Facebook has issued a series of whitepapers outlining its plans regarding the new cryptocurrency that it intends to launch in the first half of 2020.
According to the materials released today, the underlying aim of the proposed cryptocurrency, called Libra, is to make moving money around globally as easy, cost effective and safe as sending a text message.
Citing a 2017 report published by the World Bank Group, Facebook points out that 1.7 billion adults globally lack an account at a financial institution or mobile money provider, even though about 1.1 billion of these people have a mobile phone and about 425 million of them have internet access too.
Thus, in addition to making the transfer of financial assets easier and more efficient for people already within the existing financial system, Facebook sees the launch of Libra as a big opportunity to reach this “unbanked” segment of the world.
Of course, other previous cryptocurrency whitepapers have focused on exactly these themes but, as Facebook notes, these assets have not yet achieved mainstream adoption.
“Mass-market usage of existing blockchain and cryptocurrencies has been hindered by their volatility and lack of scalability, which have, so far, made them poor stores of value and mediums of exchange. Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts to improve the effectiveness of anti-money laundering,” it says in one of the whitepapers introducing Libra.
To try and tackle these problems, Facebook says that Libra will be built on a secure, scalable and reliable blockchain, will be backed by a reserve of assets to give it intrinsic value and will be governed an independent body, the Libra Association.
Looking at the blockchain issue, Facebook argues that for Libra to be truly open and operate in a manner that delivers the most benefits for people using it, the blockchain underlying it must be permissionless. However, it also says that it does not currently believe that there is a proven solution that can provide the scale, stability and security needed to support the level of transactions that it envisions occurring across the Libra network. Therefore, the Libra Blockchain will initially be permissioned, with a plan for it to transition to becoming a permissionless one within five years of its launch.
“Essential to the spirit of Libra, in both its permissioned and permissionless state, the Libra Blockchain will be open to everyone: any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers. This is foundational to the goal of building more inclusive financial options for the world,” says Facebook in one whitepaper.
The Libra Blockchain is being designed using “Move”, a new programming language for implementing custom transaction logic and smart contracts. Facebook says that when creating Move, the security incidents that have occured with smart contracts in the past were very much top of mind, which is why the language was designed in a manner that makes it easier to write code that fulfills the author’s intent, thereby lessening the risk of unintended bugs or security incidents.
“Specifically, Move is designed to prevent assets from being cloned. It enables “resource types” that constrain digital assets to the same properties as physical assets: a resource has a single owner, it can only be spent once, and the creation of new resources is restricted. The Move language also facilitates automatic proofs that transactions satisfy certain properties, such as payment transactions only changing the account balances of the payer and receiver. By prioritising these features, Move will help keep the Libra Blockchain secure. By making the development of critical transaction code easier, Move enables the secure implementation of the Libra ecosystem’s governance policies, such as the management of the Libra currency and the network of validator nodes,” explains Facebook.
To facilitate agreement among all validator nodes on the transactions to be executed and the order in which they are executed, the Libra Blockchain utilises a Byzantine Fault Tolerance (BFT) consensus mechanism. This means that even if up to one-third of the validator nodes on the network are compromised or fail, the blockchain will continue to function properly. Facebook claims that this type of consensus protocol also enables high transaction throughput, low latency and a more energy-efficient approach to consensus than “proof of work” used in some other blockchains.
Data on the Libra Blockchain is protected by Merkle trees, which is a data structure used by other blockchains that enables the detection of any changes to existing data. But crucially, unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, “the Libra Blockchain is a single data structure that records the history of transactions and states over time”.
“This implementation simplifies the work of applications accessing the blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework,” says Facebook.
A final point to note on the Libra Blockchain is that it will be pseudonymous, meaning that users can hold one or more addresses that are not linked to their real-world identity. Facebook says that users, regulators and developers will be familiar with such an approach and that the Libra Association will “oversee the evolution of the Libra Blockchain protocol and network”, while continuing to evaluate “new techniques that enhance privacy in the blockchain while considering concerns of practicality, scalability, and regulatory impact”.
The reserve fund
“We believe that the world needs a global, digitally native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance, and fungibility,” says Facebook at the outset of its description of the Libra cryptocurrency.
