What is Facebook’s Libra? Is it the next Bitcoin?
Should I invest in it?
When is it coming out and who controls it?
Well, stick around,
in this episode of Crypto whiteboard Tuesday
we’ll answer these questions and more.
Hi, I’m Nate Martin from 99Bitcoins.com
and welcome to Crypto Whiteboard Tuesday
where we take complex cryptocurrency topics,
break them down and translate them into plain English.
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don't forget to subscribe to the channel
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Today’s topic is Facebook’s cryptocurrency known as Libra.
Libra is a cryptocurrency project, pioneered by Facebook,
that is presumed to launch sometime in late 2020.
Its purpose is to connect
the billions of people living together on this planet
through one digital currency.
As the world moves into a cashless, digital only economy,
many unbanked or underbanked people may be left out.
The Libra cryptocurrency
aims to help people that don’t have any access to the banking system
to participate in the digital economy.
Libra is designed to work much like a stablecoin -
a cryptocurrency with a relatively stable value against real world currencies
also known as fiat currencies.
Unlike Bitcoin or Ethereum,
which widely fluctuate in value due to price speculation,
Libra’s value will have low volatility
due to a reserve of currencies and assets that back it.
Facebook also set up a subsidiary called Calibra Inc.
which is currently developing the first Libra wallet also called Calibra.
Calibra is set to work as an independent wallet for Libra
but will also integrate with other services such as Facebook and Whatsapp
allowing billions of users to send funds to each other with a single tap
and with low fees.
The Calibra wallet is still in development,
but according to its site,
you will be required to verify your identity with a government ID
in order to sign up.
The wallet will also allow you to purchase Libra
in exchange for fiat currencies.
While the Libra initiative was set in motion by Facebook,
some of the major companies around the world are partners in it.
Uber, Coinbase, Spotify and Vodafone to name a few.
These companies will be part of the Libra association
and will manage the development of the currency and its network.
So does this mean that Libra is actually centralized?
The answer to that requires some explanation...
Libra is set to start out as a centralized currency,
but that within 5 years will become completely decentralized
just like Bitcoin.
In its initial stages,
the Libra project will be managed and controlled by the Libra association;
A non profit organization comprised of global companies,
social organizations and academic institutions.
To become a founding member you need to stake $10m.
Each founding member will also be required to run a validator node -
a computer that validates and approves transactions
following the Libra rules.
This is a bit similar to a what a miner does in the Bitcoin network.
But money and computing power aren’t enough to join the Libra association
as a founding member.
You’ll also have to pass a certain scalability bar.
For example, commercial companies
need to have more than $1 billion in market value,
reach over 20 million people a year
and be recognized as a top 100 industry leader.
Cryptocurrency focused investors
need to have at least $1 billion in assets under management.
Social organizations will need to have
a track record of working on poverty alleviation,
ranked in the top 100 in their field
and have an operating budget of over $50 million.
And lastly, academic institutions wanting to join
will need to prove that they are in the top 100 universities in the world
according to certain standards.
While Libra’s vision is that anyone with sufficient stake in the Libra network
will be able to serve as a validator,
initially the network will be limited to
100 qualified founding members and validators.
It's important to note
that while Facebook Inc. is indeed
the initial founding member of the Libra project,
it has the same commitments, privileges and financial obligations
as any other founding member.
But what does the association actually do?
How is the power distributed between its members?
The Libra association is in charge of the Libra protocol,
meaning the rules of the network, and of managing the Libra reserve
which I’ll get to in a moment.
The governing body of the Libra Association
is the Libra Association Council,
comprised of one representative from each member of the association.
You can think of the council as shareholders in the Libra association.
They get to vote on key decisions
but they’re not involved in the day to day management.
The voting powers in the council are generally proportional to stake,
in other words -
the money invested by each specific organization.
However, the voting powers are also capped
to avoid concentration of power.
