First look at Facebook Libra

A detailed review by Binance Research of Facebook's long-awaited entry into the cryptocurrency industry.

Translation made by the INDEX Protocol project team. Now there is a lot of hype in the news around this project, while there is very little real data and good analysis. The Binance Research team was able to produce very high-quality, in our opinion, material that we translated. In the notes we note the points that were supplemented during the time after the release of the report or where we have a separate opinion. If you are interested, our previous translation was about the architecture of decentralized exchanges . The translation was done jointly with coolsiu

On June 18, 2019, Facebook published detailed information about Libra -stable cryptocurrency working on its own blockchain and supported by a basket of financial assets .

In this report, we will look at the details of this new, highly anticipated cryptocurrency, before delving into the technical details. We will also discuss how this will affect local and global markets in different perspectives.

Key points

• Libra is the internal cryptocurrency of the Libra Network blockchain, developed and managed by the Swiss fund and a consortium of companies led by Facebook.
• Cryptocurrency is provided by a basket of financial assets ( Libra Reserve ), which is provided by the operators of the nodes. The initial issue, scheduled for 2020, Libra will be supported by assets denominated in four major currencies: USD, EUR, JPY and GBP.
• This new financial infrastructure relies on Proof-of-Stake (PoS) mechanisms and a 2-token system. At the lower level, the network uses the BFT consensus algorithm and in the future may support smart contracts.
• Over the next 18 months, Libra will be included in the Facebook ecosystem, primarily in key products - FB Messenger, WhatsApp and the main site facebook.com (using Calibra wallet). This will allow to cover the entire total audience of projects (almost 2.5 billion users) and involve it in the work (transactions) with crypto assets.
• It is expected that this initiative will have a significant impact on both local and global markets, and will change the financial and economic landscape.
• In the medium term:
  
  
  • Facebook has every chance to strengthen its position and the opportunity to become an open-source service provider for applications, sites and e-commerce (note: financial services, similar to long-running services, for example, authorization ).
  • Libra can become a trigger for the growth of cryptocurrency capitalization due to the high level of access to both institutional players and ordinary users.
• Long term:
  
  
  • Changes in the payment industry : A new type of players are appearing in the world that jeopardize the dominance of traditional banks as “payment intermediaries."
  • New financial services : New players will create innovative ( more likely, now not existing or owned / controlled only by banks ) services on top of Libra Network, which will be immediately available globally to all network users.
  • Greater freedom of money and capital restrictions : Central banks will find it increasingly difficult to prevent capital flight and maintain tight monetary policies (note: on this subject, governments and regulators of some countries have already reacted violently, unusually quickly, which indicates the reality and seriousness of the new global financial player market ).
  • “ De-dollarization ”: If and when Libra gained worldwide distribution, a new settlement system for world trade appears, therefore, the dependence on the single currency decreases (note: US dollar is implied ) in the framework of international trade turnover.
• The Libra project has every chance of becoming the first "everyday" crypto embodiment of the ideology and theory that underlies such a financial instrument as Special Drawing Rights ( SDR ) and other IMF / World Bank initiatives. The result may be a global cryptocurrency system that combines the adoption of institutional players and the widest possible distribution among users.
  

Review Libra

The Libra project was first announced by Facebook earlier this year and officially unveiled on June 18, 2019.

Libra is a new global cryptocurrency built on an open source blockchain called Libra Blockchain, with its own proof-of-stake protocol.
According to the official Whitepaper , Libra is supported by a non-profit organization called the Libra Association, which has two main functions:

• Manage and supervise the Libra network.
• Reserve management that maintains Libra value.

Libra is supported by its own reserve (“ Libra Reserve ”), which consists of a basket of assets with low volatility, structured in such a way as to maintain their value relatively stable.

However, Libra is not intended to be a stable coin (according to the current definition of stablecoin ), and its value is not tied to a single fiat currency. Instead, Libra will initially be supported by a basket of assets denominated in four fiat currencies: USD, GBP, EUR and JPY.

Although these currencies are included first, we expect that in the long run, other assets that meet three basic criteria, regardless of their nature (cryptocurrency, fiat currencies, etc.), can be included in the Libra reserve basket:

• Individually uncorrelated : only assets freely traded in markets are allowed. Exchange rates should not have a tight relationship with each other or a fixed rate.
• The decision-making process should be tied either to public organizations (i.e. to central banks) or to an asset that is freely available (for example, goods). (note: we are sure that this reservation is specifically for the possibility of inclusion of cryptocurrencies in the future ).
• Prevalence : Assets must be universally recognized in different jurisdictions in order to have program value. For example, Apple shares (AAPL) are only traded in one currency: USD. As a result, these shares do not have additional quotes to serve as a valuation method for other assets in various jurisdictions. Alternative assets, such as gold or bitcoin, could better serve this purpose, as they are traded in several markets around the world and thus are more suitable for inclusion in the basket of assets used to determine the value of Libra for end users around the world.

