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Summary: Facebook’s white paper on Libra cryptocurrency, blockchain, reserve and association

After months of speculation, rumours and leaks, Facebook announced on Tuesday that it’s launching a new cryptocurrency, called Libra, which it hopes could change how money works and one day become the world’s global currency. The company released a white paper detailing its plans for:

  • the Libra cryptocurrency, which will be pegged to a set of traditional currencies to keep its value stable and avoid the wild fluctuations that have plagued Bitcoin and others;
  • the pseudonymous, open-source Libra Blockchain on which it will be built;
  • the Libra Reserve, which will give the currency “intrinsic value”, and which will be funded by
  • the Libra Association, a consortium of 28 (and counting) entities that will, having paid $10 million each, have a say in how the currency is governed.
  • a Facebook subsidiary called Calibra, which will handle the firm’s crypto business and operate a crypto wallet of the same name. Facebook has taken pains to stress that Calibra will run independently of its social network business, and there will be strict separation of financial and social data.

Here is a brief summary of the white paper that addresses each of these aspects:

The Libra currency and Libra Reserve

  • Facebook says Libra is designed to be a stable digital cryptocurrency, or stablecoin, that is backed by a reserve of real assets, the Libra Reserve. The reserve is “a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks”. The value of the Libra will fluctuate with the value of the underlying assets, which Facebook says have been chosen to minimise volatility.
  • The assets in the Libra Reserve will be held by a network of custodians to provide security and decentralisation. These assets are the major difference between Libra and many existing cryptocurrencies, which fluctuate based on expectations as they lack “intrinsic value”.
  • Libra, however, enjoys all the benefits of a cryptocurrency – the ability to send money quickly, the security of cryptography, and the freedom to easily transmit funds across borders. Sending money, Facebook says, should be as easy as sending a text message. Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jumpstart the ecosystem, and support further growth and adoption.

The Libra Blockchain

  • Pseudonymous, open-source blockchain: The Libra Blockchain, on which the the currency runs, is pseudonymous, which means it allows users to hold one or more addresses that are not linked to their real-world identity. It is also open-source, so any consumer, developer, or business can use it, build products on top of it, and add value through their services.
  • It will start as a “permissioned blockchain”, which means that Facebook will decide which entities can act as validator nodes to process transactions (that’s where the Libra Association comes in; see below). In permissionless blockchains such as Bitcoin’s, anyone who meets the technical requirements can run a validator node. Facebook says that while its ambition is to see the Libra network become permissionless, what they are trying to achieve is currently not possible through such a network. It says one of the goals of the Libra Association will be to research and implement the transition to a permissionless network and that this work will begin “within five years of the public launch of the Libra Blockchain and ecosystem”.
  • A new programming language ‘Move’: At the heart of the Libra Blockchain is “Move”, a new programming language for implementing custom transaction logic and “smart contracts” on the blockchain. A smart contract is an agreement created using blockchain technology to confirm, facilitate or enforce the execution of contract obligations. Move has safety and security as the highest priorities, Facebook says, and is specifically designed to prevent assets from being cloned. It does so by enabling “resource types” that constrain digital assets to the same properties as physical assets: a resource has a single owner, it can only be spent once, and the creation of new resources is restricted.
  • Facebook says that to validate transactions, the Libra blockchain uses a consensus protocol that’s designed to function even if one third of validator nodes are down, and is more energy-efficient than consensus through “proof of work”, which Bitcoin’s blockchain requires (and has been criticised for).
  • Unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra Blockchain is a single data structure that records the history of transactions and states over time. This, Facebooks says, will make it easier for applications accessing the blockchain to read and verify any data from any time using a unified framework.

The Libra Association

The Libra Association is an “independent, not-for-profit organisation” headquartered in Switzerland, whose purpose is to:

  • Facilitate the operation of the Libra Blockchain and manage the Libra Reserve
  • Coordinate the agreement among its stakeholders in their pursuit to promote, develop, and expand the network

It comprises the following 28 entities, which will go on to become Founding Members once they finalise the association’s charter:

  • 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 organisations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

Facebook says it hopes to have approximately 100 members in the Libra Association by the time Libra is launched in the first half of 2020

The association is governed by the Libra Association Council, which is comprised of one representative per validator node. All decisions concerning the governance of the network and reserve are brought to the council, and major policy or technical decisions require the consent of two-thirds of the voters.

The association is the only party that can create (mint) and destroy (burn) Libra. Coins are only minted when authorised resellers have bought those coins from the association with fiat assets to fully back the new coins. They are only burned when the authorised resellers sell Libra coin to the association in exchange for the underlying assets. As authorised resellers will always be able to sell Libra to the reserve at a price equal to the value of the basket, the Libra Reserve acts as a “buyer of last resort”.

An important objective of the association is increasing decentralisation over time, Facebook says. This will ensure that there are low barriers to entry for building on and using the network, and improve the ecosystem’s resilience over the long term.

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