♎ Libras And Beacons — Issue No. 48

📰 News

The Wall Street Journal reported this week that Facebook's internal blockchain project (codenamed "Libra") is aiming to be a full blown payments network. This contradicts previous reports that it would focus on the narrow use case of remittances. The report does confirm previously leaked details, such as the fact the currency will be a dollar backed stablecoin. It adds that Facebook is seeking partnerships with traditional payment processors, like Mastercard and Visa. Finally, the report notes that Facebook is mulling connecting the project to their ads engine and allowing users to be compensated for viewing ads. Link.

In unrelated news, developers from the Ethereum Foundation announced they expect the specifications for "Phase 0" of ETH 2.0 to be finished and frozen by the end of June. This would give implementation teams, many of whom are already hard at work implementing the unfinished spec, a final target to build towards. This first-of-three planned phases would see a brand new Proof-of-Stake chain, called the Beacon Chain, go live. Users would be able to migrate their ETH to it from the 1.0 Proof-of-Work chain. It's important to note that this phase would not include the other flagship feature of ETH 2.0: sharding. Link.

Sharding is the technique that will really allow ETH 2.0 to scale, but the mechanism it employs to do so is often misunderstood. If successful, there will essentially be 1,000 separate chains. These chains will each have throughput limits similar to today's blockchains. The scaling comes from the fact they operate in parallel. The chains will share the same set of validators and users will be able to transfer assets between them. Both of those features are coordinated and enabled by the special Beacon Chain, but come with certain tradeoffs. Cross-shard transactions will be considerably slower; interacting with smart contracts across shards won't be possible; each shard will have its own fee market and gas price; and so on. It's worth skimming through the ETH 2.0 "Sharding FAQ" to get a sense of how this is expected to work. Link.

While I often focus this newsletter on a single interesting story from the past week, I found the juxtaposition of Facebook's project Libra and Ethereum 2.0 interesting. Lets dig into why.

On the one hand, you have Facebook -- a company with 2 Billion+ users -- working on a supposed blockchain that will serve as a payment network and rewards system. Given the enormous scale that Facebook operates on, how will the secretive project serve its users while remaining decentralized? The answer is quite simple: it won't. Decentralized public blockchain networks do not scale. A a team of engineers at Facebook is not going to change that, for a number of reasons. Among them is the simple fact that Facebook has no incentive to do so. Whatever Facebook is launching, it's going to be centralized and censorable. The fact that Mastercard and Visa are involved makes this doubly certain.

On the other hand, you have the slow work of designing Ethereum 2.0, an attempt to architect a cryptonetwork that scales to the whole world while remaining decentralized and censorship resistant. Regular readers will know that I'm skeptical of certain aspects of ETH 2.0. I'm still not sure whether the Proof-of-Stake incentives will work. I'm very doubtful the timelines being proposed are realistic. But let me be clear: it absolutely is a good faith effort to build a scaleable, decentralized network. This is not the case with whatever Facebook is building.

Notice that even if it works perfectly, ETH 2.0 will come with tradeoffs. Sharding is not a silver bullet. If anything, it might be described as a workaround, one allowing 1000 lateral chains to share security and communicate with each other in limited ways. It doesn't really "solve" the problem because, at a fundamental level, decentralized consensus and high throughput are opposed to each other. The developers behind Ethereum recognize this, and they're trying to gives us a network that might scale well enough through parallelization despite that reality. This is what engineering is about.

I hate to harp on this, especially when it's not even launched yet, but whatever Facebook is building will not be aligned with the ethos of crypto. It will not be decentralized. It will not help diffuse power. It will (attempt) to concentrate market power further in Facebook's hands. If these things matter to you, I exhort you: stay away from project Libra.

📊 Statistics

74%. The actual collateral ratio backing the controversial Tether stablecoin. This is according to an admission by their general counsel, one that came as part of the ongoing lawsuit against them by the New York Attorney General's office. This is...well...not good. But it doesn't mean for sure that Tether is going to implode....yet. Keep your popcorn ready and your seatbelts fastened. Who knows where we go from here. Link.