02 Aug 2019

Facebook’s Libra stablecoin – A blockchain without the blocks (or chain)?

Announcement & initial reception

Facebook announced its new global cryptocurrency, the Libra coin, on 18th June 2019 as well as a new subsidiary, Calibra, which will handle its Libra-related business interests (Calibra is also the name of the wallet app offered by Facebook to Libra users). The launch date for Libra has not been announced but expectations have been set for the first half of 2020.

The announcement, which came hard on the heels of the $5Bn fine levied by the Federal Trade Commission for user data privacy violations relating to the Cambridge Analytica affair has had – at best – a mixed reception.  Indeed, many lawmakers and regulators – particularly in the US have been quick to express their opprobrium.  The chorus of execration included the comparison of Facebook’s Libra innovation to the 9/11 attacks amid general fears of Facebook becoming even more powerful on the back of its increased access to users’ data via financial and commercial transactions carried out over the Libra system.

Thus, the Libra project has already become highly politicised, drawing analogies with US anti-trust sentiment of the late 19th century but transcending economics and on a global, not just national, scale.  At the time of writing it remained unclear – notwithstanding assurances from Facebook – whether Libra would only be launched with the blessing of US lawmakers and regulators or whether it would launch in those jurisdictions in which it could gain approval, an obvious starting point being in Switzerland where the Libra Association (q.v.) is based.

Libra positioning & architecture

Conceptually, Libra is a rival to the cryptocurrencies based on blockchain technology such as Bitcoin and Ethereum but also to other innovators such as the payments systems challenger, Ripple, with which it shares the characteristic of being based on a permissioned blockchain structure (i.e. by invitation only) rather than public, (i.e. open to all).

Unlike other leading digital financial platforms such as R3’s Corda and Hyperledger Fabric, however, transaction data will be available to all participating nodes (on Corda and Fabric you can only view your own data), albeit on a “pseudonymous” basis – i.e. you can see the transaction data but wouldn’t necessarily know who the parties involved were.  Having said this, it’s far from inconceivable that Facebook themselves couldn’t “join the dots” from transactions on the Libra blockchain back to Facebook users’ account details.

Libra is importantly different to the principal cryptocurrencies, bitcoin and Ether in that it will be based on a “stablecoin” structure, i.e. fully backed by reserves of assets, such as Treasuries, denominated in major currencies such as US Dollars, Euros, Yen and Sterling.

One of the important objectives of stablecoin structures is to reduce cryptocurrency speculation by anchoring coins’ value to mainstream currencies, particularly where the resulting volatility and increase in value could undermine their principal socio-economic purpose of acting as a low cost, reliable means to transfer value.

A perhaps unintended side-effect of this basis on major currencies is the potential for it to become a significant conduit for the transference of capital out of emerging market currencies by investors seeking to protect their savings against inflation.

A key objective of the architecture is to enable the system to process a large volume of transactions (capacity is claimed to be 1,000 per second) and to be scalable which, inter alia, has resulted in Facebook adopting a unique architectural design. As with the Ripple and Corda networks gaining traction in traditional financial services applications – the Libra blockchain does not follow the more traditional, “pure” blockchain designs of Bitcoin and Ethereum but nonetheless draws on the technologies of these systems, including distributed ledger technology, hashing of data and public/private keypair encryption for ledger security, smart contracts for expeditious execution and Merkle Trees for efficient storage of the ledger history.

An important difference is that the Libra ledger history will not be stored at the block level; rather it will hold transaction level data.  The role of block creation and chaining will, however, be critical elements of the transaction validation and commitment (i.e. the final confirmation process, similar to the Bitcoin blockchain process). Thus, it is inaccurate to describe Libra as being “a blockchain without the block or chain”. From a pure database structure perspective, the block in which a transaction has been included for commitment to the ledger becomes superfluous metadata once transactions have been finally confirmed. By eliminating the block hierarchical level, storage and retrieval systems can be a great deal more effective.

Another important difference – compared to the major cryptocurrency blockchains – is the consensus protocol. Rather than the highly energy intensive Proof of Work (PoW) protocol notoriously used by Bitcoin, Libra is based on a Byzantine Fault Tolerant (“LibraBFT”) consensus – i.e. it can reach consensus regarding the validation and confirmation of transactions via a voting system even where there are potentially malicious actors in the system.

However, Libra has stated a long-term ambition to evolve to a permissionless system based on Proof of Stake (PoS), where voting power is based on quantities of Libra Coin owned.

These design features, according to Libra, will enable the system to process 1,000+ transactions per second which puts it in the same ball-park as Ripple (c. 1,500) and Visa & Mastercard (c. 2,000).  Bitcoin and Ethereum can only process around 7 and 15 transactions per second, respectively, due – in large part – to their permissionless consensus protocols being significantly less efficient than the LibraBFT and similar validation systems (generically referred to as Practical Byzantine Fault Tolerant – or pBFT – protocols).

Libra Association

At the announcement date there were 28 “Founding Members” of the Libra Association (LA) based in Geneva.  In addition to Calibra, members included credit card network giants Visa and Mastercard, PayPal, Uber, Vodafone and Coinbase (a cryptocurrency exchange).  No banks were amongst the initial members.  The role of LA members is to act as Validators for transactions in the system as well as acting as the governance body for the overall Libra enterprise.

The sheer number of active Facebook users (c. 2.4 billion at the time of writing) provides Libra with a potentially enormous business based around users sending each other money as well as purchasing goods and services. The premise is that transactions costs will be low – important from the perspective of delivering Facebook’s stated socio-economic objectives such as increasing financial inclusion – and consequently profits from the system itself are expected to be relatively low.  However, the commercial benefit to Facebook could be expected to come from their ability to increase advertising pricing by providing users with a more convenient way to purchase advertised goods and services, consequently increasing conversion rates.

Conclusions: Libra as beneficent facilitator or “Bond Baddie”?

In truth, the potential socio-economic benefits of blockchain originally envisaged via the creation of an “internet of value” – particularly in alleviating poverty via the facilitation of micro-economies and greater financial inclusion through the reduction of transaction and other processing fees for financial services – have yet to be realised.

Notwithstanding the legitimate concerns of lawmakers and regulators regarding Facebook’s trustworthiness – particularly with respect to the use of the greatly increased amount of very valuable user data that would be created by such a system – its global reach via the huge social media network does, in theory at least, have the potential to create a platform to realise the socio-economic benefits originally envisaged.

However, there is a not insubstantial risk that Facebook could simply be furthering its plans for global domination via the Swiss-based Libra Association through control of global currency systems, banking and securities markets as well as even more user data if it gained traction amongst its user base who, after all, represent around a third of the world’s population.

One of Facebook’s ripostes to its congressional inquisitors was perhaps instructive about its own strategy and (existential) risk perception.  Along the lines of “if we don’t do it, someone else will” may reflect potential threats from the other FAANGS but also from the Chinese BATs via ancillary financial services provided by WeChat Pay and Alipay.

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