After months of speculation and anticipation, the rumors of the white paper of Facebook’s cryptocurrency project being released have finally proven true. On June 18, Facebook published the white paper for Libra, which provides details about a blockchain, a low-volatility cryptocurrency, and a smart contract platform, all of whose collective mission is to enable a financial infrastructure that will purportedly empower as many as billions of people.
Both the Libra coin and blockchains are slated for a 2020 release.
Recent developments in technology have allowed for the growth of a global financial ecosystem. Despite this, there are still large groups of people with virtually no access to banks, leaving them ostracized from this interconnected world. Many of these marginalized participants of society actually have access to the internet or to a smartphone, but they can’t be a part of the current financial ecosystem because they lack the necessary funds or the required documentation, they are not able to pay high bank fees, or because they live too far away from a bank.
Cryptocurrencies have the potential to address this accessibility issue, but mass adoption has not yet been reached. This is the problem that Libra seeks to tackle. According to the white paper, lack of scalability, high volatility, and multiple problems with regulatory bodies have affected mass-market usage of crypto. Libra claims that in order to achieve a global financial system that is accessible, sustainable, secure, and with lower costs for everybody, it is necessary to work together with regulators and experts in various industries. It intends to provide a reliable digital currency and infrastructure where people from all over the world are able to move money just as if they were sending a text message.
The Libra Blockchain is touted as the foundation for financial services upon which people from all over the world can satisfy their daily financial needs. It is being built with three specific requirements in mind:
The objective for Libra is to eventually become a permissionless blockchain (one where anybody who meets the technical requirements can run a validator node), however, there are apparently no current solutions that could deliver the scalability and support that are needed to bolster such a permissionless network, which means that it will begin as a permissioned blockchain (one where access has to be granted in order to run a validator node) instead. As things stand right now, the only way to run a validator node is by becoming a Founding Member of Libra, which entails a $10M investment and has an additional set of exclusive requirements that have to be met. The transition to a permissionless system will only begin within five years of the public launch of the Libra ecosystem.
At launch, only Founding Members will be able to run validator nodes, though supposedly participation in the network will be opened progressively. More specifically, Libra Investment Tokens (a security token) will be released, and when that happens, new members will be able to enter and own a stake in the network. However, Libra Investment Tokens will only be available for accredited investors, who will be able to earn profits from the reserve if the network is successful. The idea is, however, to transition from reliance on ownership of Libra Investment Tokens to reliance on ownership of Libra coins to operate validator nodes and take part in governance voting.
Among some of the widely-used structures in blockchain technology, the data on the blockchain will be protected by Merkle trees, and users will be able to hold addresses that are not linked to their real-world identities. However, Libra also introduces two new developments in the form of their proprietary programming language and consensus protocol:
Move Programming Language
Move is a programming language that will be used to implement custom transactions and smart contracts. According to the Libra team, Move learns from multiple security mishaps related to smart contracts not fulfilling the exact intent of the author, which has lead to multiple unintended outcomes or bugs in the past. Thus, Libra offers a programming language that is “inherently easier” to understand and use, where these unintended problems are reportedly less likely to happen.
In order to comply with the vision of “empowering billions”, the Move programming language was designed in such a way that it is reportedly able to express the Libra currency and governance rules of the blockchain in a “precise, understandable, and verifiable manner”. It is supposed that with time, Move will be able to encode the rich variety of assets that make up the Libra financial structure, something that other programming languages lack.
At press time, it is believed that the use of Move as a programming language will accelerate the evolution of the blockchain and all financial innovations that are built on top of it.
LibraBFT Consensus Protocol
Although not entirely original (it is based on a recent protocol called HotStuff), the LibraBFT is a state machine replication system that will remain safe even if a portion of the validators (up to one-third of all validators) are corrupt. Additionally, this type of consensus also reportedly enables high transaction throughput, low latency, and has a more energy-efficient approach than the Proof-of-Work consensus, used in the Bitcoin blockchain.
LibraBFT is a leader-based consensus protocol that progresses in rounds. For each new round, a new leader is chosen amongst the validators. The leader then proposes a new block and sends it to the other validators, who then approve it if it has valid transactions. If a leader doesn’t propose a valid block, or a majority of votes isn’t reached, a new round will begin thanks to a timeout mechanism, where a new leader will be chosen.
The unit of currency for the project is appropriately named Libra. It is described as a “digitally native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance, and fungibility.” While that could be said for many other existing cryptocurrencies, Libra differentiates itself from others by being backed by a reserve of real assets, made up of a basket of bank deposits and short-term government securities. These are held in the Libra Reserve for every Libra coin that is created.
Libra is not actually pegged to a single currency. Rather, the reserve of real assets is expected to build trust in its intrinsic value and do away with concepts such as volatility, which affects most cryptocurrencies. Libra will inherit positive features of other cryptocurrencies too, such as the security of cryptography, but will manage to have a relatively stable value thanks to the Libra Reserve.
The Libra Reserve is described as the key mechanism to achieving value preservation, and it plays a significant role in building trust and protecting the resources that are brought to the network. The way in which Libra hopes to achieve value preservation through the Libra Reserve is by backing each coin with stable and liquid assets along with working with exchanges and other liquidity providers. By having an intrinsic value, users can be relatively certain about the fact that the value of Libra today will be similar to the value of Libra tomorrow.
