Are They Heroes or Villains?
Since the beginning of 2018, rumors and then news about some large players entering the blockchain industry mesmerized the crypto community. Presently, the projects promoted by JPMorgan Chase, Facebook and Telegram are at the testnet level, but the companies have disclosed more accurate information about them. The differences among the three projects are enormous — their aims, business models, technology, etc. Some similarities exist, nevertheless. However, with diversified feelings toward these projects, the community pointed out the challenges that they have introduced to the industry. This time, the proposal for a new cryptocurrency is not coming from an adventurous startup or some willing genial techie, but from leading companies in their sectors, which could deploy massive firepower in terms of financial resources, customers or business relationships.
This element radically changes the rules and the size of the game, with implications that would potentially affect both the evolution of cryptos and the global economy as a whole. Are these new incoming blockchains the superheroes who will bring cryptos to the world or are they what some might say the “villain” blockchains?
JPMorgan: A friendly big bad wolf
If somebody would feel the urge to spot a “bad guy” in this story, probably JPMorgan Chase would be the best candidate. Bankers have been the epitome of what the first members of the crypto community loathed more than anything else. This should be not a surprise: Since the 2007-2008 financial crisis, crypto has been the alternative tool proposed to transfer value outside the frame created by governments and banks.
The bank that John Pierpont Morgan set up in 1871 is arguably a symbol of United States capitalism, due to its one-and-a-half century involvement in every innovative business, world war, financial crisis, recovery plan and scandal affecting America and the world. That’s enough to feed a whole army of harsh critics and another one of faithful believers.
Besides, even moderate crypto enthusiasts include JPMorgan Chase’s CEO, Jamie Dimon, in the list of their adversaries, thanks to his 2017 declarations comparing Bitcoin’s (BTC) rise to the Dutch tulip mania of the 1630s and labelling cryptocurrencies as a “fraud” and “scam,” useful more for drug dealers than to respectable and wise investors. Recently, Dimon has softened his stance, declaring that cryptos could “provide healthy competition” to the traditional banking business.
Despite its cautious — or even suspicious — attitude toward cryptocurrency, JPMorgan is one of the first companies that demonstrated a straightforward involvement in blockchain technology. A project for a private blockchain, based on Ethereum (ETH) and labeled Quorum, was announced in the fall of 2016, during a technical steering committee meeting of the Hyperledger Project.
Also, at the beginning of 2017, the bank was among the founding members of the Enterprise Ethereum Alliance (EEA), alongside Microsoft, Intel, Accenture and other giants of finance, the IT industry and blockchain pioneer companies (a list of the present members is available here).
JPMorgan released declarations presenting blockchain as a critical technology in the digital transformation of finance during the following years, stressing both the potential and the limits of broader adoption of blockchain within the financial institutions. In the meantime, since the fall of 2018, the company began to test its Interbank Information Network, a Quorum-based platform connecting 75 multinational banks, including Goldman Sachs, Banco Santander, Société Générale and the National Bank of Canada (the network had reached 220 members by March 2019).
Eventually, in February 2019, the company disclosed the main lines of a project for its digital coin. The bank envisages to start testing JPM Coin by the end of 2019 and information on it is available through its website, while a more technical white paper and the code underlying Quorum is available on its Github page.
JPM Coin is a stablecoin pegged to the U.S. dollar at a 1:1 collateralization ratio, whose only aim is to serve as a temporary vehicle for real-time gross settlement between JPMorgan’s institutional clients. The coins are issued based on a client reserve account in fiat money, then transferred through the Quorum blockchain to another client, which will convert the tokens into fiat, and at this point, the equivalent JPM Coins are destroyed.
The collateral reserves that guarantee system stability would come from the $2.6 trillion in assets gathered by the first U.S. bank group. The intended users of JPM Coin are high-level financial institutions willing to replace a procedure that today requires up to a couple of working days to be accomplished with a technically efficient alternative. Therefore, the primary concern of the project is the speed of the transaction, its security and its privacy, much different to other blockchains, which are stuck it the so-called “scalability trilemma.”
Private permissioned blockchains ensure, by definition, faster execution time than public permissionless blockchains because they rely on a small number of selected and trusted verifiers rather than requiring the consensus of a large amount of “anonymous” nodes, which need to be checked through ingenious algorithms. Quorum, for instance, implement a Raft consensus procedure, which is designed to work among a small consortium of trusted members, without the requirement of Bizantine Fault Tolerance. Besides passing a flag to the nodes, the system could enable another consensus mechanism based on a three-phase procedure known as Istanbul Byzantine Fault Tolerance, part of the development of the Ethereum ecosystem, as a business-oriented alternative to proof-of-work.
