Facebook’s Libra: Big Bang or Big Crunch? A Technical Perspective and Challenges for Cryptocurrencie
Although internet and blockchain are seen as the first and the second generation of the digital revolution, both have been disruptive. The first wave of cryptocurrency research began with David Chaum’s proposal for “untraceable payments” and Adam Back’s Hashcash which later contributed to the design of Bitcoin. The second wave consisting of variations and extensions of the antecedent research was in the 1990s which proved to be a decade for trailblazing events that took a leap of faith that internet would make the dream of electronic cash a reality. As expected, the advent of internet accelerated the speed of developments in the field of cryptocurrency. While the global financial crisis of 2008 was in full swing, a pseudonymous creator under the alias Satoshi Nakamoto registered the domain name bitcoin.org in August 2008 and published a White Paper on October 31 titled Bitcoin: A peer-to-peer Electronic Cash System. Bitcoin, the first successful cryptocurrency, was launched in 2009 as a permissionless purely peer-to-peer electronic cash system without the need of a trusted third party (i.e. bank).
Since Bitcoin’s debut in January 2009, close to 3,000 cryptocurrencies have sprouted whose combined market cap currently stands at $272 billion (i.e. 67.6% or $178 billion is dominated by Bitcoin). Facebook’s formal announcement of its Libra coin in June 2019 had a big bang effect in cryptocurrency markets worldwide; in the same way, the existing cryptocurrency ecosystem that has taken a decade to form will witness a big crunch if Libra cryptocurrency sputters out due to a failure to receive all appropriate approvals before the planned launch date of 2020 from central banks, regulators, and law makers who seem eager to run headlong into backlash to Libra in order to punish Facebook which already has a troubled past of privacy abuse and exploitation of users’ data. Despite too many players in the cryptocurrency market, Facebook’s Libra is a recent invention with a brand new encryption language called Move.
Both Libra and Bitcoin as well as many other cryptocurrencies use cryptographic algorithm to satisfy high security requirements. However, there are distinct technical variations between Libra and Bitcoin; furthermore, many of the claims regarding Libra do not reflect the whole truth. For instance, unlike Bitcoin’s permissionless (purely peer-to-peer) decentralized blockchain, Libra will initially run on a permissioned decentralized blockchain where transactions will be governed by the Libra Association as the de facto central authority (like Fed) comprising 28 heavyweight firms as founding-members. Another key difference is that Bitcoin has a maximum supply of 21 million and new bitcoins can only be minted by solving double-spend problem via a mining process based on proof-of-work (PoW) consensus protocol; whereas, Libra coins are not subject to a maximum supply limit and minted by the Libra Association using proof-of-stake (PoS) consensus protocol. For safety and liveness, Libra uses HotStuff as the basis for Libra’s Byzantine Fault Tolerant – LibraBFT replication protocol.
My recent article, Facebook’s Libra: Big Bang or Big Crunch? A Technical Perspective and Challenges for Cryptocurrencies, is based on a literature review of the interaction between financial crises and evolution of money in the digital age. It provides a high-level technical overview of Libra and blockchain. The broad analysis of Libra coin looks at various models and categories of implementation approaches. The study discusses the components of blockchain technology and provides illustrative visuals when possible. The article also compares consensus protocols used in the Libra and Bitcoin blockchain networks. The analysis also touches on the use of blockchain technology in applications such as smart contracts.
Libra has several advantages over Bitcoin and altcoins; Libra’s superior functionality, higher security, and vast scale (i.e. a user base of nearly 3 billion) make Libra potentially become a viable alternative reserve crypto-currency to the dollar. Facebook is very ambitious to roll out Libra as a global currency to tap on the gold mine of unbanked adults around the world which, according to the 2017 Global Findex Database, was about 1.7 billion in 2017. The 2017 FDIC National Survey of Unbanked and Underbanked Households shows that 6.5% of the U.S. households were unbanked as of 2017 (14.1 million adults and 6.4 million children), up from 7.6% in 2009. Libra can function correctly even if 1/3 of its network fails or hacked (this is 1/2 for Bitcoin); moreover, Libra’s PoS leads to higher transaction throughput, lower latency, and lower energy cost; the latter is rather high for Bitcoin.