The Libra Reserve will obtain money from two main sources. The first source is the investors of the Libra Investment Token, and the second is the normal users of Libra. For a new coin to be created, an equivalent purchase of Libra-for-fiat must be made, which will result in fiat being transferred to the reserve. In other words, the reserve will grow accordingly with the increasing demand for Libra coins. Similarly, coins are burned when Libra coins are sold to the association in exchange for the underlying assets. This means that the size of the reserve will depend on the size of the balances that users are holding in Libra coins.
The reserve will be held by geographically-distributed network custodians that have an investment-grade credit rating, selected thoroughly, taking into consideration different factors. The only entities that will be authorized to transact large amounts of fiat and Libra in and out of the reserve will be authorized resellers, which will integrate with exchanges and other similar businesses. Regular users will not interact with the reserve, but rather with the resellers.
The money from the reserve will be invested in low-risk assets from multiple stable governments with low chances of experiencing high inflation, which are expected to yield interest over time. The revenue from this will go towards supporting the expenses of the Libra Association, including fund investments in the growth of the ecosystem, grants, and research. Part of the reserve’s money will also go to paying dividends to the early investors of the Libra Investment Token. In the case of significant changes in the market such as an economic crisis, the composition of the basket may be changed, but all such changes must go through a supermajority vote by the Libra Association’s council.
The Libra Association is a not-for-profit membership Swiss organization that governs the Libra blockchain and reserve. The role of the association is to coordinate among the validator nodes “the efforts to develop and secure the network and to promote their joint vision of financial inclusion.” These efforts are allocated towards two areas: a technical area, which is focused on the network’s technical roadmap, and a financial area, which is focused on the allocation of funds to social-impact causes.
Initially, the association will consist only of Founding Members, each of which runs a validator node. Once the network transitions into a permissionless blockchain, other holders of Libra coin will be able to be part of the association and run validator nodes.
Payment companies Mastercard, Visa, and PayPal, are among the companies that are Founding Members of Libra.
The Libra Association is governed by the Libra Association Council, which is made up of one representative per validator node. These representatives make decisions on the governance of the network and the Libra Reserve. All decisions that need to be made are brought to the council and, in the case of major decisions, at least two-thirds of the votes is required. Founding Members can also be removed if they don’t comply with the eligibility criteria, though a two-thirds majority from the council is also needed.
All of the entities in the image above made an investment of at least $10 million to become Founding Members. Each investment of $10 million entitles the investing entity to one vote in the Association Council, though voting rights are capped in order to avoid concentration of power.
It is an objective of the Libra Association to ensure that the network is moving towards decentralization. The Libra Association also plays the role of being the only entity capable of minting and burning coins. The association mints new Libra coins when resellers buy them with fiat assets, and the association buys coins from the resellers in order to burn them.
It is important to address the fact that Facebook will be maintaining a leadership role in 2019. What’s more, Facebook created a regulated subsidiary named Calibra to build and operate services that are related to the network. Calibra will also be in charge of the digital wallet for the Libra coin. However, this is supposed to be only until the 2020 release of Libra. After that, Facebook will reportedly “have the same commitments, privileges, and financial obligations as any other Founding Member”.
The Libra Association is Libra’s proposal to “collectively and democratically” make decisions on the future of the network and protocol. It is supposed to function in such a way that no single Founding Member has total control, not even Facebook.
Positive responses from the community relate mostly to the noble mission of providing financial services to people who don’t have access to banks, but others have also focused on the fact that Libra could actually benefit crypto as a whole, since it could serve as an onboarding ramp that could bring users closer to other cryptocurrencies. Other similar ideas that have been brought forward by the community include the fact that Libra as a platform will help people adapt to how cryptocurrencies and other related concepts work. Erik Voorhees, CEO of ShapeShift, stated that Libra will be the largest bridge towards decentralized finance ever, proving very beneficial for decentralized finance as a whole.
Erik Voorhees, CEO of ShapeShift, claims that Libra will be the largest bridge towards DeFi.
Changpeng Zhao praised Libra for being the “best AML”, but he did so with a rather sarcastic undertone. Seems like even Binance, often accused of centralization, has no love lost for the tech giant holding detailed personal data on 2 billion people.
Changpeng Zhao, CEO of Binance, argues that Facebook knows you better than yourself.
Other outlets have also expressed praise for the project, with the WSJ calling Libra a rival to Bitcoin, dubbing it “the most ambitious effort yet to take blockchain payments mainstream”. However, the WSJ also makes mention of the fact that Facebook didn’t mention which global agency would regulate the Calibra subsidiary, a matter that reportedly has concerned members of the association who fear that Libra could be used for nefarious reasons.
