Inventions are quite rare these days and so are groundbreaking innovations. Sometimes the world seems content with what it has but that has not stopped driven individuals from attempting to find solutions to mankind’s unresolved problems.
One such problem is the provision of financial and banking services to more than a billion people spread across the world’s poor countries. Financial institutions across the world have failed on this front prompting private players to attempt to solve this.
So when Bitcoin launched as a potential solution to this problem, the initial response to it was mixed; some of the poor and marginalized hailed this as a possible panacea they had been waiting for while establishment elites initially heaped contempt and scorn on it. The latter’s initial reaction would eventually turn into open hostility, this innovation apparently threatened to disrupt their long established ways.
The ferocity of the opposition has been ascending and may have reached a crescendo when Facebook faced off with US legislators over its plan to launch Libra, a hybrid version of Bitcoin that is supported by its own Blockchain.
Tensions had long been simmering when US President Donald Trump finally set things in motion with his trademark twitter rants against both Bitcoin and the yet to be launched Libra. Central bankers and financial gurus had been lining up for years condemning or sounding alarm against crypto-currencies. From former International Monetary Fund (IMF) managing director, Christian Largade to Jerome Powell the US Federal Reserve chairman, all have issued grim statements about Bitcoin and now the focus has shifted to Libra.
Throughout the public hearings at the US Congress in July this year, politicians repeatedly showed their disdain of Libra and Facebook itself. Some asked Facebook to halt work on Libra until they were satisfied that concerns had been addressed.
Elsewhere others have found it contemptuous for tech firms and organizations to even venture into currency issuing. According to some like the South African Reserve Bank, such as a role only belongs to central banks, a position echoed by French and German politicians, who just like their American counterparts, are staging their own opposition to Libra.
Normally such high profile opposition should be enough to convince those working on any such project to stop but that has not happened. Apparently, those who see crypto-currencies as a panacea to their predicament do not share the unfounded fears propagated by opponents, and through their adoption of the financial technology, they have signaled to creators and the fringe tech firms supporting cryptos to continue their work. For creators of Bitcoin and other alt-coins, this is all that matters, bringing financial inclusion to a billion plus adults.
This success of Bitcoin and alt-coins has not gone unnoticed by bigger players. Facebook and partners’ entry supports the realization that Blockchain backed currencies are inevitable even as they face growing opposition. In particular, Facebook’s Libra actually underlines that the crypto movement is unperturbed by the hostility, more innovation has been happening and more will happen. Libra appears to be an improvement on Bitcoin in many ways.
To illustrate, we examine how Bitcoin and Libra approach the Byzantine General Problem. While both Bitcoin and Libra are backed by a Blockchain, they do however, approach the consensus issue differently. Bitcoin has been famed for its proof of work consensus approach which ensures that the Blockchain remains temper proof. However, over the years opponents have zeroed in on the excessive energy cost incurred when confirming transactions as one downside of the approach. The proof of work mechanism is effectively a competition—which is energy intensive—used to determine who gets to update the ledger and be rewarded for doing so with new coins and transaction fees.
Some have opined that Bitcoin might not scale as a result. In a paper titled ‘Written Evidence’ published in 2018, the Bank of England remarked that the ‘widespread use of a non-sterling crypto-asset within the UK could impair the Bank’s influence over monetary stability.’
However, the bank was confident this would not happen now because pioneering crypto-currencies like Bitcoin face significant capacity constraints and so cannot handle the payment volumes required.
For example, every day in the UK, more than 30 million electronic payments are made through Bacs and Faster Payments. In contrast, Bitcoin’s global peak capacity is around 0.6 million transactions per day. Thus the Bank of England believes that no decentralized crypto-currency platform is currently capable of handling more than a fraction of the UK’s payment needs.
Furthermore, these capacity constraints can result in high cost of transactions. When demand for crypto-currency payments exceeds the capacity of the network, users must offer higher fees to ensure that their transaction is at the front of the queue of payments. In December 2017, when demand for the Bitcoin platform was highest, average fees peaked at nearly $60 per transaction, whilst tens of thousands of lower-fee transactions sat pending for hours at a time.
Now seemingly taking a cue from this observation, the Libra whitepaper explains that its upcoming token will use the Libra Byzantine Fault Tolerant (BFT) consensus protocol, which is designed to function correctly even if some validator nodes — up to one-third of the network — are compromised or fail.
According to the paper, this class of consensus protocols also enables high transaction throughput, low latency, and a more energy-efficient approach to consensus than proof of work used Bitcoin. So the Bank of England might have to prepare for the worst case scenario eventually as upcoming tokens will improve on the flaws of current cryptos.
For Libra the story does not end there. The whitepaper adds, “In order to securely store transactions, data on the Libra Blockchain is protected by Merkle trees, a data structure used by other Blockchains that enables the detection of any changes to existing data.
Unlike other 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. This implementation simplifies the work of applications accessing the Blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework.”
Of course, the Libra project is untested yet and as such some of these claims may not be as straightforward in actual practice. Barring unforeseen events, Libra is scheduled for launch in 2020 and only then we will see how the Libra works in practice.
However, what we can tell for certain is that Libra will be a fresh attempt to solve the problems outlined at the onset of this piece. It is further testament that innovation only responds to viable user needs and not threats and as we have seen with Bitcoin creators who anticipated opposition, hostility will not kill a useful product. Creators will respond to intimidation and threats with a modified innovation to make it impossible for any one regulator to stop it.
Facebook and Libra partners who include venture capitalists, payments firms and non-profit organizations, have so far indicated a willingness to dialogue to ensure all stakeholders’ interests or concerns are addressed before a roll out of the token.
Progressive authorities should reciprocate in order to lay the foundation for an outcome that will be acceptable to everyone.