Libra ≠ Blockchain

The Libra “Blockchain” is a unique database system, but it is not a blockchain.

(Credit: CNN)

Blockchain Defined

A blockchain is a distributed ledger containing a growing list of records (transactions) that are batched in blocks which are linked together using cryptography. Generally, blockchains involve the following players:

• Developers: geographically distributed Programmers who create and maintain the code underlying the blockchain.
• Users: Token Holders who broadcast transactions to Miners for inclusion in the blockchain.
• Miners: add Users’ transactions to the blockchain by producing blocks.
• Full Nodes: oracles that maintain a full copy of the blockchain in order to validate transactions.

Blockchains can either be public (“permissionless”) or private (“permissioned”). In a public blockchain such as Bitcoin & Ethereum, anyone with an Internet-connected computer can participate as any of the above players. In a private blockchain such as Ripple & JPM Coin, permission is required to participate.

The Libra “Blockchain”

The Libra “Blockchain” has neither blocks nor a chain. It is described as a “cryptographically authenticated database.” From the Libra whitepaper:

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 implementation simplifies the work of applications accessing the blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework.

There are six players in the Libra ecosystem:

• Developers: Facebook Programmers responsible for creating the code underlying the Libra ledger.
• Clients (Users): Token Holders who submit transactions to the Lead Validator.
• Lead Validator: proposes transactions to the Other Validators.
• Other Validators (Libra Association): executes/records transactions, along with the Lead Validator.
• Libra Reserve: a collection of low-volatility assets (bank deposits and government securities) which backs the value of Libra Coin and is held by a geographically distributed network of Custodians.
• Authorized Resellers: entities authorized by the Libra Association to transact large amounts of fiat and Libra in/out of the Libra Reserve in order to maintain the liquidity & stability of Libra Coin.

(Libra Blockchain Whitepaper)

The Libra “Blockchain” is permissioned. Validators are restricted to a certain set of Organizations known as the Libra Association that satisfy a set of requirements (including a $10M investment required to operate a Validator node). The Libra Association is currently comprised of 28 Organizations representing the following industries:

• Payments (Mastercard, PayPal, PayU, Stripe, VISA)
• Technology and Marketplaces (Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify, Uber)
• Telecommunications (Iliad, Vodafone)
• Blockchain (Anchorage, BisonTrails, Coinbase, Xapo)
• Venture Capital (Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, USV)
• Nonprofit/Academic (Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking)

PoW vs. PoS vs. DPoS

Credit: Blockgeeks

Traditional blockchains generally utilize one of three consensus algorithms:

1. PoW (Proof of Work): the original consensus algorithm used by Bitcoin and Ethereum. Miners compete against each other to validate batches of transactions by producing blocks which reference previous blocks, creating a chain of blocks. Miners use specialized hardware to produce blocks and receive newly-generated coins (the “Block Reward”) and transaction fees from the network for producing blocks.
2. PoS (Proof of Stake): the second-generation consensus algorithm used by Stellar and Dash. Miners are replaced by Validators who commit a certain amount of tokens (i.e. the “Stake”) to the network in exchange for the ability to validate transactions and receive transaction fees and block rewards. Validators are usually selected in a pseudo-random manner, depending on the size of the stake.
3. DPoS (Delegated Proof of Stake): the third-generation consensus algorithm used by EOS and Lisk. Users (Token Holders) vote to elect a set number of Validators (called “Witnesses”) to validate transactions and create blocks. The primary difference between PoS and DPoS is in the governance mechanism; PoS have the blockchain’s rules/parameters hardcoded into the protocol whereas DPoS have an elected panel of delegates who govern the protocol and propose rule changes which are implemented if approved by the Users.

Of the three algorithms, Libra is most closely related to DPoS with three key differences:

• Libra Users do not have the ability to elect Validators or vote on Validator proposals (these governance decisions are voted on and implemented by the Libra Association)
• Libra Validators do not receive transaction fees or block rewards. Instead, they receive interest on the Libra Reserve.
• Libra Validators do not produce blocks.

Transition from Permissioned to Permissionless

While the Libra ledger will initially be permissioned, the project aspires to transition to a permissionless system by migrating to a Proof of Stake (PoS) architecture whereby Libra Users would receive voting rights proportional to the amount of Libra Coins they control:

While this method of assessing validator eligibility is an improvement on traditional permissioned blockchains, which usually form a set of closed business relationships, we aspire to make the Libra Blockchain fully permissionless. To do this, we plan to gradually transition to a proof-of-stake system where validators are assigned voting rights proportional to the number of Libra coins they hold.

If Libra achieves a permanent transition to a permissionless Proof of Stake architecture, only then might it be considered a real blockchain.

So What?

To understand why this all matters, it helps to appreciate why Satoshi Nakamoto invented the blockchain in the first place. The very first sentence of the Bitcoin whitepaper states:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending.

Satoshi’s goal was to bring privacy to digital payments by porting the offline cash experience into an online environment and replacing centralized intermediaries (Banks, PayPal, etc.) with a decentralized network of Miners. Satoshi saw the permissioned nature and reversibility of centralized payment systems as an inherent weakness of the trust-based model that these systems rely on. As explained in the Bitcoin whitepaper:

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

Libra is a payment system centralized around the Libra Association; it relies on Users’ trust in the Libra Association that Validators will process transactions with neutrality and maintain sufficiently powerful hardware and secure environments for transaction processing. In terms of Libra Coin, Users must trust the Libra Association to adequately allocate assets in the Libra Reserve to protect Libra Coin’s stability. Per the Libra Blockchain whitepaper:

As the value of Libra is effectively linked to a basket of fiat currencies, from the point of view of any specific currency, there will be fluctuations in the value of Libra. The makeup of the reserve is designed to mitigate the likelihood and severity of these fluctuations, particularly in the negative direction (e.g., even in economic crises). To that end, the basket has been structured with capital preservation and liquidity in mind.

Not only that, Users must trust Authorized Resellers to not disrupt asset balances within the Libra Reserve. From the Libra Blockchain whitepaper:

Users do not directly interface with the reserve. Instead, to support higher efficiency, there are authorized resellers who are the only entities authorized by the association to transact large amounts of fiat and Libra in and out of the reserve. These authorized resellers integrate into exchanges and other institutions that buy and sell cryptocurrencies and provide these entities with liquidity for users who wish to convert from cash to Libra and back again.

By contrast, traditional blockchains rely on math underpinning the cryptography upon which they are built and cryptoeconomics to incentivize miners to continue creating blocks — a system that has been working remarkably well for over a decade.

Conclusion

Satoshi Nakamoto invented the concept of a blockchain to enable secure online peer-to-peer payments without a trusted centralized intermediary. Governments today are actively working to remove cash from circulation in an effort to transition to a completely digital financial system under the guise of national security; on November 8, 2016 the Prime Minister of India gave only four hours’ notice before abruptly removing 86% of rupees from circulation.

Libra is not built on a blockchain; while it does share some similar technical attributes of a blockchain (such as a Merkle Tree) it can more accurately be described as a private, cryptographically authenticated database. Libra relies on a trust-based model where Users must trust the Libra Association to:

1. Maintain adequately powerful hardware and environments for transaction processing,
2. Process transactions with neutrality, and;
3. Adequately allocate assets in the Libra Reserve.

Users must also trust Authorized Resellers to not disrupt asset balances in the Libra Reserve. Maintaining equilibrium in the Libra Reserve will be a novel challenge, and Users will have to take a leap of faith to trust the Libra Association and Authorized Resellers to act as a Fiduciary to protect the liquidity and stability of Libra Coin.