The release of the Libra whitepaper was also met with harsh responses in the world of politics. The head of the U.S. Federal Reserve, Jerome Powell, stated during the Jun. 19 FOMC press conference that there are both benefits and risks to Facebook’s cryptocurrency, echoing the sentiments of Bank of England governor Mark Carney, who said that mass adoption would force Libra to be subject to the “highest standards of regulation.” France’s finance minister Bruno Le Maire was more categorical in expressing his rejection of Libra. After the whitepaper’s release, Le Maire allegedly contacted the G-7’s central bank governors and asked them to review the upcoming cryptocurrency in order to submit a report next month. “It is out of question’’ that Libra “become a sovereign currency,’’ Le Maire said in an interview on Europe 1 radio, “it can’t and it must not happen.”
The majority of the responses from the community towards Libra have been hesitant, if not outright negative. Bitcoin entrepreneur Andreas M. Antonopoulos echoed the voice of many community members when he explained that Libra is not operating on a real blockchain and is not even a true cryptocurrency. He argues that Libra doesn’t have any of the fundamental characteristics of cryptocurrencies, and that “it doesn’t stand on [any of] the five of pillars of an open blockchain. (...) An open public cryptocurrency is open, is public, is neutral, is borderless, and is censorship resistant”.” He also goes against the idea of Libra being a rival to Bitcoin, saying that it will likely affect banks and fiat coins instead.
Another source for negative feedback from the community directly relates to Facebook and its tainted reputation when it comes to privacy matters. Most notably, Facebook made the headlines in 2018 due to the Cambridge Analytica Scandal, where the personal data of 87 million Facebook accounts was obtained illegally for political advertising purposes. This has led many to believe that their banking information and privacy, in general, will not be safe in Libra. In a similar vein, others have joked that using the wallet and trading Libra coins will be just as limited as using a Facebook account, something that users claim can be highly limited and controlled.
Twitter user @JacksonRaccoon states that the privacy of the users of Libra could be at risk, given Facebook’s history.
Saifedean Ammous, a Bitcoin economist, posted a long twitter thread on the day of the release. Initially, he began saying that Libra would be the only cryptocurrency that matters besides Bitcoin, stating that thanks to Facebook’s 2 billion users, alongside its identity verification capabilities, Libra has the potential to become a larger platform than any other existing financial institution.
However, after praising the project, he said that Facebook is building a “centralized payment processor on the US dollar and calling it a blockchain” and that they are “pretending its development will be open source”.
Saifedean Ammous states how Facebook’s Libra has similarities with other shitcoins.
The Foundation is another topic Ammous tackles, saying it was set up to “pretend the thing is independent” and that it will only remain that way until “it tries to do something against FB’s wishes” since Facebook apparently is able to turn off Libra access to its users.
He finalized his thread by stating that Libra’s only chance of survival, in the long run, is to be pegged to Bitcoin, rather than to be pegged to the US dollar, ridding Libra of the problems faced by “any political monetary system”.
Ammous states that the only way in which Libra will survive in the long run will be by being pegged to Bitcoin, otherwise it will suffer the same fate as many other failed projects.
Many community members pointed out that while the involvement of a wide array of corporations and payment companies brings more eyes to crypto, it also goes against its very ethos of decentralization. Additionally, the fact that Facebook assembled and seemingly chose the initial members of the association has also made community members suspicious of Libra.
Twitter user @SarahJamieLewis points out the fact that most members of the association are large corporations who could have the same interests.
This last remark becomes especially worrying when we consider the fact that, according to the white paper itself, only a third of the validators can disrupt the network. This, in other words, means that the Libra blockchain is susceptible to 34% attacks, whereas Proof-of-Work blockchains are vulnerable to 51% attacks (where more than half of the validators need to be corrupt in order to disrupt the network). If we consider that many of the Founding Members are multinational corporations, it is not out of the realm of possibility that they could act together in their best interest. This is just a temporary concern though, as at some point the nodes are supposedly going to be managed by regular holders of Libra. Still, the fact remains that Libra is susceptible to 34% attacks, which makes the Libra network more vulnerable.
The release of Libra is one of the most talked about developments in cryptocurrency in 2019. No matter what the final opinion on the matter is, having a social media giant such as Facebook, backed by companies like Uber, Mastercard, PayPal, and Visa, is no small feat. If anything, it is proof of how far cryptocurrencies have come. Only time will tell what will happen once Libra is released. Some say that all altcoins and blockchain technology in general will benefit from the exposure that Libra will provide. Others think that this will signal the end for many altcoins, as all endeavors, developments, and adoptions will go towards Libra or other already-established coins like Bitcoin or Ethereum.
One thing is for certain, and that is that the reputation of Facebook is damaged. Facebook has taken a rather careful approach by creating a subsidiary dedicated to the project, but the effect of the multiple privacy-related issues that have affected the reputation of Facebook still lingers on. This also applies to other companies that are part of the association whose involvement was met by criticism from the community. This evidences the widespread feeling of distrust towards centralized companies from the community.
In relationship to the white paper itself, it has to be emphasized that it is a white paper. We are still far away from the actual release of Libra. In the months before that release, anything could happen, and the landscape of cryptocurrencies could be drastically different in 2020. Only time will truly tell what will happen once Libra releases, whether it dethrones Bitcoin, becomes the gate for mass adoption, or fades into obscurity.
Thank you for reading,
The COIN360 Editorial Team