An In-Depth Analysis of Facebook Libra

Since Facebook announced its Libra cryptocurrency, the news on the subject has been nonstop. Pundits like Max Keiser have said, “virtually all alt-coins have no reason to exist post-Libra.” Others like Peter Schiff have said that Libra “is a complete repudiation of Bitcoin.” 

In this review, BTCManager will tear apart the high-level architecture of Facebook Libra and compare it to proven decentralized projects such as Bitcoin and Ethereum. We will review the details of what makes up the code of Facebook Libra and reveal five things that are potential showstoppers for mass adoption. A review of Libra’s financial architecture and how they plan to make money by forming the world’s first private Central Bank will also be highlighted. And finally, we will reveal the people behind Facebook Libra and examine who stands to gain the most.

Facebook Libra Architecture

Decentralized currencies such as bitcoin and ether have three principle security rails. This is what forms the basis of a trustless currency. The three rails are:

•         Mining or Stake Holding
•         Nodes
•         Blockchain

Each miner or stakeholder has a vested interest in performing the calculations correctly. If they do not, they will not be rewarded. Each node has a vested interest in validating blocks correctly. If they do not, other nodes will take over for the errant node.

Aside from miners and nodes, a blockchain is a public and trustworthy ledger of provable transactions. Anyone can download it and can even use a pen and paper and some math to prove the ledger. This means that armed with nothing more than a paper wallet, one can verify that the coins are valid in a multitude of ways. This is the basis of a trustless currency.

On the other hand, Facebook Libra has come up with an architecture that is not trustless. The mining and stakeholding rails, for instance, have been completely removed and replaced with a membership model. The whitepaper reads: 

“Over time, membership eligibility will shift to become completely open and based only on the member’s holdings of Libra.”

Anyone can run a Libra node so long as they put up $10 million and $300,000 per year in fees. This restricts node operations to a tiny select group of organizations willing to cough up a sizeable amount before joining the Calibra organization. 

Finally, the Libra blockchain is not a real blockchain. The blockchain will be whatever the validator says the blockchain is:

“The Libra protocol uses a single Merkle tree to provide an authenticated data structure for the ledger history. [Specifically], the ledger history uses the Merkle tree accumulator approach to form Merkle trees, which also provides efficient append operations.”

Analyzing the Libra Code

While Ethereum has made inroads in code adoption by allowing anyone to create and publish distributed applications (even for free!), Facebook Libra plans to introduce a new coding standard called “Move.” Although this language has not been released, some commentators have analyzed the whitepaper in depth and created a technical review. Lee Ting Ting wrote a worthy review for anyone considering programming in Move.

One of the main advantages of the Move language is that certain flaws inherent in Ethereum’s current language, Solidity, have been resolved in Move. While Ethereum has a multi-year upgrade path to address these issues, the Move language will feature these coding updates immediately. Coding in Move appears to be much easier and much less subject to bugs compared to Solidity.

Facebook Libra will adopt the “Permissioned Ledger” similar to Hyperledger and others have done. However, the group that is in control of validating the permissions will be the nodes mentioned above. 

Facebook Libra will also feature on chain governance using “Libra Investment Tokens.” This means that this consortium of 100 or so nodes within the Calibra organization will have full control over the blockchain. Combined with the ability to burn tokens, Calibra will have unprecedented power over their holdings.

Facebook Libra has absorbed many features from the crypto community. It copied the permissioned ledger model from Hyperledger, the governance model from Hadera Hashgraph, the logo from the online bank Current, and the governance model from Tezos. It would be interesting to learn what GNU and the Free Software Foundation has to say about this potential violation of the General Public License (GPL).

To Hodl or not to Hodl

An interesting aspect of Facebook Libra is their plan to take users’ deposits and to deposit them into a basket of fiat holdings. Presumably, the goal here is to reward Libra Investment Token holders with dividends from the interest in these holdings. At least with DAI, a stablecoin from Ethereum, it is possible for an end user to join a rewards pool with a chance of winning.

