Libra - a complete technical and analytical guide to Facebook Coin

by Osiris Team


Posted on Aug. 8, 2019, 8:30 p.m.
Analytics
Time to read: 3 min
LIBRA

Dear colleagues and followers,

Osiris Finance presents a guide on Libra, Facebook cryptocurrency totally meant for mass adoption. It includes everything for a crypto enthusiast to know from LibraBFT and HotStuff to the Libra Reserve and issues with asset-backing.

  • Overview
  • Libra (previously known as GlobalCoin or Facebook Coin) is designed to be a new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform[1] proposed by Facebook and managed by Libra Association, founded by Facebook’s subsidiary Calibre and other Founding Members. News on the currency first leaked in May[2] followed by more revelations later in June. The White paper was published on June, 18. Libra features its’ own Proof-of-Stake protocol[3].  The ledger of transactions on the Libra Blockchain will be publicly accessible so that it is possible for third parties to do analysis to detect and penalize fraud.

     

    • White paper

    According to the White paper, Libra believes that the mass-adoption of existing blockchain systems is limited due to their high volatility and the lack of scalability, which makes them poor stores of value and mediums of exchange. Moreover, Libra believes that some of the existing systems were designed to bypass the existing regulations (i.e. money laundering).

    Libra is made up of three parts that will work together to create a more inclusive financial system:

    1. It is built on a secure, scalable, and reliable blockchain;
    2. It is backed by a reserve of assets designed to give it intrinsic value;
    3. It is governed by the independent Libra Association tasked with evolving the ecosystem.

    The Libra currency is built on the “Libra Blockchain”, which is an open source.

    Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra.[4] This is supposed to reduce the volatility, but however, Libra is not “pegged” to a single currency.

     

    • Technical characteristics[5]

     

    • Technical overview

    The Libra protocol allows a set of replicas — referred to as validators — from different authorities to jointly maintain a database of programmable resources. These resources are owned by different user accounts authenticated by public key cryptography and adhere to custom rules specified by the developers of these resources. Validators process transactions and interact with each other to reach consensus on the state of the database. Transactions are based on predefined and, in future versions, user-defined smart contracts in a new programming language called Move.

    Move is an executable bytecode language used to implement custom transactions and smart contracts. The key feature of Move is the ability to define custom resource typeswith semantics inspired by linear logic: a resource can never be copied or implicitly discarded, only moved between program storage locations. Key features of Move can be found here.

    LibraBFT is a robust and efficient state machine replication system designed for the Libra Blockchain. LibraBFT is based on HotStuff, a recent protocol that leverages several decades of scientific advances in Byzantine fault tolerance (BFT) and achieves the strong scalability and security properties required by internet settings. LibraBFT further refines the HotStuff protocol to introduce explicit liveness mechanisms and provides a concrete latency analysis.

    The full guide on performing the first transaction on the Libra Blockchain can be found here.

    The Libra Blockchain is powered by open-source software. The first implementation of the Libra protocol — the technology behind the blockchain — is Libra Core, which is an open-source project managed by the Libra Association using development practices established by the open-source community.

    Moreover, the developers open sourced an early preview of the Libra testnet and the code for the Libra Blockchain.

     

    • Consensus algorithm, LibraBFT and HotStuff

    LibraBFT belongs to the class of classical BFT consensus algorithms and it is based on another consensus algorithm called HotStuff, which in turn borrows some of its consensus logic from other classical BFT algorithm pBFT (Practical Byzantine Fault Tolerance). It works in asynchronous environments like the Internet and incorporates several important optimizations that improve the response time of previous algorithms by more than an order of magnitude. However, critics still argue that protocols like Practical Byzantine Fault Tolerance can be slow and expensive to run, as well as self-restricting, given the existence of an upper bound on network delay.[6] HotStuff is aimed to resolve these issues as adds additional properties to pBFT: 1) Linear View Change, and 2) Optimistic Responsiveness.

    In pBFT each round in the consensus performs similar work (like, collecting votes from replicas etc.), which HotStuff optimizes by chaining Quorum Certificates. HotStuff also implements a mechanism called Pacemaker that guarantees liveness after GST. Pacemaker synchronizes all correct replicas and a unique leader into a common height for a sufficiently long period of time. It chooses the unique leader such that the correct replicas synchronized will make progress with the chosen leader. This mechanism decouples liveness from the protocol, which in turn decouples it from safety.[7]

    LibraBFT improves upon HotStuff with a detailed specification and implementation of the Pacemaker mechanism discussed above. It also comes with a liveness analysis that consists of concrete bounds to transaction commitment. Other than these enhancements, LibraBFT is essentially HotStuff and makes the same assumptions about the system model with a partially synchronous network.[8]

    In LibraBFT processes are called Validators and they make progress in rounds, each having a designated validator called a leader. Leaders are responsible for proposing new blocks and obtaining signed votes from the validators on their proposals.[9] LibraBFT follows the chained HotStuff model explained by the following figure:

     

    • Founding Members[10]

    The association is governed by the Libra Association Council, which is comprised of one representative per validator node. According to the statement in the White paper, members of the Libra Association will consist of geographically distributed and diverse businesses, nonprofit and multilateral organizations, and academic institutions. The initial group of organizations that will work together on finalizing the association’s charter and become “Founding Members” upon its completion are, by industry:

    • Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
    • Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, MercadoPago, Spotify AB, Uber Technologies, Inc.
    • Telecommunications: Iliad, Vodafone Group
    • Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
    • Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
    • Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

    Facebook teams played a key role in the creation of the Libra Association and the Libra Blockchain, working with the other Founding Members.

