time shooing marmots away from my plants.

When I heard Facebook was going to launch its own blockchain product, I was initially really excited. It had the potential to be good validation for the permissioned chain thesis. The use of a permissioned chain would permit, for example, seamless value transfer between accounts on Facebook’s various social media properties, such as Instagram and WhatsApp, which would settle out to USD or local currency. Privacy wouldn’t be an issue as Facebook would run all the nodes. Other companies would presumably follow suit and use similar systems to pass data between their own different consumer-facing applications.

But this is not what Facebook built.

I know blockchains well, and there is no reason whatsoever to use a blockchain for Libra. Furthermore, the promises Facebook has made in relation to Libra make no sense if a blockchain is used.

For example, Facebook promises that it will “allow users to hold one or more addresses not linked to their real-world identity” but will also be regulatory compliant. Facebook also tells us Libra will be “a single data structure” that allows validators to “read any data from any time and verify the integrity of that data using a unified framework” but also, in public statements, that the company cares about privacy and that features to “enhance privacy” will be considered over time.

This is nonsense. Design choices have consequences, and when a specification gives, it also takes away. If you permit anonymous transactions you will fail KYC/AML/CFT requirements. If you hold all data forever and allow validator nodes to read it, user privacy simply does not exist.

Keeping in mind the need for global regulatory compliance, an immutable public ledger and data privacy of any sort are incompatible. On the blockchain, every validator has read permissions, ipso facto. Libra is proposing to have 100 corporate validators. With distribution that broad, it might as well publish the transactions in the New York Times.

Not even the most silver-tongued Frenchman can smooth over a pile of bullshit this large.

So here’s what I think

If Facebook had built an app that just allowed in-app, user friendly payments in USD, I could have gotten behind that.

What has been proposed instead is a combination of a licensed version of Liberty Reserve with an ETF, which furthermore proposes to share transactional data with a veritable rogues’ gallery of privacy-abusing tech companies and the VC firms that funded their rise. The marketing plan uses the word “blockchain” to frighten away legislative scrutiny, under circumstances where the scheme clearly has as its aim the destruction of government money and enrichment of Facebook. It is clear enough from David Marcus’ comments today what Facebook wants to do: the company wants to own payments, from the moment someone is paid, to the payments for the advertisements that person is served, to tracking where the payments go and how effective the advertising was, and right back through where the merchant pays its employees and the process begins anew.

Facebook has assembled a stunning array of partners, from Andreessen Horowitz to Uber, whose mantra for the last two decades has been venture-funded loss-leading expansion to establish a monopoly, followed by network effect-reinforced rent extraction once the monopoly position has been secured.

Libra
The Circle of Trust

Facebook’s problem, of course, is that it cannot grow any larger – its products are used by more than 1/3rd of all sentient life – so it must grow deeper. See, for example, internet.org, a scheme whereby Facebook seeks to become the only means of access to telecommunications available to the global lumpenproletariat. Among those societies which can afford telecommunications, the growth plan is Libra: turn Facebook into the only means of access to commerce.

Just as Uber eviscerated municipal taxi guilds with little regard for regulations and livelihoods, so Facebook will eviscerate small countries, community banks, credit card issuers and small payment processors, in collaboration with industry giants, until it – through its Libra cabal – has the power to determine the terms on which ordinary Americans, and indeed anyone on Earth, can buy goods and services, if our governments let Facebook get away with it.

This will be no ordinary monopoly; it will be neo-feudalism. Presumably the plan is for goods and services sold by the hundred-odd eventual Libra members to be heavily discounted to incentivize people to toss their Amex cards and close their bank accounts. Libra will be hooked  into Stripe, Uber, PayPal, and other companies run by the same bunch of Allbirds-wearing hipsters in a 50-square-mile area of California, with the acquiescence of card giants like Mastercard and Visa, all with the aim of making Libra more attractive than money.

Once money is dead, then the trap will snap shut. Look up the term “Embrace, extend, and extinguish.” This is an old West Coast tech tactic. They’re doing it here just as they have before.

And it won’t stop with dominating commerce. The Valley has long shown a willingness to deplatform businesses, people and ideas of whom or which they disapprove. See Milo Yiannopoulos (banned by Facebook, Twitter, and Coinbase – the latter of which is also a Libra consortium member), Laura Loomer (banned by Facebook and Uber), Alex Jones (banned by everyone), or Linsday Shepherd (banned by Twitter).

The cherry on top – an insult to our intelligence – is that Facebook and its for-profit commercial partners claim that this is a non-commercial public good to bank the unbanked. They point us to the “Libra Association,” notionally a non-profit in Switzerland despite the fact that operating an income-generative money transmission system is by any reasonable measure a for-profit enterprise.

If Facebook raised an army, this would be only slightly more hostile to the people of the United States than what is currently proposed. Big Tech doesn’t share American values and doesn’t care about American users. It doesn’t care about the unbanked. It cares about money. It cares about building defensive moats, i.e., monopolies. And Libra – the tech industry monopolization of global finance – is a phenomenal way to get both free money (the token represents, after all, an interest-free loan from Libra’s users) and a very deep, wide moat, not just for Facebook, but also for every other major category leader/tech monopolist on the planet.