Privacy is another paramount issue for a tool created to operate for the banking industry. Quorum is designed to support both Etherium-like public transactions and private transactions, which the blockchain registers as hashes, which only the selected nodes that validate it could decode, retrieving data such as timestamp, accounts involved and the amount transferred. JPMorgan’s developers are trying to solve some problems related to private transactions cooperating with the team of another public blockchain, Zcash.
Quorum is also the first platform that can be managed using Microsoft’s blockchain-as-a-service (BaaS) platform, Azure Blockchain Service, which was released in May. The cooperation with Microsoft also encompasses other topics, such as privacy architecture and streamline node deployment. JPMorgan demonstrates itself as very attentive in the selection of partners and technical solutions. Since the beginning, the company focused on the development of its version of the Ethereum ecosystem, foregoing the existing platforms designed explicitly for inter-bank financial transactions, such as Ripple or Corda’s R3 (as a cooperation agreement exists between EEA and Hyperledger Fabric). Ripple’s CEO, Brad Garlinghouse, harshly criticize the competitor project since its first announcement.
Other comments stressed that JPM Coin is not a direct competitor for any existing cryptocurrency (XRP included) because the new digital coin seems to be an internal tool not intended for individual use, while the official stance of the bank about cryptocurrencies remains very cautious:
“We have always believed in the potential of blockchain technology and we are supportive of cryptocurrencies as long as they are properly controlled and regulated. As a globally regulated bank, we believe we have a unique opportunity to develop the capability in a responsible way with the oversight of our regulators. Ultimately, we believe that JPM Coin can yield significant benefits for blockchain applications by reducing clients’ counterparty and settlement risk, decreasing capital requirements and enabling instant value transfer.”
However, the choice to rely on the blockchain instead of some other database-like solution, jointly with some declarations by the head of JPMorgan’s blockchain project, legitimate the hypothesis that the company would explore other possible applications of the distributed ledger technology in the future. Dimon himself admitted that JPM Coin “could one day be consumer.”
Libra: Power to the people
Facebook is probably the most relevant success story of the post-dot-com-bubble wave of innovation related to the internet since its founder, Mark Zuckerberg, dropped out of Harvard to develop the business full time, which he first created in 2004. After 15 years, however, the company retains very little from its fresh image of a bold startup. Facebook, alongside Google, is being energetically criticized for a business model of economic exploitation of personal data by projects proposing alternative models for personal data management and social networking based on blockchain.
The interest of the company owning Facebook, Whatsapp and Instagram in blockchain is somehow recent. Besides, it coincided with one of the bleakest moments of its history, the Cambridge Analytica scandal. The fallout from the scandal has pushed the company to explore new options to fix and relaunch its business, and it’s possible that blockchain was researched as one of the potential new development paths.
In May 2018, Facebook announced the creation of a new blockchain group led by David Marcus, a Facebook vice president and also — for a brief time — a Coinbase board member (the company recently hired other officers from Coinbase this year). Eventually, a company called Libra Networks, with Facebook Global Holdings as a stakeholder, was registered in Geneva, Switzerland, on May 2, and on June 18, Zuckerberg announced the creation of the Libra Foundation, raising a wide range of mixed reactions. Libra’s extensive and appealing website offers a wide range of information both for the general public and for tech-wise readers Besides this, a Github repository makes public the main code underlying the new blockchain.
The project communicates itself as a socially aimed initiative rather than as a business venture: On Github, for instance, Libra’s mission is “to enable a simple global currency and financial infrastructure that empowers billions of people,” while the website summarizes its aims: “Reinvent money. Transform the global economy. So people everywhere can live better lives.”
The white paper explains in-depth that the intended target is mainly the share of the unbanked population (i.e., adult people “outside of the financial system with no access to a traditional bank”) who, nevertheless, could afford a mobile device and internet access (estimated to be about half a billion people worldwide). Some comments underline that Libra would find pairing with unbanked-but-connected people in a country like India, where Facebook is the leading social media and instant messaging platform.
Libra then aims to create a global digital currency and the infrastructure to allow domestic and international financial transactions based on a friendly mobile interface based on a blockchain architecture designed to achieve security, speed, scalability and, at some point in the future, full decentralization. All the main functions of the system are based on a new language, called Move, expressly designed to manage digital assets.