In addition to the high-level design and key parameters of the Libra ecosystem, we will further examine the technical foundations of the Libra Network.

Technical review

This section will discuss the consensus algorithm, as well as support for smart contracts and token design.

Consensus algorithm

Libra will work on its native blockchain, the Libra Blockchain with the Proof-of-Stake (PoS) mechanism, in which nodes managed by the consortium members are geographically distributed and meet fairly high technical requirements.

These nodes will rely on a new consensus algorithm, which is Byzantine fault tolerant (BFT). The algorithm, called LibraBFT, is a variant of the HotStuff system, first published in 2018 by Maofan Yin and Dahlia Malhi of VMware Research. This may provide future compatibility with other BFT consensus-based blockchains, such as Tendermint and Binance Chain.

Note:HotStuff is a modified version of the well-known pBFT protocol, which reduces the number of rounds of messaging, so consensus requires n + 2 rounds instead of 2n. In return, this leads to very strict and high requirements for the hardware platform of validator nodes and channel bandwidth (recall that in BFT systems, each node must maintain a connection with everyone else). After the first analysis of the protocol, there are some doubts about the appropriateness of such an approach - for the sake of several improvements, the introduction of a new protocol and, most likely, the deliberate lifting of the bar of requirements for validators. The Tendermint Core is already a rather mature solution, tested in battle by several projects, in the development of which many dozens of man-years.

Quorum, a private (permissioned) blockchain created by JP Morgan, was previously widely discussed as another major crypto asset initiative from a traditional (non-crypto) company.
The following table illustrates the similarities and differences between JPM Coin / Quorum and Libra / Libra Network.

Smart Contract Programming Language

Smart contracts will be written in Move, a programming language created specifically for the Libra blockchain. According to the technical whitepaper of the Move language , it is "a language translated into executable bytecode used to implement user transactions and smart contracts."

One of the features of the current private blockchain is ready-made smart contracts that are pre-approved for use on the network. Only these smart contracts will be involved during network startup. Yes, such conditions limit the possibilities for users, but in return it also reduces the likelihood of any error, such as an incident with Ethereum Parity Wallet (note:we are talking about the vulnerability of some versions of multi-signature wallets, as a result of which about 153,000 ETH were lost ). All functions allowed to work are checked by both the consortium members and the community. Already now you can go to the site for developers to read the documentation and start experimenting with the code.

Since there is a consortium of more than 100 different participants behind the Libre Network project, we were able to preliminarily study and highlight the most common, necessary and useful use cases that formed the basis of the basic contracts.

Note:This approach, in our opinion, is not without rationality, just look at examples in the world - most contracts in Ethereum do not shine with a variety of algorithms and are usually based on the already tested and tested OpenZeppelin library, which allows us to consider it part of the standard library for working with Ethereum Another similar option is BitShares, a public blockchain in which the source library of more than 70 basic contracts covers almost all options for using the network. Perhaps if Libra claims to be the next standard in financial technology, this limitation is more than reasonable. However, there is no more information about the implemented options for contracts.

Two Token System

As there are two tokens in the MakerDao system , MKR (management token) and DAI (stablecoin), in other systems with two tokens, there will be a separate management token called Libra Investment Token (LIT), which will allow you to participate in network management. The value of this token is related to the cost of participation in this management or, possibly, to any income or remuneration paid to network-supporting participants, and is not related to the daily market value or activity of the Libra token. Instead, the cost of a management token depends on the durability and usefulness of the tokens offered by the consortium.

However, it is important to note that non-profit organizations, NGOs and other organizations wishing to participate in the management can get this opportunity without having a minimum amount of 10M USD. Due to the fact that many such organizations carry out international payments and transactions, the lowered Libra barrier to entry into such institutions, this can be a significant incentive for their adoption, as evidenced by the already announced participation of three major organizations that influence society: Kiva, Mercy Corps and Women's World Banking.

For ordinary enterprises that do not seek control, we will clarify the conditions whether they will be expressed in specific amounts of USD or as a percentage of the ownership of the entire network (i.e. 1% provided that there are no more than 100 validators).

Global and local influence

In this section, we will discuss the impact from both a local and global perspective in three different ways: short, medium and long term.

