Facebook GlobalCoin Tech: 2 of 3
As mentioned in my previous article, the Facebook GlobalCoin is not my normal area of interest with Finteum, which is solving bank treasury and intraday liquidity problems. Although I’m not an expert in these areas and I’m not a Facebook analyst, I am interested in GlobalCoin from a strategy perspective, from a technology perspective, and from a monetary perspective so I’ve written a series of three LinkedIn articles. This is article 2 about the technology. Please see here for article 1 on strategy. All the views and theories are from public sources, or are my own. Please let me know if you agree or enjoy it, and also if I’ve missed something or made a mistake.
In the Facebook GlobalCoin technology, why use blockchain?
When Facebook reveals more information about how GlobalCoin will work and what the goals are, expected in a white paper on 18 June, it will be interesting to validate why they are using blockchain technology. At Finteum, we think that if either blockchain or distributed ledger technology (DLT) is the best technology to solve a specific problem for people and organisations then we should use it, but otherwise not. There are specific benefits for Finteum’s future clients that led us to build using R3’s Corda DLT protocol. As everyone points out, including nearly everyone in the blockchain and DLT world, it’s usually better and easier to solve a business problem with a centralised solution and a relational database than it is to use blockchain.
Instead of using blockchain, Facebook could have created or bought a system like Venmo if they wanted payments data, or if they wanted to disrupt the “freemium” business model. They could have revived the centralised Facebook Credits system, In fact, nearly everything I outlined in the previous article on strategy could have been achieved without blockchain. Facebook could still have gained fast adoption and retained control on the data that it wants without blockchain. Facebook doesn’t need blockchain to make the project open, or to link the GlobalCoin to a basket of fiat currencies. It’s much harder to hire blockchain people, which is probably part of why Facebook reportedly has 30 open blockchain roles. There is only one reason that makes sense to me on why Facebook would use blockchain as an underlying technology for GlobalCoin.
The one reason to use blockchain is that it could limit the control Facebook or any individual organisation has on the GlobalCoin system, while sharing data securely between the involved organisations. Compared with a centralised solution, this could help to restore trust in Facebook as an organisation and a brand. The approach that has been reported, to establish an external foundation to govern GlobalCoin, aligns with this. Using blockchain could theoretically help to reduce Facebook privacy concerns and it would give shareholders, users and regulators the feeling that Facebook as an organisation is becoming more open by not retaining control on the GlobalCoin protocol or data, without Facebook having to change its core business. However, as described below, it depends entirely on the implementation.
How could the GlobalCoin Protocol work?
The GlobalCoin protocol will be the set of rules that defines how transactions happen, how they are validated, whether they can be stopped or cancelled, what happens if a validating node goes offline before confirmation, etc.. In a blockchain-based solution, GlobalCoin could transfer data that is shared and possibly encrypted using a protocol that could be open-source or could be proprietary. This would enable buying and selling GlobalCoins using conventional money, peer-to-peer transfers of GlobalCoins, and validation of transactions. Facebook or the foundation may not have sole visibility or control on the GlobalCoin transaction data. They may not have sole control of the protocol; maybe those who hold GlobalCoins or those who validate transactions could propose or vote on changes to the protocol. Facebook’s external partners could be used for buying or selling GlobalCoins through bank transfers or in exchange for cryptocurrencies (cryptocurrency exchanges) or for storing users’ GlobalCoins (cryptocurrency wallet providers), reducing Facebook and the foundation’s control. In that way, the protocol could have some similar characteristics to a public blockchain protocol. It’s unclear whether Facebook will use an existing protocol (buy, build, or partner).
For validation of transactions (consensus mechanism), allegedly about 100 organisations including financial institutions are expected to pay $10m to licence a validating node, and the money will also be used to back the initial GlobalCoins. It will be interesting to see if it would be open to any organisation or user to create a validating node, and how the protocol would reward validating nodes. $10m seems like a lot of money, so the economics of operating a validating node will be interesting. It’s unclear how Facebook can reward validating nodes sufficiently and also keep the network free or cheap for GlobalCoin users.
How could the GlobalCoin Network work?
The crucial part of implementation is not the GlobalCoin protocol, but the GlobalCoin network. It’s unclear whether some parts of the structure will be governed by a foundation and this is especially important for the network. If the network of Globalcoin users is controlled by a foundation, then it will be interesting to see how users will authenticate to join the network. Joining the GlobalCoin network could be authenticated using Facebook, Whatsapp, or Instagram credentials – “login with Facebook”. This is important because Facebook would possibly want to tie together GlobalCoin transactions (payments data) with other user data that Facebook collects, for the benefit of advertising. Facebook might be able to achieve that, even if transaction data is encrypted, depending on the implementation of authentication. Importantly, regulators may want Facebook or the foundation to authenticate users’ wallets (KYC & AML) in the GlobalCoin network to detect or stop a suspicious or fraudulent transaction. Detection is more likely to occur at the GlobalCoin user and transaction level, rather than solely using anonymized GlobalCoin transaction data, so detection is unlikely to be performed by validating nodes. It will be interesting to understand what data Facebook and/or the foundation, the validating nodes, GlobalCoin users and the public will see.
How could GlobalCoin link to other services?
Some reports suggest that GlobalCoin will not solely link to Facebook services. This suggests that a GlobalCoin user could also link their GlobalCoin balance to other services. If the network is controlled by a foundation, then I think the foundation would need to decide which services GlobalCoin can link with. That could apply to authentication to join the network (“login with Google”), or initiation of a GlobalCoin transfer in the network (“pay for your Amazon cart with GlobalCoin”). It’s possible that Facebook could automatically create a wallet for every user of Facebook, Whatsapp and Instagram on day one, as has been suggested in the media, immediately creating billions of empty wallets in the network. If that happened, Facebook could claim that GlobalCoin would be a more distributed network than any public blockchain. However, if it’s operated by an independent foundation, I’m not sure that the foundation could justify giving a wallet to every Facebook user on day one. Maybe it will be easy to create a wallet from day one, authenticating with Facebook, Instagram or Whatsapp credentials, and maybe at some later date to authenticate with other credentials like Google. It’s likely that Facebook will want users to connect the GlobalCoin wallet to other accounts and spend GlobalCoins across platforms. It will be interesting to see if a person will be able to have multiple GlobalCoin wallets and what incentive there will be to have multiple, or just one.
How could identification of other Globalcoin users work?
Facebook could explain the service to users saying “send money to your friends for free with only their Whatsapp number, Instagram username, or Facebook username”, which is point-to-point wallet identification, similar to Venmo, Paypal, etc.. It means nobody knows how many GlobalCoins another person in the network has. Maybe not even Facebook or the foundation would know, depending on the implementation. But anyone in the GlobalCoin network could send GlobalCoins to someone else. This could possibly carry the pre-condition they are already connected through Facebook, Whatsapp, Instagram or another network.
Conclusion
If Facebook or a foundation solely controls the network layer and acts as the gatekeeper for admission to the GlobalCoin network, or decides on mechanisms for identification, or can stop a transaction, then it could upset the cryptocurrency community because of the value they place on censorship resistance. One of the main benefits of public blockchain is that it reduces censorship and increases decentralisation. If using blockchain for GlobalCoin is intended to reduce Facebook control, then it needs to be implemented effectively to avoid it backfiring on Facebook.
I hope some of these points on the GlobalCoin technology are interesting and provide some points to watch out for in the upcoming release. Feel free to contact me if you are also interested in it, or feel free to share alternative theories on why GlobalCoin would use blockchain. Please see here for the final article in the series on the monetary aspect of GlobalCoin.