Libra’s “blockchain” isn’t, in fact, based on blocks, as it stores the transactions in a Merkle Tree-structured sequence, whose root’s hash is authenticated in a conventional blockchain manner. This generates a distributed versioned database, whose ledger states changes after every transaction (a complete explanation is available here). Libra defines its consensus model as a variant of HotStuff protocol and labels it as LibraBFT (Byzantine Fault-Tolerant): A randomly selected leader proposes the validation of a group of transactions to all the nodes, which “votes” for or against it, evaluating the ledger state they recorded. If the proposal reaches the required quorum, the updated database hash is added to the chain and the new state of the database is committed, if confirmed by two more blocks and quorum certificates during the rounds. The HotStuff protocol was selected and enhanced to work in a network encompassing at least 100 validators, with a perspective enlargement up to 500–1,000 nodes.
Libra is therefore designed as a permissioned network, relying on a small number of carefully selected validators. However, the official documentation states its commitment toward “no-centralized control” and for a “progressive opening in participation to the network,” aiming to eventually start researching and implementing transactions with a permissionless architecture within five years of the public launch (actual centralization is, nevertheless, one of the features of the project that is more criticized).
The Libra platform is based on a stablecoin pegged to a basket of low-volatility fiat currencies, backed by an extensive collateral reserve, providing the coin with underlying assets and giving stability to its value across the time. Every single coin is issued against an equivalent amount of fiat that is added to the reserve, and it is destroyed when the coin is converted back into fiat. This will happen with both the coins purchased by the users through wallets and investment tokens given to the Libra Association’s founding members as an equivalent of the assets they froze in the reserve, these tokens are intended to be freely distributed to boost adoption. The reserve would then be invested in low-risk assets and managed by a plurality of subjects to guarantee diversification and constant value. The profits coming from this activity are intended to sustain the development of the platform and to reward the first investors.
The role of the members of the association in managing the reserve, the network and “quality” of its founding members are elements guaranteeing the stability of the project and the rising concern among its critics. Even after reaching the investment threshold ($10 million), the aspiring council members need to meet an extensive list of requirements — technical, economic and ethical — restricting access only to industry leaders and qualified entities, of which Binance is rumored to be in the mix.
The association provides Libra with relevant economic resources as well as an impressive portfolio of potential final users with a decade of expertise. Giving every single user of Facebook, Whatsapp or Instagram in the world with a friendly crypto wallet, Calibra — likely backed with some free coins redeemable with services such as Spotify, Uber or eBay — Libra has a potential that is difficult to overestimate. However, the interpretation of the possible outcome varies significantly: Some in the crypto community define Libra as a Trojan Horse getting the masses used to digital money and paving the way to the “true” cryptocurrencies, as pictured in a cartoon by Fabrice Manzo.
In contrast, the usual adversaries of crypto-fiance stressed its difficulties concerning regulation — among them, the banking sector, central bankers (e.g., in Australia, France, Singapore and Japan) and political authorities. The U.S. House of Representatives Committee on Financial Services first announced a hearing about Libra on July 17, and then requested that Facebook and its partners agree to a moratorium on its development. On an ever more pessimistic note, some commentators describe Libra as a tool to control both the cryptocurrency market and real economy, overcoming existing cryptos and regulations.
In the case of worldwide adoption, Libra would indeed amass a tremendous amount of fiat money deposited in the reserve and an extensive base of personal data provided to clear the Know Your Customer (KYC) requirements. The acceptance among the general public seems quite cold, recent research pointed out. Besides, prize-winning economist Joseph Stiglitz severely criticized the project, referring to the issues of trust — saying, “In just a few short years, Facebook has earned a level of distrust that took the banking sector much longer to achieve” — and of the distribution of the interest paid on the assets underlying the stablecoin. Stiglitz’s declarations were partially answered by Marcus in a statement suggesting the independence of Libra from Facebook, whose image is still compromised regarding these crucial issues.
TON: The dark knight rises
Opposite to what JPMorgan stands for, Nikolai and Pavel Durov, the creators of social media site Vkontakte (VK) and instant messaging app Telegram, have a better chance to claim playing the role of heroes, even if somehow a “dark” one. While Nicolai is a renowned mathematician, Pavel pairs his coding skills with entrepreneurial capabilities and an unruly libertarian spirit. Refusing to hand over the personal information of the users of his brainchild — a doppelganger of Facebook, VK — to Russian authorities, Pavel was forced to abandon his company and his country. Then, in 2013, the creation of Telegram brought him into a clash with authoritarian regimes such as Iran and the establishment of a tense relationship with some countries concerned over an unregulated end-to-end encrypted messenger.