Now this cryptocurrency is designed to be a stablecoin, meaning that it will be fully backed by a reserve of real assets and supported by a network of exchanges where it is sold and bought. This potentially solves one problem that has plagued some cryptocurrencies such as bitcoin, which is generally too volatile to be a good store of value and therefore remains a poor medium for transactions.
Noting that in their infancy many traditional fiat currencies were backed by real life assets, such as gold, to instill confidence in their value, Facebook says that Libra will similarly be backed by a collection of low-volatility assets, “such as bank deposits and short-term government securities in currencies from stable and reputable central banks”.
This does not mean that the value of Libra will not fluctuate against any given local currency, but simply that it should preserve its value over time. According to Facebook, the assets in the Libra Reserve will be held by a geographically distributed network of custodians with investment-grade credit rating to provide both security and decentralisation of the assets.
“The assets behind Libra are the major difference between it and many existing cryptocurrencies that lack such intrinsic value and hence have prices that fluctuate significantly based on expectations. Libra is indeed a cryptocurrency, though, and by virtue of that, it inherits several attractive properties of these new digital currencies: the ability to send money quickly, the security of cryptography, and the freedom to easily transmit funds across borders. Just as people can use their phones to message friends anywhere in the world today, with Libra, the same can be done with money — instantly, securely, and at low cost,” it adds in one whitepaper.
Interest on the reserve assets will be used to cover the costs of the system, which Facebook says will ensure low transaction fees, pay dividends to the investors who provided capital to jumpstart the ecosystem, and support further growth and adoption.
The Libra Association
The Libra Association is responsible for coordinating and providing a framework for the governance of the Libra Blockchain and the Libra Reserve. This governing entity is an independent, not-for-profit membership organisation, headquartered in Geneva, Switzerland.
The association is governed by the Libra Association Council, which is comprised of one representative per validator node, and will initially consist of the founding members, which include such well-known names as: Mastercard, PayPal, Visa, eBay, Lyft, Uber Technologies, Spotify AB, Coinbase, Vodafone Group and Andreessen Horowitz.
“While final decision-making authority rests with the association, Facebook is expected to maintain a leadership role through 2019. Facebook created Calibra, a regulated subsidiary, to ensure separation between social and financial data and to build and operate services on its behalf on top of the Libra network,” says Facebook.
Importantly, once the Libra network launches, Facebook and its affiliates will have the same commitments, privileges and financial obligations as any other founding member. In terms of governance, its role in the association will be the same as its peers.
“Through the association, the validator nodes align on the network’s technical roadmap and development goals. In that sense, it is similar to other not-for-profit entities, often in the form of foundations, which govern open-source projects. As Libra relies on a growing distributed community of open-source contributors to further itself, the association is a necessary vehicle to establish guidance as to which protocols or specifications to develop and to adopt,” says Facebook.
In terms of managing the reserve fund, the Libra Association is only partly able to create (mint) and destroy (burn) Libra. Coins are only minted when authorised resellers have purchased those coins from the association with fiat assets to fully back the new coins. Coins are only burned when the authorised resellers sell Libra coin to the association in exchange for the underlying assets. Facebook claims that since authorised 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”. These 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.
In addition to releasing details regarding Libra today, Facebook also issued a list of tasks that need to be completed ahead of the targeted H1 2020 launch of the cryptocurrency.
On the blockchain side, this includes: constructing well-documented APIs and libraries to enable users to interact with it; creating a framework for the collaborative development of the technology behind the blockchain using the open-source methodology; extensive testing; fostering the development of the Move language and determine a path for third parties to create smart contracts once language development has stabilised; and researching the technological challenges associated with shifting from a permissioned to a permissionless blockchain.
With regards to the reserve fund, Facebook says that a geographically distributed and regulated group of custodians for the reserve needs to be established, operational procedures regarding how the reserve will interact with authorized resellers must be agreed and policies and procedures regarding how the association can change the composition of the reserve basket need to be put in place.
Meanwhile, Facebook says that it will “work to grow the Libra Association Council to around 100 geographically distributed and diverse members, all serving as the initial validator nodes of the Libra Blockchain”. The association will also be tasked with developing and adopting a comprehensive charter and set of bylaws for the association on the basis of the currently proposed governance structure. There are plans to recruit a managing director for the association, who will then help hire the group’s executive team. Finally, Facebook plans to “identify social impact partners aligned with our joint mission and will work with them to establish a Social Impact Advisory Board and a social impact program”.