Short term

In 2019, Libra will be tested as part of a test network. This live sandbox will allow third-party developers and organizations to experiment with the new blockchain and its smart contract interface.

Based on the list of initial participants , one of the most interesting exceptions is the lack of financial institutions - banks. Earlier, we investigated this issue - non-financial companies are more risk averse than traditional financial companies, and they have more incentives to destroy the payment industry in order to be able to carry out their operations faster and cheaper.

Banks are testing blockchains using XRP / Ripple and JPM Coin / Quorum .
For users of Facebook, Whatsapp and Instagram, Libra is likely to find application in everyday applications, starting with the Calibra wallet.



Although the launch of the main network is expected in 2020, at this stage it is believed that there is no worthy alternative to Libra, which will become a serious competitor of the same level and scale as the initial pool of Libra members, which includes most of the largest companies in the financial technology industry.

Compared to the initial licensing infrastructure of Quorum’s private chain from JP Morgan, the gradual transition of the Libra Network from a controlled environment to a fully open one should interest third-party projects to become pioneers and already begin to develop their own solutions.

Medium term

We expect a positive impact on both Facebook and the crypto industry as a whole.

For Facebook - The Next Digital Frontier

In the past, Facebook has always devoted a significant amount of its resources to creating infrastructure for the whole world.

• Website Authentication : Facebook first introduced its Facebook Login authentication tool on its developer portal, which lowered the initial barriers to building social apps, games, websites and platforms. Today, even despite problems with data and privacy, many users everywhere use this feature to save a few clicks during the registration process on any new site.
• Mobile Application Development : Over the past few years, Facebook has also been developing an open React Native platform for developing applications on mobile and web platforms, again reducing the barrier to creating mobile / universal interfaces with the highest quality UI / UX. Now many applications are created using React, which helps to consolidate the status of Facebook as a serious player in the mobile world.
• Digital payments : the main gem among the entire open source infrastructure? An open source economic platform such as the Libra blockchain and the Move language will keep the company at the forefront again. If other companies, platforms and trading platforms accept this token as the default currency, this can allow Facebook to act as a key player in the e-commerce of the future, while reducing the costs for companies and individuals to create and run a business.

For the world of cryptocurrencies - Accessibility

Today, the world of cryptocurrencies, despite a combined market capitalization of $ 283 billion ( at the time of writing ), is still facing obstacles to global adoption. However, the Libra ecosystem seems to have unique opportunities to expand the reach and influence of cryptocurrencies by increasing accessibility for everyone:

• Adoption Extensions: Today, access to cryptocurrencies requires access to intermediaries when working with fiat currencies or OTC platforms that have the appropriate licenses to work as a transaction intermediary. With Libra, the initial entry into the world of cryptocurrencies and digital currencies can be possible even without the participation of ordinary money. For example, eBay or other trading floors (such as Mercado Libre) participating in the initial consortium can help distribute Libra into the wallets of millions of people, allowing people to sell or offer their services and goods directly for cryptocurrency. Similar to the tokenomics of the BitTorrent ecosystem, which allows users with an Internet connection to provide resources for earning cryptocurrencies, the initial token holders and Internet partners can act as “atomic swaps” (note:reliable intermediaries, there is not a very correct, in our opinion, analogy with the concept of atomic swaps, where the fulfillment of obligations of both parties is controlled by impartial algorithms and cryptography, and not by an arbitrarily large consortium, but still people ) between physical, real resources and digital tokens. The network effect allows you to scale unlimitedly and find the best deals for all market participants.
• Additional arbitrage opportunities : since Libra is trading against major cryptocurrencies such as BTC, this creates arbitrage opportunities that can only be closed by trading a pair of quotes (in this case, BTC) against each of the components in the Libra reserve basket. Such a multi-stage arbitrage strategy can lead to increased trading volumes and liquidity for cryptocurrencies around the world. It can also attract new institutional groups to cryptocurrency trading, provided that they have access to the currencies trading that make up the Libra reserve.
• Increased competition between stablecoin issuers : thanks to its access to local custodial partners in many jurisdictions to ensure the functionality of two-way exchanges around the world, Libra may be ahead of other issuers. Existing stablecoin issuers will be forced to maintain similar levels of transparency and emission management to provide a noteworthy tool for cryptocurrency users.
• Mass digital adoption : finally, with the potential for the formation of many trading pairs on exchanges against fiat, cryptocurrency and other market assets, the Libra token itself has a unique position in order to become a truly massive tool. This paves the way for involving more end users, expanding familiarity with blockchain technology, aligning the learning curve of users of the new crypto ecosystem.

