A ‘stablecoin’ that can not be mined, with its own programming language and an opaque reservation: this makes Libra different from the rest of cryptocurrencies

A 'stablecoin' that can not be mined, with its own programming language and an opaque reservation: this makes Libra different from the rest of cryptocurrencies
A 'stablecoin' that can not be mined, with its own programming language and an opaque reservation: this makes Libra different from the rest of cryptocurrencies

Libra is the new digital currency driven by Facebook. A powerful initiative that counts on the support of important companies and is postulated as a strong alternative to the most popular cryptocurrencies. Like these, Libra will be based on Blockchain but the similarities end there, since we are facing a digital currency with very specific characteristics.

Cryptocurrencies have a series of properties that differentiate them from traditional currencies. These include a decentralized responsibility, open access in which anyone can connect and greater security through cryptography. But far from being all the same, the truth is that today we have very different cryptocurrencies. Some totally decentralized but very volatile as Bitcoin and others linked to different values, known as ‘stablecoins’. Libra would be of the second type, but its configuration is quite special.

Once the Libra Association has released the ‘White Paper’, we have been able to examine how this new digital currency will work, how it is created and what kind of operations it will allow to carry out.

To what extent is Libra really a cryptocurrency?

It depends on what we define as cryptocurrency. If we refer to the way in which transactions are accepted and payments are approved, then Libra itself is a cryptocurrency. In this case, Libra uses a protocol called HotStuff developed a few months ago by VMWare. However, if as the most purist we define cryptocurrency in terms of how the network is managed, then Libra would not be a cryptocurrency as such, simply a “digital currency”.

To understand how Libra works, we must differentiate three key elements: the Libra Association, which is in charge of making decisions; Libra Blockchain, a new type of Blockchain that will allow establishing the so-called ‘ Smart Contracts ‘ and finally the Libra itself (≋) , the cryptocurrency. A ‘stablecoin’ whose value will be linked to a fund of fiat currencies such as the euro, the dollar or the yen.

Is Libra an ‘open source’ currency?

Libra will be an open source currency under the Apache 2.0 license. The developers will be able to read, build and participate in the patch program. If you are an interested developer, Libra has already made available a preview of Libra testnet, along with the necessary documentation. At the moment it is in the early stages of development, but we are facing an open platform.

To explore and work with Libra, the organization has also presented a new programming language, Move, as well as a new virtual machine. In the case of Libra Blockchain, the intention of the platform is to launch Libra Core, written in Rust and that will end up becoming a new open protocol alternative to Blockchain.

What is the role of Facebook in the development of Libra?

Facebook explains that its team has had a leading role in the development of Libra Blockchain and for the moment in 2019 it will continue acting as its most important developer.

Once the digital currency is launched in 2020, Facebook will maintain the same privilege as the other founding members. That is to say, it will have a vote in the management of Libra Reserve as well as future developments, but the functioning of Libra is not related in any way to the ecosystem of Facebook applications.

Facebook will be a member of the Libra Association and the cryptocurrency will not be linked in any way to the Facebook ecosystem. Different subject will be the digital wallets used to manage and pay with Libra.

Additionally, Facebook has created a subsidiary called Calibra. It is a company through which the Libra currency will be managed within the Facebook ecosystem. While for the management of Libra Facebook will only have its influence as a founding member, through Calibra it will be able to apply their respective policies.

In case of doubting the privacy of Facebook, David Marcus, director of Calibra, then recommends simply “betting on one of our competitors’ purses”.

Is Libra a decentralized currency?

The new cryptocurrency makes use of its own block chain called Libra Blockchain based on a consensus protocol called Byzantine Fault Tolerant (BFT). At the moment the Libra Association is the main responsible, but according to the documents shown, the intention is that in the future a fully decentralized currency will be used, where each individual can validate new nodes and confirm that the transaction is safe. Of course, this is a promise of the future.