Furthermore, holding a basket of fiat would put Facebook at risk for inflationary pressures on the various currencies. Unless an exchange rate mechanic comes into play between Libra tokens and the different fiat tokens, Facebook Libra would be at risk for price changes on the fiat currencies. As we have seen in places like Venezuela, this can be a significant risk. There are already many real-world pressures on fiat currencies right now.

A no-deal Brexit could cause a global recession, for instance. Britain and Germany are two substantial economies now facing a great deal of friction over Britain’s desire to leave the EU. Beyond that, the United States appears to be rushing headlong into a costly war with Iran. Russia’s economy isn’t in a great place either. China has been artificially manipulating its’ economy for years. 

There are several significant problems with fiat economies, and some of these are problems solved mainly by the deflationary cryptocurrencies.

Another big showstopper with Facebook Libra revolves around adoption. Presently, it seems that Libra will require KYC/AML for transactions on its network. Regulators from France, for example, have stated that Facebook Libra must adopt KYC/AML rules. This barrier risks leaving out millions of users from the platform. On the Calibra site, there is a featured video showing citizens of third world countries using the token. This is the very thing that will be restricted since many of these citizens are refugees fleeing war-torn areas such as Yemen or Ukraine. As a result, these people do not have an easy way to prove their identity. Bitcoin and virtually any cryptocurrency do not require KYC/AML for use. An exception to this rule is opening an account on popular exchanges.

By accepting deposits from users all over the world and storing them in a central basket, Facebook Libra would have unprecedented power over end user’s funds, the rates of exchange, and lending power. Such a move indicates Facebook’s interest in becoming the world’s first private Central Bank. The access that this foundation would enjoy exceed any current nation-states’ Central Bank.  

Who Runs Facebook Libra?

The coding team is comprised of some fascinating people. Among the 35 individuals that signed the whitepaper include:

Christian Catalini: An MIT professor and one of the first to study the economics of cryptocurrency. He is a writer for the Harvard Business Review (HBR) and other publications.

Ben Maurer: He has worked at Facebook as an infrastructure engineer. He graduated from Carnegie Mellon University with a degree in computer science. If readers have ever used reCAPTCHA, they have him to thank. Google bought his company in 2009. He is leading the team that built the Move programming language.

George Danezis: Danezis was one of the creators of Chainspace and the Coconut protocol upon which Libra is based. Facebook bought his startup in February 2019.

François Garillot: An AI and Machine Learning Engineer who is likely working on merging Libra’s AI with Facebook’s AI.

Ramnik Arora: He was an analyst at Goldman Sachs using quantitative analysis. He likely is one of the architects behind the “basket of fiat” management and earnings.

Corporate sponsors of Facebook Libra include:

• Coinbase – likely to be heavily involved in the exchange between fiat and Libra.
• PayPal, Mastercard, Visa.
• Spotify, Lyft, Uber
• International investors include iliad and Mercado. This group would likely cover Europe, Asia, and Africa.
• A variety of highly-successful technology investment companies such as Andreessen Horowitz (AirBNB, BuzzFeed, and many more) and USV (TuCows, Coinbase, Cloudflare, and others) means that they would drive adoption across all their properties.
•  Thrive Capital – a firm that keeps their holdings very secret. It should be known, however, that Thrive Capital is led by Josh Kushner, Jared Kushner’s brother. 

While the Google June update has pushed Facebook Libra cryptocurrency news to the forefront, the rest of the community has remained skeptical about the currency as a whole. 

Facebook has too much power and a terrible track record when it comes to protecting our private information. We need to hold them accountable—not give them the chance to access even more user data. #BreakUpBigTech https://t.co/eQr06VMMyx

— Elizabeth Warren (@ewarren) June 19, 2019

Facebook Libra is not an advancement in any way of the technologies that make cryptocurrencies viable. Users of the cryptocurrency will remain at risk to the whims of the individuals and organizations at Calibra.