Long term prospects

The long-term impacts of Libra are very different both economically and financially; Some potential macroeconomic consequences include:

• Changes in the payment industry : a new arena with new entrants will appear in the digital world. In the ongoing debate about who will ultimately become the main financial services provider in the mobile industry, the Libra ecosystem can lead to “ unbanking the banks ” (note: a difficult word game for me, essentially depriving banks of the basic financial functions that make their banks ).
• The growth in the supply of financial services : like DeFi (note: the abbreviation for any decentralized financial projects, protocols and solutions ), a programmable blockchain can lead to the creation of new decentralized services for crypto assets, which would ultimately increase competition with traditional finances, providing lower barriers to entry for individuals.
• Ensuring greater freedom of money and reducing capital restrictions around the world : as a basket of world currencies and financial assets, Libra cryptocurrency can contribute to providing new opportunities when people seek refuge for their assets. With Libra's channels and markets, this could prevent central banks from adopting monetary policies based on capital restrictions. Stalkcoins and cryptocurrencies also perform this function in some countries, as evidenced by trading with a large premium on domestic exchanges in countries with limited capital (note:it means that now BTC in some countries, for example, Venezuela or Zimbabwe, is traded on local exchanges much higher than the average rate on world exchanges and this premium (difference in exchange rates) is just an indicator of the desire of capital to leave the country).
• “ De-dollarization of the world ", that is, the introduction of a new unit of account for global trade: if Libra were used everywhere in the world, this could (tentatively) lead to the creation of a new standard for global trade. “This global figure” can be seen as a functional and selling version of the SDR proposed by the IMF. However, Libra is currently more limited (as it does not include the Chinese Yuan) as one of the components, but management in the future will be more decentralized. This will lead to a transition in the monetary economy from government officials to private corporations, which may ultimately violate consumer rights and lead to a new round of monopolization of world exports / imports.

Although this initiative serves a long-term goal for individuals and consumers around the world, Libra, as an ecosystem and cryptocurrency, can also benefit major players and financial institutions around the world. Potential features include:

• A single currency for raising capital : for global companies wishing to raise money through an initial bond issue, it may be interesting to collect money in a “neutral currency” such as Libra, instead of conducting a multiple issue of bonds in different local currencies.
• Settlement currency for world operations : in international affairs, a global (neutral) currency can be useful to facilitate the settlement of litigations between two parties in different jurisdictions, with different national currencies, etc.

Ultimately, in the long run, this initiative may hinder the growth of payment implementations in existing cryptocurrency projects, primarily the Lightning Network, if BTC is not included in Libra Reserve. However, from the point of view of value, Libra (and other similar initiatives) can lead to new opportunities in the industry, increase investment in all cryptocurrencies and digital assets, and the assets themselves remain to perform their functions, which can coexist in parallel with Libra.

In short, Libra, in the long run, can help bridge the gap between crypto and the traditional “off-chain” economy.

conclusions

The Facebook initiative, with the Libra cryptocurrency at the center of the project, will have a significant impact on the financial industry and the global economy, both in the medium and long term. With the support of the fiat money basket in the initial release, Libra is the first attempt to create a world currency, whatever the blockchain. with daily use by billions of people and organizations around the world.

However, the extent of success will depend heavily on how Libra can convince regulators and financial institutions to work with the consortium to create a flexible structure that meets the need for decentralized governance, while adhering to existing domestic and international regulations.

Other important factors are the ability to scale the Libra user base and create a reliable alliance of financial institutions that support the storage of collateral reserves and provide two-way exchange functions (i.e., deposit accounts in fiat currency). In addition, the ability of the Libra Foundation to operate independently of Facebook, just as there is a separation between monetary and fiscal policies in developed countries, will be a key factor in gaining public confidence.

Regardless of whether it turns out to be one of the biggest successes in the crypto assets industry, Libra is likely to contribute to bridging the gap between the right to access basic financial services and those who do not have access to banking systems (note: unbanking people ) .

However, there are still a number of questions for Libra, including:

• What financial institutions will participate in this consortium?
• More detailed information on the profitability of staking and the cost / reward for participation in the network.
• How Facebook will use this project in tandem with the Internet.org initiative to allow access to the Libra network without access to the Internet
• What dApp or tools can be built on top of the Libra core functionality
• How can a network prioritize transactions between users instead of contract transactions that can overload the entire network

Despite this uncertainty, Libra has already laid an extensive and well-thought-out foundation for blockchain and cryptocurrency technologies, which will be accepted by both traditional companies and private individuals.