Libra — A new player in the wild waters of digital finance.
Cryptocurrency fever — a term that accurately describes the current situation in the financial world after Facebook announced its very own cryptocurrency called Libra, together with its wallet Calibra last month. Everyone is talking about it, from bitcoiners and economists to philosophers. Libra also caught the attention of regulators, and the Congress of the United States already held a hearing to learn more about Libra’s big plans to dominate the digital payments market. We’re entering a new era in the evolution of cryptocurrencies, an age of international corporations — and maybe even governments — creating their own “cryptocurrencies”.
But what exactly is Libra? How does it compare with Bitcoin? And what are all the pros and cons of using Libra?
I read all of the Libra’s extensive documentation, so you don’t have to, and here’s the TL;DR.
What is Facebook’s Libra Blockchain, and what is the difference between Libra and Calibra?
As stated in Libra’s White Paper: “Libra is a simple global currency and financial infrastructure that empowers billions of people.” An excellent marketing statement, but it doesn’t say much, does it?
Libra aims to be a permissioned digital currency built on Libra Blockchain using a completely new programming language called Move. An open-source, decentralized, and programmable database designed to serve the needs of the global digital market while allowing anyone in the world to develop their own apps and platforms built on Libra.
The primary target audience of Libra are the Unbanked — billions of people around the globe for whom having a bank account or a payment card is too much of a luxury to afford.
Libra should be running on its own ledger governed by an independent not-for-profit Libra Association based in Switzerland. Established by Facebook and other 27 founding members, Libra Association plays a vital role in the Libra ecosystem and its evolution. Each of the founding members paid a minimum of $10 million to (optionally) run a transaction validator node on the network, receive dividends from the interest earned on the Libra Reserve, and gain one vote in the Libra Association council. This council will be the main driving force of the whole project, and it decides how Libra works, who can join the association, and what are the rules of the Libra network. Libra aims to increase the number of its association members to 100 by 2020, so each of the members holds precisely one vote in the council.
Libra claims to be backed by a basket of stable assets called the Libra Reserve. These assets are in the form of government-issued currencies deposited by the users purchasing Libra and short-term government securities. The Libra Association can then adjust the basket composition based on the market situation to ensure the stable value of Libra. Libra is backed by the Libra Reserve on a one-to-one basis. This means that every time a user buys Libra with his or her local currency, Libra Reserve mints an equal amount of Libra currency. Every time the user sells Libra for fiat currency, the corresponding amount of Libra is burned/destroyed. This way there’s always 100% of the Libra in circulation collateralized with real assets held in the Libra Reserve.
“Libra is fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value. The Libra Reserve will be administered with the objective of preserving the value of Libra over time.”
— Libra White Paper
Libra itself wouldn’t be too useful if there’s no interface that allows users to easily buy, store, and manage their Libra assets. For this reason, Facebook has created a subsidiary company called Calibra, and the first project of this company will be the digital wallet carrying the same name. Initially, Calibra will work like any other existing crypto wallet. Later on, Calibra plans to introduce advanced features such as paying your bills directly with Libra, shopping online, or using public transport, all of this within the interface of the wallet. Calibra digital wallet will be a standalone application compatible with both iOS and Android, and it will be also integrated into Facebook platforms like Whatsapp or Messenger. This will allow Facebook’s 2.7 billion users to access Calibra directly in the apps they already know and use.
What is the difference between Libra and Bitcoin?
Many bitcoin enthusiasts, and even US Congress members, are asking the same question: What is the difference between Libra and Bitcoin?
TL;DR: Almost everything is different.
Bitcoin is a pseudonymous peer-to-peer digital cash designed to work on a decentralized and permissionless blockchain. This completely removes the need for trusted intermediaries and payment processors. Bitcoin is also fully censorship-resistant, meaning that no one can control who is allowed to use the network. In Libra’s case, there’s a single governing body: the Libra Association.
The other thing is the basis of value. Bitcoin’s value is built on economic scarcity with a fixed supply of bitcoins and mathematically verifiable ownership of the assets. On the other side, Libra’s value depends on the trust in its issuer. Comparable to how central banks operate, Libra Association could potentially inflate or deflate the currency based on its needs if the council passes the vote to do so.
As this comparison chart I kindly borrowed from Coin Center shows, it is clear that Libra and Bitcoin are more different than similar.
