The Libra Blockchain: The Hype and Beyond

So... Facebook launched its own cryptocurrency. They are set to take on the world! Is that really what it is? Let's dive a bit deeper...

Introduction

"Libra is a simple global currency and financial infrastructure that empowers billions of people." - said Libra's whitepaper. After what we today know as Social Media, Facebook now aims to revolutionise the Global Payments System.

First and foremost, Libra is a cryptocurrency that will be controlled NOT by Facebook, but by an independent association, the Libra Association ... well, sort of!

Facebook will act as the leader through 2019, but once the Libra network launches in the first half of 2020, with approximately 100 members in the Libra Association, Facebook and its affiliates, will have the same commitments, privileges, and financial obligations as any other Founding Member. As one member among many, Facebook’s role in the governance of the association will be equal to that of its peers.

Going forward, Libra is slated to be completely permissionless, with every participant having the necessary technical requirements being able to run a validator node, which essentially means that as time passes, the Libra Blockchain will become more decentralized, ultimately being distributed.

Whitepaper Analysis

The Libra Blockchain is "A scalable, secure and flexible blockchain platform designed to support a global currency along with other financial services."

The 3 requirements for the Libra Blockchain to meet:

1. Scalability - (the Achilles' heel of Bitcoin) to be a "high transaction throughput, low latency, and an efficient, high-capacity storage system."

2. Security - to ensure the security of financial data and funds.

3. Flexibility - to power the Libra ecosystem’s governance as well as future innovation in financial services.

The 3 decisions regarding the Libra Blockchain:

1. Move - Move is the new programming language to code and implement custom transaction logic and smart contracts, with a ton of features to prioritize the security of the Libra Blockchain.

2. BFT Consensus - Using a Byzantine Fault Tolerant consensus mechanism, which essentially means that any transaction will be validated and processed even if one-third of the nodes are compromised. And the consensus protocol is not Proof of Work like Bitcoin, but Proof of Stake, which means that Libra will be more energy-efficient and scalable.

3. Data Structure - Using the Merkle Trees data structure to detect changes to existing data for the immutability of records.

The Libra Currency and Reserve

For Libra to be a stable digital currency (unlike the likes of Bitcoin), Facebook needs people to have trust in Libra. This will be done by addressing the issue of liquidity constraint as Libra will be "supported by a competitive network of exchanges buying and selling Libra", and ensuring that it always has the full backing of real assets, which is called the Libra Reserve.

The Libra Reserve consists not of gold (like the good ol' days), but of "a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks", which would be "held by a geographically distributed network of custodians with investment-grade credit rating to provide both security and decentralization of the assets."

Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees and pay dividends to investors who provided capital to jump-start the ecosystem. Users of Libra won't receive a return from the reserve.

The association is the only party able to create (mint) and destroy (burn) Libra. Coins are only minted when authorized resellers have purchased those coins from the association with fiat assets to fully back the new coins. Coins are only burned when the authorized resellers sell the Libra coin to the association in exchange for the underlying assets.

Since authorized resellers will always be able to sell Libra coins to the reserve at a price equal to the value of the basket, the Libra Reserve acts as a “buyer of last resort.”

The activities of the association are governed and constrained by a Reserve Management Policy that can only be changed by a supermajority of the association members.

(For the Tech-heads out there, here's the link to their whitepaper. It has further links to the technical papers.)

Future Outlook

Why is it likely to fail?

1. Negative outlook and apprehensions of governments - Any government would want to have the controlling hand over the most important resource of its economy - its currency. By adopting Libra even as a secondary currency, a government fears losing the ability to regulate the money market, or more simply, it can forget that such a thing as a monetary policy exists. It's already being viewed negatively by the Indian government.

2. Lack of Trust - For any type of asset to qualify as a currency, one of the prerequisites is Trust on part of the people in the economy - in this case, the global economy. Since, at the end of the day, the Libra Association does not consist of any government and only private companies, it will be hard for people to put their trust in it and start using it as a currency.

3. Lack of proper clarity - Libra is merely an idea as of now. How will the consensus mechanism actually work? How low will be the transaction fee? How long will it take for Libra to go fully permissionless? What happens to the currencies in existence? Who decides what assets in which countries are to be included in the Libra Reserve? What happens when a person from a country, with no assets in the Libra Reserve, wants to convert her Libra back in the form of real assets? How will the transfer of assets work then?

Thus, there are many questions left unanswered at the moment.

But on a serious note, even at the ideation stage, Facebook has got many things right, as far as designing a global cryptocurrency payment technology is concerned. It has learned from the many previous iterations of cryptocurrencies. For example, it will have Proof of Stake consensus protocol after learning from Bitcoin's issue of scalability and energy management due to its Proof of Work protocol; it will have real assets backing it, as opposed to being highly volatile as a result of mere expectations; it is slated to be truly decentralized in the coming years, unlike competitors like Ripple.

What actually happens... only time will tell!