Since 2014, the Durovs have became citizens of St. Kitts and Nevis and allegedly starting living in Dubai, while the headquarters of Telegram moved from the U.S. to Berlin. Similar to another well-known caped superhero/billionaire from the comics-then-movies, the Durovs’ fight for what they believe is justice are often at odds with authorities. The peculiar communication strategy of Telegram Open Network (TON) is perhaps echoed in the founders’ personal preference.
Leaks regarding the TON blockchain began to circulate in December 2017, boosted by information never confirmed nor denied by the Telegram Foundation (or by the even more mysterious TON Foundation). Then, rumors of an initial coin offering (ICO) of unmatched scale began to spread in January 2018. The complete lack of official information made it impossible for scammers to exploit gullible wannabe investors, as the first news about a private ICO held in two rounds during January-February and March 2018, involving about 175 selected big investors (Contelegraph estimated the ICO’s value at $1.7 billion). The option of a public ICO was subsequently abandoned, due to the abundance of funds already raised.
Rumors about the debut of TON by Fall 2019 circulated in October 2018, becoming more insistent at the beginning of the following year and in May 2019. Unconfirmed sources external to Telegram reported tests were undergoing since April 2019, while the first leaks of TON’s technical details had been available since the end of May, as per Cointelegraph reported on TON’s programming language and lite client. Finally, on May 20, 2019, the Russian research agency Aton published an extensive business analysis of the project.
Presently, the only official source of information remains the website from which it is possible to download a detailed technical white paper signed by Nicolai Durov on March 2019, as well as other documents and the code of the TON Blockchain Test Network Lite Client. The only information concerning the economic dimension of the project is a white paper leaked in January 2018, which is most likely authentic but could be outdated. The only other information that is possible to retrieve is that the Who Is database confirms that the domain Ton.org was updated at the end of March 2019. Finally, the project is not officially seeking any involvement of the community, at the moment: The code shared as open source is only a part of the project, and TON’s repository available on Github is managed by enthusiastic independent developers, without any link to Telegram.
TON aims to become a cornerstone of a new model of decentralized economy and, to achieve this result, pursues the vision of a user-friendly, reliable and efficient blockchain, suitable for mass adoption. Its goal is, therefore, a higher level of speed and scalability, intuitive interfaces, and the possibility to back its introduction phase with an engaged base of users.
An original solution of the “scalability trilemma” is presented in Nicolai Durov’s paper, sharing similarities with Ethereum 2.0’s sharding solution and the architecture of Polkadot and the Cosmos Network. TON deploys a flexible architecture encompassing a masterchain and several working blockchains (up to 4,294,967,296), which could have different rules (sustaining different currencies) and which could divide itself into sharded “children” blockchains (up to 1.152921505×10¹⁸) for each working blockchain. The whole system can automatically split and merge to accommodate the transaction load under the “Infinite Sharding Paradigm.” These multiple independent blockchains could then be coordinated through a smart-routing mechanism labeled “Instant Hypercube Routing.” Besides this, the messaging system on which the coordination among shardchains is based would allow for the interaction with off-chain services and other blockchains like Bitcoin or Ethereum. The smart contracts managing the system are coded in the Fift programming language.
A distinctive feature of TON is its “self-healing” mechanism, allowing to preserve valid blocks even if “grown” on a block containing unrelated errors. This is yet another instrument to achieve speed and save resources (every block in the shardchain could work as a “horizontal blockchain,” which could also contain information to amend proven errors in the blocks already “vertically piled”).
TON is a permissionless public network based on delegated proof-of-stake (PoS) involving a “few hundred validators” staking a considerable amount of tokens. An even smaller subset of validators is randomly selected every 1,024 blocks to be in charge of every sharded chain. Blocks are validated as per the Byzantine Fault-Tolerant protocol, which is similar to Practical Byzantine Fault Tolerance (pBFT) or Honey Badger BFT. Alongside the “nominators” entrusting their token to the validator nodes, the system encompasses the role of “fishermen,” gathering rewards by pointing out validators’ mistakes, and “collators” suggesting new shardchain block candidates to the validators.