Like other cryptocurrencies such as Ethereum or Tezos, for the moment the responsibility of the structure rests with its inaugural members, where each of them will have its own node to offer access to the network. There are currently 28 founding members, but according to the Libra Association at the time of launch, it is expected to have 100.

According to the sources, the annual estimated cost of maintaining a Libra validation node is about $ 280,000, high enough to keep many enthusiasts out. Beyond the cost, it is also not very clear what this transition would be like as it should have the approval of the Libra Association.

Can it be mined like most cryptocurrencies?

As designed, Libra Blockchain will begin by authorization with a Proof-of-Stake (PoS) system, which means that only founding members will have the necessary hardware to participate in the consensus process necessary to create new coins. It is a solution that we have already seen in other business solutions such as R3 and ConsenSys. And is that according to the vision of Facebook, systems ‘permissionless’ as Bitcoin for now are not yet ready to reach global audiences.

How are new pounds created then? For this, another element has been created, the ‘Libra Investment Tokens’. These are tokens held by the founding members that are equivalent to the percentage of assets in the reserve. That is, the equivalent “currency” that the founding members will use to create more pounds in their possession. With this, as the amount of Libras grows, the reserve of fiat currencies will also grow, which will help to prevent volatility from increasing. A security measure as explained by Facebook.

In a period of approximately 5 years, the idea is for Libra to become a cryptocurrency with other consensus systems , but there is an associated problem. That is, the more nodes are added to the network, the slower the transactions are managed. It is a limiting factor that other currencies like Ethereum already know, but as Libra will not be a cryptocurrency of this style, they will not face this challenge.

We therefore have a cryptocurrency where the creation of new coins is in the hands of the members of the Libra Association. At least for a few years. Enough time to see how the system evolves.

What are the advantages and disadvantages of Libra compared to other currencies?

The clear advantage of Libra lies in the fact of having the support of large companies such as Facebook, Visa, Mastercard, Paypal or eBay for its expansion. This will help the fact that it is accepted in more places and therefore its use is extended, potentially reaching users who until now had not dealt with other cryptocurrencies. And even being able to become a global payment system widely used if for example the users of WhatsApp accept it.

There is also the fact of being a ‘stablecoin’, a currency that will seek to maintain greater stability. The objective of the Libra Association is that its value is always close to that of the dollar or the euro.

But the fact of having large companies behind is also their biggest problem.

We are not dealing with a totally decentralized currency, so instead of being in the hands of large banks, it will be, at least in its beginning, in the hands of large companies. This causes these companies to act to block certain transactions. Another disadvantage is that it does not use the same Blockchain system, although it is true that the new protocol will remain open.

Finally there is the issue of privacy and anonymity. If you look at Libra, cryptocurrency does not require the user to be identified. However, the same will not happen with the digital wallet. That is, the currency itself does not require identification but its use through Calibra itself.

How will the founding members control Libra?

The Libra permit system makes the creation of new coins in the hands of the founding members. Initially it is expected that there will be 100 public companies that will have the management of the nodes, this will make it easy for them to coordinate with each other to block certain transactions.

We can understand the Libra Association as a board of members equivalent to the big organizations of world banking, where to make changes at least two thirds of the members will be needed.

The Libra Blockchain documents do not specify that they have to be regulated by the authorities, although the different developers (like Calibra) will be responsible for complying with the legal obligationsand jurisdiction of the country where they operate. That is, the Libra Association itself does not specify the legal implications and responsibilities, although they must be fulfilled by those companies that offer operations with the currency.

How will the volatility and value of the reserves on which Libra is based be managed?

Although in a future Libra it can be decentralized, contrary to what happens with other currencies, the value of Libra is closely linked to the Libra Reserve, a reserve of funds with low risk based on four fiat currencies: the dollar, the euro, the yen and the pound sterling.