I would have a hard time arguing with anyone who suggested that the Libra scheme, if operational, could possibly meet all of the criteria for a cartel. As proposed, it should not be permitted to exist. Of course it will be, just as all manner of funky commercial activity becomes passable long as the word “blockchain” is included.

In closing

There is no need for a permissioned blockchain here. Facebook should back off the cypherpunk act and just use PostgreSQL. Permissioned blockchains, like all distributed systems, crypto or otherwise, are best used to circumvent Big Tech.

I am hopeful for the future. Today we see seeds of rebellion across the Internet. New payment processors. New social networks. Bitcoin. Facebook is infuriating the people who would otherwise be power users in the name of profits. Their arrogance inspires competitors. I hope they keep doing it. And I predict Libra – the mother of all corporate overreaches – will be the company’s Stalingrad.

I grow increasingly tired of hearing what Big Tech thinks the world should look like. I trust millions of others are starting to get sick of them too. I embrace any decentralized solutions being built immediately, as soon as they cross my desk.

So should you.

 

 

**Postscript:

A little-known fact is that, just as Satoshi Nakamoto is the mystery-shrouded father of Bitcoin, the father of permissioned blockchains is a quasi-mythical character known only as “Marmotoshi Nakaburrow.” After extensive investigation I have narrowed down his identity to two possibilities:

  • The first possibility is that he is a groundhog named “Doug the Smart Contract Marmot” who lives in Preston Byrne’s back yard.
  • The second is that he is not one man but a group of people. The title “father of the permissioned blockchain” (sorry ladies) can probably be divided up evenly between Monax’s Dr. Tyler Jackson and Casey Kuhlman, Cosmos’ Ethan Buchman and Sweden’s Andreas Olofsson. Preston wrote the copy and signed the checks, so I suppose he played a role too.

Marmotoshi’s identity must remain secret, so the question of whether this blog post is written by Preston Byrne or Doug the Smart Contract Marmot will go unanswered.

All you need to know is that this post was written by Marmotoshi himself.

On the looming Bitcoin bubble

I haven’t made any predictions for awhile (seeing as my Bear Case for Crypto is playing out more or less exactly as described), but I will sound a warning today.

Dramatic run-ups in the price of Bitcoin strangely seem to coincide with large exchanges having banking, withdrawal, and possibly solvency problems. This was the case with, e.g., Mt. Gox in 2013, and some have argued was also the case with long-suffering crypto exchange Bitfinex in 2017.

Gox is an old story, from Bitcoin’s ancient history, where a mere $460 million was at stake. Fortunately, the scribes at Wired etched the tale into granite, a copy of which may now be read online here.

For those of you who are really new around here, the 2017 bull run coincided, almost to the day, with two events at the beginning of April, 2017:

  1. Bitfinex getting cut off from the U.S. banking system by Wells Fargo.
  2. The Tether shadow dollar hawala system, which was nominally independent but appears to have been managed by the same individuals who run Bitfinex, kicking into overdrive and beginning a ten-month run in which Tether would print several billion dollars’ worth of Tether tokens.
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Source: CoinDesk
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Bitcoin’s bull run, starting in April 2017. Source: coinmarketcap.com
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Tether was created in 2015, but began aggressively issuing its new USDT “stablecoin” tokens in April 2017 and did so throughout the 2017 bull run.

Prominent critics have delved into possible explanations for this coincidence in more detail than I care to expand on here, save to say that I do not dismiss those explanations out of hand.

Today, Bitfinex – the largest cryptocurrency exchange in the world – appears to be, allegedly, in a spot of trouble once again. And the price of Bitcoin is rising quickly once again.

I will not dwell at length about Bitfinex’s current drama, save to say that individuals who have allegedly done business with Bitfinex are under federal indictment, assets managed by those individuals have been seized, and Bitfinex itself is known to be under investigation for alleged fraud by the Attorney General of New York.

If you’re a trader or investor, tread carefully. It is possible that the current price of a Bitcoin bears some relation to, and is uniquely vulnerable to, regulatory developments.

If the looming bubble should spin wildly out of control, here’s a timely and healthy reminder to investors to keep their wits about them, don’t propose that a new paradigm is upon us, and be mindful of gravity.

Follow-up: I found two identical packs of Skittles, among 468 packs with a total of 27,740 Skittles

The things some people are curious about.

Possibly Wrong

Introduction

This is a follow-up to a post from earlier this year discussing the likelihood of encountering two identical packs of Skittles, that is, two packs having exactly the same number of candies of each flavor. Under some reasonable assumptions, it was estimated that we should expect to have to inspect “only about 400-500 packs” on average until encountering a first duplicate.

So, on 12 January of this year, I started buying boxes of packs of Skittles. This past week, “only” 82 days, 13 boxes, 468 packs, and 27,740 individual Skittles later, I found the following identical 2.17-ounce packs:

Test procedure

I purchased all of the 2.17-ounce packs of Skittles for this experiment from Amazon in boxes of 36 packs each. From 12 January through 4 April, I worked my way through 13 boxes, for a total of 468 packs, at the approximate rate of six packs per day. This…

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