In the last few weeks, we have witnessed numerous reports featuring Facebook’s upcoming cryptocurrency, ‘Libra’. Facebook— the social media giant with more than 2 billion users— kept Libra under wraps until it was recently unveiled to the public.
On May 2nd 2019, Libra Networks was registered in Geneva, Switzerland, with ‘Facebook Global Holdings’ as stakeholder.
According to the white paper, “Libra is a simple global currency and financial infrastructure that empowers billions of people.” Libra has five essential components/features:
- Built on a secure, scalable, and reliable blockchain.
- It is a stablecoin which is backed by a reserve of assets.
- It is governed by the independent Libra Association.
- Uses the LibraBFT consensus mechanism.
- Smart contract coding is done through “Move” programming language.
According to blockgeeks, Facebook aims to have 100 members in its Libra Association before the launch, which in on first half of 2020. Final decision-making authority lies with the association but Facebook will maintain a leadership role through 2019. However, the whitepaper states that once the network launches, all the members of the Association will have the same commitments, privileges, and financial obligations as any other Founding Member. All the peers will have equal governance power. Facebook has built a digital wallet called “Calibra” which will be used to interact with Libra.
Users will be able to send Libra via their smartphones by using Calibra. To send funds to your Calibra wallet, Facebook will allow you to select from a list of partner payment providers, such as MasterCard, Visa, PayPal, and Stripe. People will also be able to turn US dollars into Libra for their Calibra digital wallet, by going to local or online currency exchanges.
The Libra Blockchain
The Libra blockchain is not really a blockchain in the traditional sense. The Facebook team decided to code their chain from scratch for it to fulfill the following requirements:
- Must have the ability to scale to billions of accounts. This requires high transaction throughput, low latency, and an efficient, high-capacity storage system.
- Must be highly secure, to ensure the safety of funds and financial data.
- Should be flexible, so that it can power the Libra ecosystem’s governance as well as future innovation in financial services.
- Facebook Libra: Permissioned moving on to permissionless
Blockchain can be widely categorized into the following:
Permissionless vs Permissioned
Bitcoin and Ethereum are both examples of a permissionless chain. Anybody can buy some ASICs and become a miner in either of those ecosystems. However, Ripple is a permissioned network since not just anyone can become a part of its networks. Only banks or financial institutions which have been vetted can become a part of the network.
Permissionless blockchains are highly decentralized but they are much slower since they have a huge number of nodes. Permissioned blockchains are faster but not as decentralized as their permissionless counterparts.
Libra will start as a permissioned blockchain, with the Libra Association taking care of the overall network well-being. Their goal is to become a permissionless chain eventually. However, they acknowledge that there are several hurdles which need to be overcome before they can do so. As of now, there is no proven solution which can handle “the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network.” The Libra Association will be working closely with the Libra community to research ways to implement the transition from permissioned to permissionless. This research will begin within five years of Libra’s launch.
Understanding Facebook’s Cryptocurrency: Libra
The data structure that you see above is a Merkle tree. In the diagram shown, Hash 0-0 and Hash 0-1 are children of Hash 0, which is known as the parent. You can derive the children from the parent hash. The Top Hash is also known as the Root and you can derive the whole tree through the root.
In Libra, the root of their Merkle Tree will have an authenticator value which is similar to the block hash in a normal blockchain. The authenticator of the transaction will depend on the authenticator of the previous transaction.
While cryptos do a great job as a medium of exchange, it is as a unit of account and store of value where it falters miserably. The reason? It is just not stable enough. If you own something that is extremely volatile, will you trust it as a store of value?
Would you want to safely invest your hard-earned money in an asset which may be worth half of its present valuation in 24 hours?
While traders take advantage of this volatility to make their profits, the reality is that they could quickly lose all their money by taking their eyes off the screen. Most of these crypto-crypto exchanges don’t support fiat funds, which is why it is necessary to have a stablecoin where traders can keep their profits untouched.
Cryptocurrencies are not ideal for time-based contracts. If someone were to bet 1 BTC on an event occurring in a year, then they are exposing themselves to two major risks. Firstly, the event may not occur at all, and secondly, the value of BTC may drop down in that time. This volatility makes it extremely difficult to do a proper risk assessment.
Finally, to have widespread mainstream adoption, stablecoins maybe the best form of the currency to take up that role. This is arguably the most important reason why Facebook wanted Libra to be a stablecoin. To boost adoption and to become a “global currency,” Libra became a stablecoin.
So, where does the stability comes from? For that, we need to understand the idea of “pegs.”