Will Libra Beat Ethereum and Take Over DeFi?

Good morning defiers! Today’s newsletter is all about whether Libra is an Ethereum killer :)


The Best Version of Libra Looks A Lot Like Ethereum

Facebook wants to put Libra, the digital currency it announced yesterday, in the hands of its 2 billion users with the mission to “enable a simple global currency and financial infrastructure.” Will it replace Ethereum, and become the settlement layer for decentralized finance?

While in its first phase Libra will be a digital means of exchange in a relatively centralized network, its goal is to evolve into a permissionless, proof of stake, smart contracts platform –so pretty much, it’s trying to become Ethereum 2.0.

Here are all the ways Libra is similar to Ethereum:

  1. Proof of stake

Libra is aiming to switch from a system where 100 multi-billion dollar companies (and some non-profits) control the network, to proof of stake, where anyone who holds tokens can participate.

“Membership eligibility will shift to become completely open and based only on the member’s holdings of Libra,” according to the whitepaper. “The governance of the entire Libra ecosystem evolves as the validator set changes from the initial set of Founding Members to a set based on proof of stake.”

Some of the smartest minds in blockchain have spent the past few years trying to figure out how to build this at scale and the most optimistic estimates say we’re still one to three years away from PoS on the Ethereum main net. Facebook hasn’t cracked this puzzle and it will have a lot of catching up to do.

  1. Account-based data model

Blockchains use different accounting models. Ethereum uses the account-based model, while Bitcoin uses the unspent transactions output (UTXO) model.

“The ledger state represents the ground truth about the Libra ecosystem,” the whitepaper says. “The Libra protocol uses an account-based data model [16] to encode the ledger state.”

Libra plans to use the account-based model which allows for more complex transactions (for example derivatives settlement and interest payments) than the UTXO model, which is better suited for transferring value. It signals Facebook’s interest in taking Libra beyond being “just” a means of exchange.

  1. Gas

The risk of decentralized systems is that they can be vulnerable to attackers who overwhelm the network with computation requests. Ethereum solved this by charging fees for each computational step, measured in gas and paid in ether, the network’s native token. Libra plans to do the same.

“In order to manage demand for compute capacity, the Libra protocol charges transaction fees, denominated in Libra coins,” the whitepaper says. “This follows the gas model popularized by Ethereum.”

The difference with Ethereum is that Libra aims to keep fees low by allowing only entities that are able to process a high load of transactions as validators. They’re prioritising performance over decentralization.

  1. Smart contracts and a virtual machine

Ethereum was the first blockchain to have a built-in computer –called the Ethereum Virtual Machine, or EVM– able to process programs known as “smart contracts,” which self-execute code given a pre-determined set of conditions. Ethereum has its own programming language for smart contracts, called Solidity. Libra also plans to have a virtual machine able to process smart contracts written on its own language, called Move.

“Transactions are based on predefined and, in future versions, user-defined smart contracts in a new programming language called Move.”

Initially, only a limited subset of Move’s functionality will be available to users and they won’t be able to make their own smart contracts. By offering only previously vetted tools, Libra wants to reduce the risk of developers writing faulty code that attackers can target. Ethereum launched with the express goal of allowing developers to write whatever they want on the platform. This spurred innovation but also incidents like The DAO and the Parity multi-sig wallet hacks.

Libra will look a lot like Ethereum if it reaches its goals and moves to proof of stake, allows anyone to become a validator, and enables developers to write their own smart contracts. If these things were to happen any time soon, then Libra would be a strong competitor to Ethereum.

But the implementation of this permissionless blockchain will only begin within five years of the launch. In that time Ethereum 2.0 with proof if stake and scaling should have launched. If not, then Ethereum 1.x will have likely developed tools to carry the load (and if it didn’t, then it’s likely an entirely different blockchain will have taken over DeFi and it will be them who have to worry about Libra).

In the meantime, Libra can become an enormous payments platform, but the limited programming language and more centralised version of the protocol probably won’t attract development of the complex financial applications that are being built on Ethereum today. What drew so much developer interest to Ethereum is its flexibility and decentralization. Libra in its earlier stage isn’t that.

It should provide some validation for the Ethereum community that when Facebook started thinking about the best way to make a cryptocurrency, it arrived at something that looks a lot like what Vitalik Buterin thought of five years ago.