Will the Stars Align for Libra?

This week, Facebook announced details about its cryptocurrency project, Libra. They expect it to go live for Facebook and other social media platform users sometime in 2020. The list of initial backers, the Founding Members of the Libra Association, is quite long and filled with industry heavyweights such as Coinbase, eBay, Mastercard, PayPal, and Visa. Other tech companies including Lyft, Spotify, and Uber are Founding Members, as well as Andreesen Horowitz and Thrive Capital.  

Designed to be a peer-to-peer payment system, Libra will be backed by a sizable reserve and pegged to physical currencies to defray wild currency floats and speculation. The Libra Association will manage the reserve, and it will not be accessible to users. The Libra Association will mint and destroy Libra Coins in response to demand from authorized resellers. Founding Members will have validator voting rights. As we can see from the short list above, Libra Founding Members are large organizations, and they will have to buy in with Libra Investment Tokens. This investment is intended to incentivize Founding Members to adequately protect their validators. Libra eventually plans to transition to a proof-of-stake system where Founding Members will receive voting rights proportional (capped at 1%) to their Investment Tokens. They expect this to facilitate the move to permissionless blockchain at some point in the future. Libra blockchain will therefore start off as permissioned and closed. The Libra roadmap can be found here.

Let’s look at some of the interesting technical details related to security that have been published at https://libra.org. Libra protocol takes advantage of lessons learned over the last few years of blockchain technologies. For example, unlike Bitcoin, which depends on the accumulation of transactions into blocks before commission, in Libra, individual transactions compose the ledger history. The Consensus protocol handles aggregation of transactions into blocks. Thus, sequential transactions and events can be contained in different blocks.  

Authentication to accounts will use private key cryptography, and the ability to rotate keys is planned. Multiple Libra accounts can be created per user. User accounts will not necessarily be linked to other identities. This follows Bitcoin and Ethereum model for pseudonymity. Libra accounts will be collections of resources and modules. Libra “serialize(s) an account as a list of access paths and values sorted by access path. The authenticator of an account is the hash of this serialized representation. Note that this representation requires recomputing the authenticator over the full account after any modification to the account... Furthermore, reads from clients require the full account information to authenticate any specific value within it.”  

Transaction fees in Libra will adhere to an Ethereum-like “gas” model: senders name a price they are willing to pay, and if the cost to the validators exceeds the number of units at that price, the transaction aborts. The ledger won’t be changed, but the sender will still be charged the fee. This is designed to keep fees low during times of high transaction volumes. Libra foresees that this may help mitigate against DDoS attacks. It also will prevent senders from overdrawing their accounts, because the Libra protocol will check to make sure there is enough Libra coin to cover the cost of the transaction prior to committing it.

The Libra Protocol will use a new programming language, called Move, which will be designed to be extensible to allow user-defined data-types and smart contracts. There will be no copy commands in Move, only create/destroy, to avoid double-spend. Programmers will be able to write in higher level source and intermediate representation languages, which will be output to a fairly simple and constrained bytecode which can be type- and input-verified for security. Transactions are expected to be atomic, in that each should contain a single operation. In Libra, modules will contain code and resources will have data, which is in contrast to Ethereum, where a smart contract contains both code and data.  

Another interesting concept in Libra is the event. An event is defined as a change of state resulting from a transaction. Each transaction can cause multiple events. For example, payments result in corresponding increases and decreases in account balances. Libra will use a variant of the HotStuff consensus protocol called LibraBFT (Byzantine Fault Tolerance), which is architected to withstand multiple malicious actors attempting to hack or sabotage validators. The HotStuff consensus protocol is not based on proof-of-work, thereby avoiding performance and environmental concerns. Libra intends to launch with 100 validators, and eventually increase to 500-1,000 validator nodes.

Libra Core code will be written in Rust and open sourced. Facebook and Libra acknowledge that security of the cryptocurrency exchange depends on the correct implementation of validator node code, Move apps, and the Move VM itself. Security must be a high priority, since cryptocurrency exchanges are increasingly under attack.  

Facebook’s new subsidiary Calibra will build the wallet app. Given that Coinbase and others in the business are on the board, it’s reasonable to expect that other cryptocurrency wallets will accept Libra too. Facebook and other cryptocurrency wallet makers must design security and privacy into these apps as well as the protocol and exchange. Wallets should take advantage of features such as TPMs on traditional hardware and Secure Elements / Trusted Execution Environment and Secure Enclave on mobile devices. Wallets should support strong and biometric authentication options.

Users will have no guarantees of anonymity due to international requirements for AML and KYC. Facebook claims social media profile information and Libra account information will be kept separate, and only shared with user consent. Just how Facebook will accomplish this separation remains to be seen. The global public has legitimate trust issues with Facebook. Nevertheless, Facebook, WhatsApp, and Instagram have 2.3B, 1.6B, and 1.0B user accounts respectively. Despite some overlap, that user base is larger than a couple of the largest countries combined.

The moral argument in favor of cryptocurrencies has heretofore been that blockchain technologies will benefit the “unbanked”, the roughly 2B people who do not have bank accounts. If Libra takes off, there is a possibility that more of unbanked will have access to affordable payment services, provided there is sizable intersection between those with social media accounts and who are unbanked.  

Much work, both technical and political, remains to be done if Libra is to come to fruition. Government officials have already spoken out against it in some areas. Libra will have to be regulated in many jurisdictions. An open/permissionless blockchain model would help with transparency and independent audit, but it could be years before Libra moves in that direction. While Libra runs as closed/permissioned, they will face more resistance from regulators around the world.  

Facebook and the Libra Association will have to handle not only a mix of financial regulations such as AML and KYC, but also privacy regulations like GDPR, PIPEDA, CCPA, and others. There was no mention in the original Libra announcement about support for EU PSD2, which will soon govern payments in Europe. PSD2 mandates Strong Customer Authentication and transactional risk analysis for payment transactions. Besides the technical and legal challenges ahead, Facebook and Libra will then have to convince users to actually use the service.

Initiating payments from a social media app has been done already: WeChat, for example. So it’s entirely possible that Libra will succeed in some fashion. If Libra does take off in the next couple of years, expect massive disruption in the payments services market. It is too early to accurately predict the probability of success or the long-term impact if it is successful. KuppingerCole will follow and report on relevant developments. This is sure to be a topic of discussion at our upcoming Digital Finance World and Blockchain Enterprise Days coming up in September in Frankfurt, Germany.  

 


Blockchain Enterprise Days 2019

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Blockchain Enterprise Days 2019

HOLM - House of Logistics & Mobility, Frankfurt am Main

Digital Finance World 2019

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Digital Finance World 2019

HOLM - House of Logistics & Mobility, Frankfurt am Main

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