June 2019

Facebook's Libra Network

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In June Facebook announced that it would be releasing its own blockchain called the Libra Network. This is a hugely significant announcement for the ecosystem. With one of the largest companies in the world designing its own solution, Facebook has validated the idea of public blockchains.

In June Facebook announced that it would be releasing its own blockchain called the Libra Network, targeting a launch in 2020. This is a hugely significant announcement for the ecosystem. With one of the largest companies in the world designing its own solution, Facebook has validated the idea of public blockchains, smart contract platforms and digital assets. The announcement of Libra has led to a broad spectrum of reactions. The media sees it as the “Dawn of corporation-government”. Lawmakers are concerned about the implications of a global digital currency run by Facebook. Banks say that Libra could impact global financial stability. Blockchain enthusiasts are torn between concern at its lack of decentralisation and euphoria as to Libra bringing further legitimacy to the space. This month we are going to dive into what the Libra Network is, how it works and its implications for the broader blockchain ecosystem.

The announcement of Libra did not come as a surprise. Mark Zuckerberg, Facebook’s CEO, famously takes on annual challenges. One year he learned Mandarin and another he visited every US state. In 2018, he decided to spend the year focusing on decentralized technologies. In tandem with this personal focus on the space, Facebook’s internal blockchain team grew in size and stature throughout 2018 and early 2019. With the CEO dedicated to researching the space, the announcement of a blockchain project (Libra) was widely anticipated. At CMCC, we first reported about Libra in our February investor letter.

There are a number of parts that make up the Libra Network and Facebook has clearly taken inspiration from a lot of existing projects. At the lowest level (1), consensus is reached in a similar way to Tendermint BFT that is used by Cosmos. The validators tasked with coming to consensus are part of a consortium of members (2) that govern the network, similar to Hedera Hashgraph. On the application layer (3), the account model is similar to Ethereum. Libra has a token (4) that is collateralized in a similar way to many stablecoins. Finally, Facebook announced a standalone wallet called Calibra (5) that will be similar to other digital payment services like PayPal and Venmo.

At the heart of the Libra protocol is the consensus layer (1), that allows all of the Libra nodes to come to agreement as to the state of the network. The network uses a state replication machine called LibraBFT to do this. The design of LibraBFT is similar to Tendermint, the system used in Cosmos, and it also draws inspiration from HotStuff, a protocol created by VMware Research 2018. There are rounds of voting, and in each round a single validator is selected to become the leader. Leaders are responsible for proposing new blocks and obtaining signed votes from the validators on their proposals.

The Libra network is permissioned, meaning that validators need to be accepted by Facebook to join their Geneva-based not-for-profit organisation called the Libra Association (2). This association of validators has governance rights over the network and will earn interest and fees from operating the network. The Libra Association has the power to determine the technology roadmap, the use of its budget and it has control of the Libra reserves. This association is formed of global companies that must each contribute USD10m to the Libra “reserve” that backs the libra token. Facebook has stated that the network will become more decentralized over time. However, given that this will require the agreement of the Libra Association, there is a risk that the members opt not to open up the platform given their incumbent advantage and potentially large fees.

Running on top of the consensus layer is the application layer (3). This is where smart contracts and applications are deployed. Facebook has created a new programming language, called “Move”, to allow developers to interface with the application layer. Move is a general purpose, on-chain language. The main innovation of the language is that it defines digital assets as a new data type known as “resources”. Resources could be tokens, a shipment to be tracked or the deed to a home. Anything that is declared as a resource behaves like a physical asset, meaning that they can be transferred between wallets, but not copied. Move is one of the more interesting parts of the Facebook announcement and we anticipate it shaping dapp development in the decades to come.