However, this reserve of funds is quite opaque. At the moment, it is unknown which institutions will keep this reserve and no more details have been offered about the type of deposits. Although, the Libra Association has explained that the funds will be in reputed banks, high quality entities, with low volatility and geographically distributed to ensure decentralization.

By working with a reserve that combines numerous low volatility funds, the value of Libra is expected to be fairly stable. This will allow not only to always buy at a similar value, but also to recover a large part of the investment if sold.

With Libra we are facing what is known as “the problem of the oracles”. While the Blockchain system does know a priori how it works, we do not have that knowledge of the “translation” of the reserves to the cryptocurrency. That is, the transparency that is offered to us in the currency is lost when we want to discover the internal dynamics in the management of the reserve.

What about the interests?

The Libra Association will not pay interest. That is, regardless of the value of the reserve and the fluctuation no more money will be paid. The possible interest generated by the reserve will be used to cover the costs of the system, ensure low commissions and pay dividends to the founding members.

All the extra money will be focused to pay costs, although again the rules are quite opaque. The Libra Association will establish the rules for allocating interest, although initially these funds are not expected to generate many benefits because they are low risk. Of course, as the currency grows there will be more benefits that will go to the members of the Association.

Additionally, as Lewis Cohen, co-founder of DLx Law, points out, “we are in an era where negative interests, more if they do not have commissions, are interesting”.

Is it feasible on a large scale?

The ambition of Facebook is to create the basis of a currency that serves to meet the financial needs of millions of users. To proceed to build such a large project, Facebook is based on two key elements: on the one hand the support of investors who will be rewarded with votes in the Association and with the ‘Libra Investment Tokens’ and on the other the use of Libra by the users.

Is it profitable for companies to participate in the Libra Association and promote the digital currency? We will have to see it with time. At the moment each of the founding members has collaborated with 10 million dollars, which have gone to the reserve. Depending on the size of this reserve, the dividends for the participants will be more or less large.

According to the sources, with a profit of 1% in a reserve of 160,000 million (the approximate size of the Bitcoin network), 1,600 million euros would be generated per year. Beyond the benefits, participating in Libra will allow members to build new businesses and influence the direction of the cryptocurrency.

However, it is not the economic profitability that generates doubts, but its influence on the current economic system. We will have to wait for the reaction of the various regulators, but for the moment Bruno Le Maire, the French finance minister, has already expressed his concern about Libra and how it “could be used to finance illegal activities”.

Along the same lines, a German MP has gone to the European Parliament, who in statements to Bloomberg has expressed that “we run the risk that Facebook becomes a ghost bank” and “companies should not be allowed to operate in a kind of Nirvana when they introduce new virtual currencies “.

How will the arrival of Libra affect the rest of the cryptocurrencies?

It is too early to know what impact Libra will have. Until the first quarter of 2020 its arrival is not planned. That said, Libra could indirectly impact a revitalization of Bitcoin. Mainly for being two complementary and quite different cryptocurrencies. While Libra is based on the stability and control of large companies, Bitcoin is more decentralized.

But the key is, as pointed out by Binance, that in the near future Libra could boost digital payments and ecommerce to a level not yet reached. This would allow more users to have their first contact with cryptocurrencies and therefore all of them would benefit. In the long term, the forecast is that Libra could represent a strong competition to the current currency system and its high commissions and restrictions.

What is missing to know?

There is still much to know. The Libra Association has to continue offering more documentation, the programming language Move has to evolve and the framework must be finished, which is currently a prototype.

Another aspect that we do not know is which companies will bet on Libra. Not only do we refer to all the companies that are missing until we reach the 100 members that Facebook promises will belong to the Libra Association in 2020, also which of them will create their own digital payment wallet to rival and present an alternative to Calibra.

What can we get to pay with this new currency? Will we exchange Libra for physical money as David Marcus points out ? Will Google, Amazon, Apple or Microsoft react with their own currency? The future of Libra is very promising but also opens the door to many unknowns. We will follow it closely to discover it.