Economic incentives possibly misaligned?

General
#1

According to https://libra.org/en-US/about-currency-reserve/#the_reserve

The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc

Since the assets backing Libra will be in government securities that generate returns to match inflation but then interest will be used for expenses and dividends, won’t Libra’s purchasing power depreciate overtime?

How does the reserve plan to generate positive yield safely when nominal interest rates for government securities are negative in many safe markets are negative? https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html

If Libra makes for a poor store of value compared with keeping fiat in interest bearing accounts, won’t users mostly use it purely as a way of transferring value in which case a relatively small Libra marketcap and reserves can support a high volume of transfers? Say $1 Billion in reserves to support $25-$100 Billion in annual transfers?

At $1 billion in reserves, will there be enough of a ROI for validators and network participants to operate?

Does Libra plan to release an economic feasibility study?

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#2

I don’t see government securities as the only investment possible for the reserves. And even still there are government securities around the world that give nominal positive returns and even real positive returns still. I take it that the reserves investment strategy could be tweaked as economic conditions dictate. I agree that I don’t see the need to for a 1:1 requirement of libra to reserves.

#3

I think the main purpose of Libra is to lower down transaction costs and bring convenience to the world? I really don’t think it has much value as an investment unless someone can manage the reserves so well

#4

I’m not saying there is not a need to be fully backed. What I’m saying is related to token velocity.

If the average holding time of Libra is one day in a transaction from acquiring Libra then sending and finally receiver converting to their native currency then the turnover or velocity of Libra in a given year is 365. If in a given year Libra facilitates $365 Billion in transactions, the market cap only needs to be $1 Billion as the amount of value being locked up in Libra at any given point in time will be ~$1 Billion.

#5

How can it accomplish that if it’s economically not feasible for the network to sustain itself?

#6

The purchasing power of all currencies depreciates over time, as it should. A properly designed currency is optimized for being exchanged for goods, not for being hoarded.

If Libra is to be a currency rather than an artificial speculative medium then it is correct to track the average value of a basket of major world currencies.

#7

Where does it comes from that a currency should depreciate overtime in order to be effective as a medium of exchange? Why can’t a currency appreciate at the same gradual rate it historically depreciated at?

Using your point of Libra being purely for exchange and not hoarded then Libra can facilitate potentially hundreds of billions (USD) in transactions per annum with a total monetary base of a billion or less in reserve. In this case how will reserves generate enough interest to pay for all the costs of the network?

#8

The only reason that fiat currencies decline is governments debasement of them.

#9

@bgits if it makes more sense, you could think of libra like fiat currency in cash form. If you store cash under your bed it doesn’t appreciate even though its backed by reserves by the Federal reserve. Since there is a lot of trust/KYC built into the Libra network people might store their Libra in Libra banks within the Libra network which pay them a dividend and lend their Libra out. This is just speculation though.

#10

I am thinking of it that way. Libra “banks” would be an additional protocol or application on top of the base layer but does not explain how the base level protocol will generate enough fees to sustain itself.

Also why would users keep their wealth in Libra when they should be able to seamlessly convert between Libra and other cryptocurrencies that are more decentralized, serve as a store of value and provide interest bearing opportunities as well?

It’s not hard to imagine someone creating a Libra wallet which stores the value in Bitcoin and automatically converts to Libra for sending funds and back into Bitcoin when receiving.

#11

The base level Libra protocol aims to sustain itself through charging a “gas” fee for each transaction. This compensates validators who run nodes on the network.

I’m pretty sure this is correct, users wouldn’t keep their money in Libra in the same way people don’t tend to keep their money in physical cash. People would only use it for transactions.

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#12

Many people would keep holdings in Libra. Instead of selling cryptos for fiat, we could convert in Libra. Similar stability of fiat, but it is much easier to reenter a crypto position at any time and it has all the advantages of being easy to move. (this is valid more generally for all the stablecoins)

#13

@bigits This is the way currencies are supposed to work. If you don’t like it, invest your money in something else: gold, stocks, bonds, whatever. This is also why we invented markets – if you don’t like what you have, you can trade it for something else.

Consider an hour of labor in the year 1900 at a wage of $1/hr. If you were a horse-driver or wax-candle-maker in 1900, you’d be lucky to earn $1/hr today. The labor performed to earn that dollar was much more valuable a hundred years ago than it is today, which is why the value of the labor – which you traded for $1 – goes down over time if you simply store the $1 in your mattress. Only in a static world should the value of all currencies be fixed forever. We do not live in a static world.

#14

Then why does bitcoin exist? You can put it under your mattress and be worth more when you go back for it. If it doesn’t function on a model where a private entity gains all the equity from market growth while the user/purchaser gains nothing on that investment.

No, currencies are not supposed to work in a specific fashion. Libra in particular is a model that favors only few in comparison to bitcoin.