This blockchain architecture would be accessible through a peer-to-peer network on which a wide range of service will be available. The project encompasses features such as distributed file storage technology, network proxy/anonymizer layer, a platform to sustain payment channels and other arbitrary services. The primary token of the ecosystem is Gram (GRM), also used to pay transaction fees — similar to Ethereum’s gas — and to reward blocks validators with freshly minted coins. The original supply is limited in 5 billions GRM, and the expected yearly inflation is about 2%. However, a portion of the stakes taken away as a punishment from malicious validators would be burned, reducing GRM’s supply. All GRM will be sold by the TON Foundation at an increasing price (starting from $0.10, but rising with each subsequent sale exponentially). The Foundation will retain the largest share — 52% — binding itself to use this reserve to contrast speculative maneuvers, reducing GRM’s volatility.
The Telegram messenger would provide the critical mass of users to sustain the first steps of TON and its transition from the Telegram Open Network to The Open Network. The white paper leaked at the beginning of 2018 stated:
“Integrated into Telegram applications, the TON wallet will become the world’s most adopted cryptocurrency wallet. Telegram will leverage its existing ecosystem of communities, developers, publishers, payment providers, and merchants to drive demand and value for TON cryptocurrency.”
Even with a smaller number of users (200K or 300K, as no official figures exist) than Facebook/Whatsapp/Instagram, Telegram’s project would hence be leveraged on a hardcore group of qualified and committed “testers,” a precious resource during its launch phase.
It is therefore quite surprising that TON seems to be looking at very few for the early involvement of the community: the — legitimate — choice to hold an ICO aimed at a small number of selected investors associated with a complete lack of official information, which could oppose wild rumors and scam attempts.
On June 11, 2019, the crypto community was thrilled by the announcement of an incoming initial exchange offering (IEO) managed by the Japanese exchange Liquid and Gram Asia, a financial company chaired by Kim Dong-beom — reportedly the largest holder of GRM in Asia. However, the initiative came from entities not immediately related to TON Foundation and seems to violate an agreement that all investors signed preventing sales of GRM before the official launch of the blockchain. Other doubts concern the offering price, estimated far above the level offered during the ICO.
Despite these concerns, Liquid’s website remains the only source of semi-official” information about the project, while Telegram and the TON Foundation have not endorsed or even commented on the IEO. In a recent interview, Liquid’s CEO, Mike Kayamori, reassured potential investors that the operation is part of TON roadmap and that the inclination toward obscurity is part of the the Durov brothers’ style, saying, “Unfortunately, that’s Telegram and how they have operated from the beginning.”
The privatization of money
Apart from the many differences, all these projects are aimed at achieving full acceptance of cryptos and blockchain, leveraging some formidable advantages of the proponents in their specific niche of activity. Also worth noting is that, if the blockchain industry wants to achieve maturity, it needs to play following the same rules as all the other industries. Giant multinational economic entities — even if going by other names, waving crypto weapons — could be a scary picture for both national governments and libertarian crypto enthusiasts. The latter are probably the ones who should be less concerned.
A future dominated by corporate-managed currencies was foreseen by a Nobel Prize winning economist who was very attentive to the topic of liberty, Friedrich August von Hayek. In a short essay published in 1976, after the meltdown of the remains of the gold exchange standard, Hayek wished for the birth of numerous private monies competing among themselves and gradually substituting the exploitative national fiat. In Hayek vision, different companies would issue their currency with specific features, answering to the needs of their niche of customers, then managing them as a central bank.
Stability is the key for success: Adoption would be eased through the ability to redeem private currency through fiat at a minimum fixed exchange rate. Besides this, private money must have a real reserve of value, while fiat doesn’t — guaranteeing the possibility to purchase a benchmark basket of goods using an identical amount of private coins. To maintain this “goods-pegged” stability, the issuing company should manage the supply of money and its collateral reserve in fiat. However, the free money would become a compelling alternative to money issued by the state, whose value is forcibly imposed and continuously eroded by inflation. In an actual free market economy, every customer would eventually opt for the more reliable and suitable currency, prizing its constant purchase-power for relevant goods and making the underlying legal redeemability in fiat meaningless. During the pre-internet/crypto time when Hayek wrote, the possibility to design monies with different features were, in fact, quite limited.
The three ambitious projects presented here share among them — and with Hayek’s theory — the idea of an adoption process made possible because they are mediated by a coordinated authority, and hence a corporate strategy with potential profits equivalent to the risk undertaken. All of them affirm the need for some stability as a requisite for wide adoption, even if that means backing everything with fiat. For now, it is hard to distinguish between heroes and villains, it will depend on which paths these companies will walk to reach their aims.