From everything we know it seems to be clear that Libra is more of a competition to government-issued currencies, especially the US Dollar, rather than to Bitcoin. Libra has been designed for a different purpose and aims at a different goal than Bitcoin. The most optimistic Bitcoin enthusiasts believe that Libra could be a gateway for the public to learn about cryptocurrencies, and eventually, find their way to Bitcoin. Whatever the effect of Libra’s entry to the big-boy table will be, even the skeptics might be soon forced to admit that many people will perhaps start asking the most important question: “Can there be money outside the state power?”
Due to the different design and nature of Bitcoin, it is improbable that Libra could be a severe competition. Bitcoin allows self-custody, private payments, and a censorship-resistant, self-sovereign environment to everyone, regardless of their citizenship, wealth, political status or geo-location.
Something that Libra could hardly compete with in its currently proposed form. It is questionable whether Libra could be even considered a cryptocurrency as it lacks one crucial characteristic of cryptocurrencies as we know them — censorship resistance.
But what is it then? A stablecoin? Not really.
Stablecoins such as Tether (USDT), the most popular stablecoin, are pegged to one single currency, such as US Dollar, Euro, or Japanese yen. Libra will be “pegged” to a variety of government-issued currencies combined with government securities. This means that Libra, an asset backed by securities, is more like ETF, rather than a stablecoin or a cryptocurrency.
In the end, it’s not Bitcoin that keeps Zuckerberg awake at night; it’s WeChat. With over 1.08billion monthly active users in Q3 2018, WeChat is China’s Facebook, Lyft, Mastercard, Amazon, UberEats, and much more, all on one platform. Earlier this year, WeChat announced plans to expand to Europe where Facebook generated a massive revenue of over $4 billion in the last quarter of 2018, and it’s no surprise that Facebook aims even higher for the next years to come. Facebook has to grow and keep up with its competitors if it wants to protect its position of the market leader. Libra, if executed properly, has the potential to become Zuckerberg’s new global digital kingdom.
The pros and cons of Libra.
Libra could be a great solution to those who do not have access to the banking system. Those who can’t afford to pay the bank account fees, transaction fees, and other costs associated with having a bank account. All you need to use Libra is a simple smartphone with Calibra wallet and connection to the internet.
Libra could also become the go-to solution for millions of small businesses already using Facebook, who can’t afford to pay for an expensive payment processor or point-of-sale terminals. Libra could revolutionize the way we shop, as Facebook plans to implement its Calibra wallet in Whatsapp, Messenger, and other partner platforms. This would allow users to make purchases directly through their favorite social media and provide Libra with a stable flow of income from payment processing fees. Pay for a Lyft ride, your monthly Vodafone bill, or buy a Spotify subscription, all with the touch of a button.
But not everything that glitters is gold, and there are some severe concerns about Libra to consider.
To use Libra’s digital wallet, Calibra, users will be required to verify their identity by uploading a photo of their passport or other identity documents. This could allow Libra to track its users, learn their financial habits, and even prevent specific users, or whole regions, from using this platform if the Libra Association decides so.
“An additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.”
— Libra White Paper
A tiny group of only 100 international corporations will be in charge of who can buy, when they can buy, and what they can buy. This could be a legitimate reason for anyone who has even the smallest doubt to stay away from Libra.
I would like to point out that Facebook’s representatives stated that Libra will work as a pseudonymous currency without your real name attached to the transactions. They also stated that they will in no way associate your social data gathered by Facebook and its other projects with your Calibra financial data. Considering Facebook’s bad track record, this might turn out differently in the future.
Conclusion
Regardless of your opinion on Libra, one thing is certain — this bold move by Facebook focused the attention of the world on cryptocurrencies. Bitcoin and other cryptocurrencies could ride this momentum and bring mass adoption of these technologies closer than we can imagine.
Right now, Facebook leads the way with Libra announced to launch in 2020, and everyone is nervously waiting to see if the reality will match the proposed White Paper. But before that happens, we might see other giant corporations attempting to create their own cryptocurrencies, following Facebook’s example.
As one of my favorite bitcoiners, Andreas Antonopoulos said, the era of corpcoins is here.
Additional recommended reading (and watching):
Jameson Lopp — How Will Facebook’s Libra “Blockchain” Really Work?
Andreas Antonopoulos — Libre Not Libra: Facebook’s Blockchain Project
Josh Constine for TechCrunch — Highlights from Facebook’s Libra Senate hearing
Thanks for edits to Bach and Oliver from the Trezor team.
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