Facebook has released details of its long-awaited cryptocurrency, stating its ambition to provide the first global medium of exchange.
The company’s CEO, Mark Zuckerberg, seems to be hoping that digital payments can help restore clients’ trust in a company that’s lost it. Over the last year Facebook has faced accusations of interference in electoral processes and widespread abuses of user privacy.
Now, the social media giant says it will be launching a new digital currency, called Libra, to the general public and the 2bn-plus users of its social networks, which include WhatsApp, Messenger and Instagram. The launch is planned for 2020.
Libra will be operated by a not-for-profit Swiss foundation called the Libra Foundation, which has 28 signed-up members, including Facebook and firms from across the payments, technology, telecoms, blockchain, venture capital and non-profit sectors. There are no banks, however, in the starting line-up.
“The Libra Association exists to make their collective mission a reality: to create a simple global currency and financial infrastructure that empowers billions of people, stimulating the global economy,” Libra said in a statement published on June 18.
“It will instantaneously have many hundreds of times the user base of the world’s most popular existing wallets”
Facebook’s interests in the new venture will be represented by a new subsidiary called Calibra.
Calibra says on its website that it aims to make the process of sending money across a network like WhatsApp as easy as sending a message or a photo.
Calibra also boasts of the advantages of scale offered by Facebook’s existing client base.
“It will likely be the first cryptocurrency wallet that hundreds of millions of people will have access to, by nature of being bundled with Facebook’s massive ecosystem. With billions of users potentially interacting with Calibra, it will instantaneously have many hundreds of times the user base of the world’s most popular existing wallets from Coinbase and others,” Calibra says.
Founding members of the Libra Association
A stablecoin backed by reserves
Libra will be a so-called stablecoin, whose value is backed by currency held in reserve in the form of securities or deposits in bank accounts.
“Libra is fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value,” the Libra white paper states.
Libra has not given an indication of the likely breakdown of currencies underlying the new digital currency.
Holders of Libra will be exposed both to fluctuations in the value of the underlying fiat currencies, and to the counterparty risk of the securities issuers or bank deposit providers. However, Libra says it has put measures in place to mitigate these risks.
Any interest earned on the reserves will not accrue to Libra coin holders
The reserve assets backing the new Libra stablecoin will include bank deposits and government securities “in currencies from stable and reputable central banks”, Libra says.
“The makeup of the reserve is designed to mitigate the likelihood and severity of these fluctuations, particularly in the negative direction (i.e., even in economic crises). To that end, the above basket has been structured with capital preservation and liquidity in mind,” the foundation adds.
These assets will be held by a geographically distributed network of custodians with investment-grade credit ratings, Libra goes on.
Any interest earned on the reserves will not accrue to Libra coin holders, however.
Interest on reserves will go first go to support the operating expenses of the Libra Association, and then part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions, the foundation says.
Consensus and move to proof-of-stake
Libra calls its new coin “a stable digital cryptocurrency”.
Libra is quite different from cryptocurrencies like bitcoin
However, in important ways, Libra is quite different from cryptocurrencies like bitcoin.
Bitcoin’s market value, for example, is not backed by any assets held in reserve. Instead, bitcoin derives its value from a supply cap, which is backed by a cryptographic algorithm, and from the electrical energy expended by entities called miners.
Consensus over bitcoin’s transaction history is arrived at by a mechanism called “proof-of-work”. This enables miners to demonstrate publicly that they have expended sufficient computer processing power to produce an updated version of the network’s transaction history.
However, Libra will rely on a group of validators, who initially will be the founding members of the Libra Foundation. A majority vote amongst validators will be sufficient to process transactions in the Libra network, the Foundation says.
“The consensus protocol progresses in rounds, and in each round a leader is chosen amongst the validators,” Libra says in a white paper on its consensus mechanism.
“The leader proposes a new block consisting of transactions and sends it to the rest of the validators, who approve the new block if it consists of valid transactions. Once the leader collects a majority of votes, she sends it to the rest of the validators. If a leader fails to propose a valid block or does not aggregate enough votes, a timeout mechanism will force a new round, and a new leader will be chosen from the validators.”
However, Libra says it aims to change its internal protocol over time, with the objective of moving to a permissionless system, following the so-called proof-of-stake consensus model.
In a proof-of-stake system, decisions are not made centrally, but according to the principle of allocating voting power over the network’s transaction history to network users, in proportion to the number of coins they hold.
“As the technology matures, the Libra blockchain will transition from relying on ownership of the Libra Investment Tokens — in order to operate validator nodes and vote on governance — to relying on ownership of Libra coins. The basic intuition is that at scale the network should be owned by its users,” Libra says.
Proof-of-stake, however, is a largely untested consensus mechanism. Libra itself lists a number of serious challenges it may face before moving to the new protocol, downplaying the prospect that this shift will happen any time soon.
“Before the network can be truly permissionless, the Libra Association will need to find technical and economic answers to several open problems. Some of these are challenging, unsolved research and development questions, and some involve high-assurance engineering, which takes time,” Libra says.
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