Existing on the application layer is also the Libra token (4), the most reported on part of the Libra announcement. This is a cryptocurrency that Facebook will undoubtably incorporate into its existing applications, exposing it to over 2.5 billion users across Facebook Messenger, Instagram and WhatsApp. This token will be stable in value as it is backed by a basket of fiat currencies in the Libra reserve (as of now, USD, JPY, EUR and GBP). This reserve will be managed by the Libra Association. Interest income from its reserve treasury, which comprises of both the USD1bn coming from the 100 validators (who each contribute USD10m to the reserve) as well as from Libra users who will purchase Libra tokens with fiat currency, will be distributed to the association members (the 100 validators) along with income from transaction fees. It is important to note that the Libra token is not a USD stablecoin, in that it will not be directly pegged to the USD. Instead Facebook says it is a “low-volatility cryptocurrency that will have the ability to serve as an efficient medium of exchange for billions of people around the world”. This statement seems to suggest that the Libra token could become a replacement to other government backed fiat currencies.

The final part of the Libra announcement is the release of a new wallet (5) for users to be able to store and transfer the Libra token. This wallet is being branded “Calibra” and is a wholly owned subsidiary of Facebook. At launch, the wallet will be available in Facebook Messenger, Whatsapp and as a standalone app. In its announcement, Facebook notes that “almost half of the adults in the world don’t have an active bank account”, that “70% of small businesses in developing countries lack access to credit” and that “USD25 billion is lost by migrants every year through remittance fees”. It seems clear that Facebook is targeting international remittances and the developing world in general. Interestingly, much of the Calibra announcement is focused on user privacy, something Facebook knows it will face tough questions about.

The announcement of Libra has caused a flurry of media analysis. There are three primary criticisms levelled at the platform; lack of decentralization, lack of privacy and regulatory uncertainty. It is true that Libra will not be decentralized relative to protocols like Bitcoin. To participate in consensus, validators must be part of the Libra Association and de facto must be approved by Facebook. On top of that, the Libra cryptocurrency will not be a borderless asset. For example, it is unlikely that Libra will be available in Iran due to US sanctions and we can expect the Libra Association to be able to block transactions. On the other hand, the platform is far more decentralized than fiat currencies like the US dollar. Facebook has also stated that it wishes to decentralize over time, which is a sensible option and similar to the stance taken by NEO. By starting out relatively centralized the platform can adapt more quickly without needing to get a large number of stakeholders to agree.

Regarding privacy, it is unlikely that Facebook will prohibit governments and law enforcement from tracking transactions. Indeed, this is likely to be a requirement from a regulatory perspective in order to prevent money laundering. The more prescient question is whether Facebook will have the willingness to censor itself from analysing user spending data. The company already has access and insights into user locations, activities and behaviours. Adding spending data to a user’s digital avatar would complete the picture for Facebook and likely unlock additional advertising dollars. The company is highlighting privacy as a key priority for them, but given Facebook’s recent track record, privacy remains a serious concern.

From a regulatory perspective, Facebook is already facing a backlash. Politicians are concerned both for their citizen’s privacy, but also for their own control of the money supply. In the US, House Democrats have requested a halt to development until Congress has had time to investigate the risks it poses to the global financial system. In Europe, senior politicians are concerned about Libra becoming a sovereign currency and are calling for G7 banking officials to issue a report on Facebook’s plan. It is clear that the Libra announcement will have an impact on the regulatory landscape. However, this is likely to be positive for the ecosystem. It will force regulators to make decisions and clarify their positions. Additionally, Facebook has the resources to make a case for Libra to the world’s regulators, something that many smaller blockchain projects do not have the ability to do.

Despite the criticisms levelled against Libra, this is a hugely positive announcement for the blockchain ecosystem. One of the largest companies in the world has been working on blockchain technology and decentralized infrastructure for over a year and is now entering the space. The scale of their ambition is vast, with Facebook’s distribution channels able to target a third of the world’s population. Libra will become the largest bridge to decentralized finance, blurring the line between finance and technology. Most importantly, Facebook will educate a large portion of the world as to how to use digital assets as they bring practical use cases of blockchain and cryptocurrency to a mass market audience. From here, Facebook’s users may be inclined to try out different flavours of decentralized system. We are already seeing mainstream news outlets discussing Libra in comparison to platforms like Bitcoin, Ethereum, Hashgraph and others. Libra could be the catalyst for these platforms to gain mass adoption.