Things have settled after Facebook's libra announcement. The crypto community followed the Libra debacle unfold in US Congress. Recently the European Commission announced its Libra investigation. I am not sure if Facebook was expecting such a backlash by publishing just a whitepaper and starting a discussion on a global level, but it certainly managed to raise global interest. The purpose of this blog post is to share some thoughts on the topic of Libra's decentralisation and its possible future.
Before we move on further, let's clarify a few terms defined by Facebook.
- Calibra - Calibra is the interface allowing users to manage their Libra coins. Think of it as a blockchain wallet with a few more added functionalities. It will be developed by Facebook.
- Libra - Libra are the fully-backed stable coins which hold a basket of currencies in safe assets such as cash bank deposits and highly liquid, short-term government securities. Think of it as a multi-collateral version of Tether. Libra won't be pegged to the value of any single currency. Instead it will have its own stable value and a corresponding exxchange rate to other fiat currencies.
- The Libra blockchain - The network and protocol responsible for the security and governance of the system. Even though Facebook uses the term "blockchain", it becomes clear from the whitepaper that they are not going to have blocks in their data structure. The question is, why are they still using the term "blockchain"? A possible answer would be that they are keeping it for simplicity and marketing reasons. I will keep things simple by calling the Facebook DLT a blockchain.
- Move - The smart contract programming language used by the Libra blockchain. Like Ethereum's Solidity, Libra will have its own smart contract language.
If you follow the crypto community on social media, it is evident that Libra gets criticized for it's "centralization" and "governance" issues. For many people, these claims don't mean anything if not placed in a context. The purpose of this blog post is to bring structure and understanding of why the claims are somewhat inaccurate.
The blockchain space is plagued with the issue of incomplete definitions and lack of standardized terminology. By using a conceptual framework provided by the University of Cambridge, I will try to identify the different design choices made by Facebook compared to Bitcoin and other open blockchain systems.
DISCLAIMER: The analysis of Libra is based on limited information from the whitepaper and public discussions.
The anatomy of a blockchain system
The framework defines three main layers of a blockchain system: Protocol Layer, Network Layer and Data Layer.
The protocol layer defines, manages and updates the global ruleset that governs the system. Changes to the protocol layer can impact the whole network. In the case of Bitcoin, for example, governance happens off-chain. This rule is defined in the protocol. The network layer takes into consideration the protocol rules and establishes the communication, transaction and validation activities. Determining who can create and broadcast transactions would be part of the network layer. Both network and protocol layers influence the data layer, which is assembled over time by saving transaction data to the ledger.
Even though Facebook uses the term "blockchain", it becomes clear from the whitepaper that they are not going to have blocks in their data structure. The question is, why are they still using the term "blockchain"? A possible answer would be that they are keeping it for simplicity and marketing reasons.
To bring everything into context, I will compare Libra to Ethereum and Bitcoin by the different categories and their subcategories: Governance, Network Layer and Data Layer (Reference).
Comparing the three coins, it immediately becomes evident that Bitcoin is the most decentralised cryptocurrency in terms of governance. The difference between Ethereum and Libra is more challenging to spot. Non-profit entities in Switzerland represent both Ethereum and Libra. Ethereum is governed by the Ethereum Foundation where individuals outside of the Foundation can make proposals to the protocol (the so-called Ethereum Improvement Proposals) and a recognised leadership at the Foundation approves the changes. From a legal standpoint, Foundations are set up for collective purposes. On the other hand, Facebook is governed by the Libra Association. The main difference between the Association and Foundation is the presence of members. The Facebook Association is made up of the validator nodes and the companies (in some cases, organisations) behind them. The Association must approve protocol changes by member vote. It is not completely clear if the Libra Association will be open to community protocol proposals. Even if they claim they would be open to such proposals, we have no evidence of this working until the network launches. Until then, we could say that Libra is the most centralised of the three cryptocurrencies in terms of governance. Let's not forget that decentralisation comes in levels. There are other much more centralised projects than Libra like, for example, Hyperledger Fabric, Corda, etc.
The network layer is divided into three main subcategories: Network Access, Transaction Processing and Incentives. While Bitcoin and Ethereum can be seen as entirely open, Libra can be defined as semi-open. While anyone can build on top of Libra, access to validator nodes is restricted by the Association and also includes a subsatntial investment in fiat currency. As a result of the network access design, transaction processing is also affected by these decisions. Anyone with a corresponding private key can create and sign transactions on any of the three blockchains. The issue with Libra is that since all nodes are known and part of an Association censoring transaction will be very easy. The EOS blockchain experienced a similar scenario where the nodes froze user accounts. This kind of behaviour is also expected by the Libra blockchain. In terms of incentives both Bitcoin and Ethereum have intrinsic incentive structure: block rewards and transaction fees. The incentive structure of Libra is not completely defined in the whitepaper. I would guess that since all nodes are part of an Association and are bound by legal contracts, there is no need for block rewards, hence the extrinsic incentive structure. Transaction fees are only introduced for spam prevention reasons.
Facebook tried to make the blockchain as decentralised as possible while keeping some control over the network. Comparing the network layer to a private blockchain we can see a lot of improvement in terms of decentralisation.
The reference as a subcategory of the data layer represents whether the records produced by the network participants reference purely internal (endogenous) or external (exogenous) assets. An endogenous reference model would be Bitcoin and Ethereum's native ETH currency. The Ethereum Virtual Machine (EVM) allows for the creation of any token type, also allowing for a hybrid system (e.g. a tokenised gold). Libra is comparable to Ethereum in the sense that it will also allow for programmable assets through its Move programming language. The Libra coins is a perfect example of a hybrid asset where the coin represents a value stored off-chain.
Decentralisation comes in levels. One cannot explicitly say that a cryptocurrency is centralised or decentralised. Many design decisions need to be taken into consideration when labelling projects. Libra is undoubtedly not a censorship-resistant self-sovereign cryptocurrency like Bitcoin. Nevertheless, it is much more decentralised as people initially anticipated. The fact that Libra is not even pegged to the US dollar but instead relies on a basket of currencies means that Libra might be superior to any national currency (in terms of stability). The way the Libra value is determined reminds me strongly of the IMF (International Monetary Fund) SDR (Special Drawing Right) "currency".
The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling., www.imf.org, 2019
Libra is currently as close as a private company could get in terms of decentralisation. Taking into consideration all legal requirements and the goal of Facebook we could have seen a much more centralised approach. Facebook acknowledged for the first time that for the network to gain traction they would need to give up some control over the system.
The Libra announcement made the world governments very uncomfortable about what Facebook is doing mainly because they see Libra as a threat to their currency monopoly. Since the Libra announcement governments openly started discussing whether private companies should be allowed to issue their own currency. This never happened before and it is a step in the right direction. On top of that Facebook had its fair share of privacy scandals in recent years, which made the situation even more delicate. Nevertheless, Libra should have a net positive effect on the blockchain space. Facebook is the first major company to announce a privately issued currency. I am sure other corporations are already exploring the possibility of a crypto asset. As for now, the industry is waiting for Facebook's next steps.