    The Libra Association also serves as the entity through which the Libra Reserve is managed, and hence the stability and growth of the Libra economy are achieved. The association is the only party able to create (mint) and destroy (burn) Libra. Coins are only minted when authorized resellers have purchased those coins from the association with fiat assets to fully back the new coins. Coins are only burned when the authorized resellers sell Libra coin to the association in exchange for the underlying assets. Since authorized resellers will always be able to sell Libra coins to the reserve at a price equal to the value of the basket, the Libra Reserve acts as a “buyer of last resort.”

    The Reserve Management Policy can be found here.

    1. Conclusions
      • The Libra Reserve

    According to the information on the Libra website[11], the reserve is designed to sustain the confidence in Libra’s present and future value. Backing up Libra coins with a stable amount of liquid assets and closely working with a number of exchanges, it is believed to give confidence in it’s intrinsic value and avoid speculative swings affecting the price volatility of Libra coin, making the investment it’s primary function. Libra Association believes that this confidence is crucial to sustain the mass adoption of Libra.

    • Main issues with asset-backing

    Although the reserve is claimed to be one of the main advantages of Libra in compare with cryptocurrency market capitalization leaders such as Bitcoin (BTC) and Ethereum (ETH), there is an existent precedent of asset-backed stablecoin Tether (USDT) which is supposed to be worth exactly one U.S. dollar. This ratio was maintained, Tether claimed, by keeping exactly one dollar in an account for each USDT issued.

    Despite many skeptics believed that even if Tether claimed to be pegged to the dollar, it may not been actually backed up by the multi-billion amount, the statements about the cash held in Tether Ltd.’s account, reviewed by Bloomberg[12], may not provide the full coverage on Tether’s accounting, but offered insights about the fears may be unfounded. However, Tether never released full audited financial statements proving it had the dollars promised. Even the bank statements reviewed by Bloomberg don’t demonstrate the origin of the funds or where are they now. During this period, Tether struggled to maintain it’s 1:1 peg with the USD, and it wasn’t the only stablecoin unable to do so.

    Other attestations of Tether’s financial accounts were provided by the law firm Freeh, Sporkin & Sullivan LLP in 2018. The number of factors, including Freeh, Sporkin & Sullivan was not an accounting firm and didn’t make the confirmations using the generally accepted accounting principles.

    The credibility of USDT is still a big issue in the cryptocurrency community. With the total capitalization of $3,540 billions of dollars, and the recent changes altering the way in which it backs up the tokens it issues, USDT remains one of the most controversial stablecoins. The latest update adjusted the details of a reserve composition of circulating tokens, now including not only fiat currency but riskier assets such as receivables from loans.

    At this stage, there is a little information about the Libra Reserve, but according to the claim made by Libra, they aim to resolve the issues associated with previous generations of asset-backed cryptocurrencies such as USDT. The money in the reserve will be attracted from investors in the Investment token (association is planning to pay incentives in Libra coin to Founding Members), and the users of Libra. Hence, on the user side, the reserve would grow as new users purchase coins with fiat, which is, in turn, will be transferred to the reserves. The reserves are promised to be diversified to avoid concentration and invested in low-risk assets that yield interest over time, such as bank deposits and multiple countries government securities. The interest will be used to cover the costs of running the ecosystem and to pay dividends to early investors.

     

     

    1. Reaction

     

    • News overview

    News on Libra first leaked in May, followed by more revelations later in June. The White paper was published on June, 18. Although Libra hasn’t yet officially launched, the initial reaction was mixed: while some analysts, including Mark Mahaney and Zachary Schwartzman from RBC Capital Markets believe that “this may prove to be one of the most important initiatives in the history of the company to unlock new engagement and revenue streams”, US representative Maxine Waters, who chairs the House Financial Services Committee believes that “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy”. Donald Trump has recently demanded strict regulations over Libra, stating that 'unregulated crypto assets may cause unlawful behaviour'.

     

     

    [1] Libra White paper - https://libra.org/en-US/white-paper/#the-libra-currency-and-reserve

    [2] Libra (cryptocurrency) - https://en.wikipedia.org/wiki/Libra_(cryptocurrency)

    [3] Facebook Libra (LIBRA) on CoinMarketCap - https://coinmarketcap.com/currencies/facebook-libra/

    [4] Libra White paper

    [5] Technical papers - https://developers.libra.org/docs/the-libra-blockchain-paper

    [6] What is HotStuff and why is it a big deal? - https://medium.com/@cypherium/what-is-hotstuff-and-why-is-it-a-big-deal-213f39696763

    [7] A technical perspective on Facebook’s LibraBFT Consensus algorithm - https://www.theblockcrypto.com/2019/06/19/a-technical-perspective-on-facebooks-librabft-consensus-algorithm/

    [8] A technical perspective on Facebook’s LibraBFT Consensus algorithm

    [9] A technical perspective on Facebook’s LibraBFT Consensus algorithm

    [10] Libra White paper

    [11] The Libra Reserve - https://libra.org/en-US/about-currency-reserve/#the_reserve

    [12] Crypto-Mystery Clues Suggest Tether Has the Billions It Promised - https://www.bloomberg.com/news/articles/2018-12-18/crypto-mystery-clues-suggest-tether-has-the-billions-it-promised


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