Will Libra be a Crypto Killer or a Flash in the Pan?
Thoughts from Chris Li, Vite Labs CSO
Several days ago, Facebook launched the official whitepaper and Testnet of its much-anticipated Libra cryptocurrency. Will this put Facebook on the path to becoming a new whale in the crypto space? Or is this just an attempt to regain public trust in light of their privacy and security scandals? Let’s take a closer look.
Overview
Libra is a permissioned blockchain that serves primarily as financial infrastructure to improve public access to financial services. Secondly, Libra will serve as an open-source platform allowing for community-built applications. Using their new programming language, Move, developers can write smart contracts supported by the Libra virtual machine.
There will be two cryptocurrencies issued on Libra, the Libra Coin and Libra Investment token. The Libra Coin is a “stablecoin” whereas the Libra Investment Token is a security that acts as an incentive for others to join the Libra network.
Facebook claims to build Libra as a decentralized system. Currently, over 20 entities have joined the Libra consortium. Facebook’s goal is to onboard 100 entities to form their governing body. Additionally, although Libra is currently a permissioned blockchain, there are plans to switch to a permissionless platform in the future.
Blockchain Technology
Libra is currently a permissioned blockchain. The Libra protocol uses an authenticated data structure, which decreases confirmation time and fork rate. The consensus algorithm is called LibraBFT, a variant of HotStuff, which is primarily a mix of PBFT and DLS, with some Casper and Tendermint mixed in. The blockchain uses an account model and requires users to remit gas fees when sending transactions. The current expected transaction per second (TPS) will be around 1000.
Although Facebook’s consensus algorithm has a new name, “LibraBFT”, their fundamental technology is based on already-existing public blockchains — in other words, they haven’t innovated much in this regard.
Users will be charged gas fees, which could be a deal breaker for high frequency applications developed on this platform. 1000 TPS might be enough for most DApps on the current market, but this speed is way too low to be acceptable for large-scale applications, such as transferring money between all the WhatsApp users worldwide. Theoretically, Libra can use layer 2 solution to scale up, but building out a layer 2 technology might become its own issue.
Libra Coin
The Libra Coin (LC), or the so-called “stablecoin” will be used primarily for transactions. Currently, most stablecoins on the market are pegged 1:1 to an existing fiat currency. Facebook’s LC will not be pegged to fiat. According to the whitepaper, LC will be backed by “a set of stable and liquid assets” to ensure that the “value” of the coin today will be close to that of tomorrow.
At first glance, this is an interesting stablecoin concept that seeks to prevent price fluctuations of stablecoins pegged directly to fiat currencies by spreading the risk across a basket of assets. This feature may be helpful for people living in areas where the local currency fluctuates drastically due to inflation, but for those living in places where the local currency is relatively stable (for example, the United States), the price of the holdings in your account may change every day. This will also bring uncertainty to merchants when deciding whether they want to accept Libra as a viable payment method.
Libra Investment Token
Libra Investment Token (LIT) is the other native token issued on the Libra blockchain. Holders of LIT have access to interest gains from the reserved assets of LC. Additionally, companies that want to become block validators must invest a minimum of $10 million to LIT.
That means, despite the LC users being the ones putting in the funds in exchange for LC, at the end of the day, Libra will send all the interest they made from your investment to another group of people.
Dividends aside, “the reserve assets are a collection of low-volatility assets, including cash and government securities from stable and reputable central banks”. Does this sound familiar? Although Facebook is claiming that it wants to build a decentralized network, we are still depending on a Libra “bank” with its bank reserve. The only minor difference is that this time, we are trusting a consortium rather than a single company. We are still moving backward from a decentralized network to a third-party trust.
Governance
The Libra Association is a nonprofit organization based in Geneva, Switzerland. This organization consists of all the Libra chain validators (which, as a reminder, paid $10 M to join). Each validator entity appoints one representative to sit on the council that forms the off-chain governing body behind Libra chain. Each representative’s voting right corresponds to their voting weight in the protocol — that is, how many LIT they owns i.e. how much money they invested to join.
With this set-up, Facebook is laying the groundwork for transitioning the off-chain governing to an on-chain governance model since each representative’s voting rights are already tied to the amount of LIT they hold. This makes sense given Facebook’s plan to transition to a Proof-of-Stake (PoS) system.
What makes less sense is the fact that once the transition occurs, these validating entities will be assigned voting rights proportional to the amount of LC they hold.
Regardless of the difficulty of switching underlying incentive structure, once this shift occurs, all blockchain-related functions of LIT will be removed, rendering LIT essentially useless as a token. Previously, the main function of LIT is to act as a staking token, with interest collection and distribution happening off-chain. However, once LIT staking is removed (since voting rights will be proportional to LC in the PoS system), there will no longer be any reason for LIT to be on-chain.
Conclusions
Libra has lofty ambitions to bring blockchain to the masses. Although it brings some innovation to the blockchain space with a unique stablecoin model, virtual machine programming language, and mixture of permissioned and permissionless blockchain, it faces issues such as gas fees and performance limitations. Furthermore, its current model seems to be a contradictory patchwork of solutions:
- The “stablecoin” model attempts to solve price fluctuations of stablecoins tied to fiat currencies, but by pegging to neither real nor fixed currencies, Libra Coin may end up being even less stable in value.
- To create some aspect of decentralization, they opted to first create an off-chain governing body tied to a token that will become useless once transitioned to a PoS system.
- Libra might have began as an open-source protocol. However, it seems that Facebook felt the original set-up was too open, and as a result ended up bringing in additional entities to form a governing body.
If we look back at the history of innovation, many new technologies were brought to the forefront by emerging companies. It is better for giants like Facebook to actively cooperate and support small startups with innovative technology rather than bringing in current whales in non-related industries. Only through openness and inclusiveness will blockchain achieve real adoption.
References
[1] The Libra Blockchain, https://developers.libra.org/docs/the-libra-blockchain-paper
[2] Move: A Language With Programmable Resources, https://developers.libra.org/docs/move-paper
[3] State Machine Replication in the Libra Blockchain, https://developers.libra.org/docs/state-machine-replication-paper
[4] The Libra Association, “An Introduction to Libra,” https://libra.org/en-us/whitepaper
[5] The Libra Association, “The Libra Association,” https://libra.org/en-us/association-council-principles
[6] The Libra reserve, https://libra.org/about-currency-reserve
[7] Moving toward permissionless consensus, https://libra.org/permissionless-blockchain
[8] There’s a Second Token: A Breakdown of Facebook’s Crypto Economy, https://www.coindesk.com/theres-a-second-token-a-breakdown-of-facebooks-blockchain-economy
