Report:
Initial Analysis of Facebook Libra Protocol and Currency

Arf.one
Arf.one
Jun 20 · 4 min read

Executive Summary

Facebook just announced the “Libra Protocol” and “Libra Coin” scheduled for public release in the 1st half of 2020. It’s a bold move from the company for a bunch of reasons:

· Libra is a stable cryptocurrency to be used by the 2,4 billion strong Facebook community around the world. Just this number is mind-boggling in and on itself, not just for the crypto market but the entire financial system.

· Libra is probably the biggest attempt in the history of capitalism to overtake the creation and distribution of money from state actors and banks (central and otherwise). In the long term, a new set of gatekeepers may emerge in the digital world which would threaten the existing positioning of banks as “payment facilitators”.

· Libra is not backed by a single currency but a basket of currencies (USD, EUR, GBP & JPY for now), called “Libra Reserve”, which is positively surprising coming from a US company in the direction of un-dollarization of the world.

· Facebook not only decoupled the management of Libra but also its main wallet Calibra. Libra protocol will be governed and oversaw by the “Libra Association” established in Switzerland and comprised of some massive tech companies and non-profits (100 founding members including Facebook). Calibra mobile wallet is built by a subsidiary of Facebook independently. Calibra will support the existing Facebook messaging ecosystem comprised of Whatsapp and Messenger.

Libra could spark additional cryptocurrency volume due to increased accessibility from both institutional players and everyday retail users.

Technical & Procedural Details

Unlike cryptocurrencies running on public, permissionless blockchains like Bitcoin or Ethereum, Libra is a permissioned system for now governed and oversaw by the Libra Association. Just like in MakerDao’s MKR (governance token) & DAI (stablecoin) system, and other two-token systems in the cryptoasset industry, there will be a governance token called the Libra Investment Token (LIT), which will allow for participation in the governance of the network. Initial (founding) members of the Libra Association will have to buy $10 Million worth of LIT each to become a member and have the right to run validator nodes.

The white paper suggests that Libra protocol will use Proof-of-Stake as it evolves to a permissionless system in the coming 5 years. However, it seems that they haven’t solved any of the major problems that Ethereum has been tackling for its own PoS protocol for years now.

One of the most important parts of the protocol is that it supports smart contracts, built by the newly introduced “Move” language, run on Libra Virtual Machine, similar to Ethereum ecosystem. However, smart contracts from 3rd party developers will not be allowed in the protocol for an undeclared time as the Move language and the protocol mature.

Comparing JPM’s Quorum & Facebook’s Libra (Resource: Binance Research)

Conclusion

Although it’s very early to make definitive judgments on the possible effects of Libra to the financial ecosystem in general or to the cryptocurrency market. However, it is safe to assume if Facebook can release Libra successfully it will render a majority of altcoins and stablecoins moot since it does the same job better, at a significantly higher scale and liquidity. It is, however, a net good for Bitcoin for several reasons.

· Millions of people around the world will be introduced to cryptocurrency first time at an unprecedented speed.

· Thousands of merchants will start receiving payments in the form of a cryptocurrency.

· There will be a global onramp (cash-in) to Libra once it’s released, meaning people will buy the Libra currency using their local fiat currency. A percentage of them will convert Libra to Bitcoin.

· Libra might become a cash-out option (even the de-facto e-money) for other Bitcoin wallets in many developing countries.

Since Libra is a permissioned protocol Libra Association will have to work closely with regulators in each country that Libra is available. Even now, regulators from the EU and US have expressed concerns about the initiative. French Finance Minister Bruno Le Maire said that whereas US House Financial Services Committee Chairwoman Maxine Waters went a step further and outright . Hence, one cannot dismiss the chance that Libra may never see the light of day or become extremely geographically limited which contradicts Facebook’s global ambitions and brings the $10 Million price tag on validator nodes into question.

Even though Facebook’s ambition is to slowly (in 5 years) convert the protocol to a permissionless one there are major obstacles ahead before that can be done. Libra’s seemingly proposed Proof-of-Stake network has proven very problematic with Ethereum over the years and Facebook seems to just assume that those problems will be solved in just 5 years. Also, the way validators connect and come to a consensus using the “Libra Byzantine Fault-Tolerant Consensus” mechanism seems to require a lot of work before it can be scaled past a few hundred validators. These factors may force Libra to remain a permissioned protocol for much more than 5 years, maybe forever. This possibility begets the question of whether a consortium of giant corporations can be trusted with the entire financial system.

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Arf — We Make Bitcoin Simple in Everyday Life

Send/receive Bitcoin and get paid in Bitcoin abroad with “0%” network transaction fee, always!