The council appoints an executive team under a managing director
to carry out decisions and manage day to day issues,
similar to shareholders appointing a CEO.
Additionally, a Libra Association Board,
comprised of 5 to 19 members of the council
will provide guidance to the executive team.
This would be similar to a board of directors
to which a CEO is accountable.
Finally we have the social impact advisory board
led by nonprofit organizations and academic institutions.
This advisory board seems to have limited influence
since the board has to approve its recommendations.
For Libra’s vision of decentralization to indeed be realized,
the association would eventually become unnecessary
and the Libra project will be controlled
through the public’s participation in the network.
But what about the value of the Libra currency?
How will it be maintained?
As you may already know,
most cryptocurrencies aren’t backed by any commodity or fiat currency.
That’s why they often fluctuate so dramatically in price,
since a lot of people are speculating on how much they will be worth
in the future.
Libra, on the other hand, is set for day to day use,
which requires it to have a less volatile nature.
That’s why for every Libra created
there will be a set of stable and liquid assets backing it.
This backing, known as the Libra reserve,
helps make Libra more stable
so users will be able to sell Libra coins at
or close to the value for which they bought them.
The Libra reserve expands and shrinks
according to supply and demand for Libra from the market.
So unlike many cryptocurrencies that have a limited supply,
or use mining to generate new coins,
the Libra supply is ever changing.
If people demand Libra -
more coins will be created
in exchange for the fiat currency used to buy it.
If people sell off the Libra -
the reserve will shrink accordingly and so will the Libra money supply.
The initial funding for the reserve
will come from founding members of the Libra association
and from users buying the coin once it launches.
It will be safeguarded by several different custodians,
to avoid centralization risk, and it will be audited periodically.
The reserve backs the Libra in full
with a goal to always preserve Libra’s purchasing power.
This type of reserve discourages a classic run on the bank.
The typical rationale behind a bank run is that a coin is only fractionally backed,
and there isn’t enough hard cash to go around
if everyone were to decide to cash out at the same time.
A fully backed reserve
promises that everyone would be able to cash out at any moment
even if the market were to panic.
You may be wondering
what do the founding members get in return for their initial investment
which creates the reserve?
The answer is the Libra Investment Token.
The reserve funds I mentioned earlier
will be invested in low-volatility, highly liquid assets
like bank deposits and government bonds
with low default probability and low inflation expectations.
The yield from the reserve
will be used to support the operating expenses
of the Libra association
but will also be distributed to the holders of the Libra investment token.
The Libra Investment Token is in fact
a security issued by the Libra association
which, unlike the Libra coin, can, and probably will fluctuate in value.
When a founding member of the Libra association
invests an initial amount in the reserve,
they get the Libra Investment Token in return.
This token can be considered as a share in the Libra association.
If the Libra reserve generates a profit it will be distributed to the token holders.
Since the Libra Investment Token is considered a security,
it will be available only to founding members of the Libra association
and to accredited investors from the general public.
Keep in mind that since the reserve
is invested in very low risk - low yield assets,
it’s planned to make a substantial profit
only if the Libra project were to truly take off.
The reserve needs to be large enough to generate substantial profits
even from low interest rate investments.
So there you have it-
a vision for a global decentrazlied currency
that’s starting out as a centralized cryptocurrency
controlled by a consortium of corporates worldwide.
As you can imagine,
the Libra project attracts its share of criticism.
So before we conclude today’s lesson,
let me point out some of the more concerning points about Libra.
First of all, Libra seems to be just another fiat currency,
only this time it’s controlled by corporates
and not by central banks.
The Libra association states
that in the early development of the Libra network,
its founding members are committed to working with authorities
and to address all regulatory concerns.
Basically, this means that Libra will probably be available
only for people who pass a certain verification process,
making it still unreachable to many unbanked
and underbanked people around the world.
Keep in mind that over half of the 1.7 billion underbanked
come from just seven countries:
Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan;
in more than half of these places,
cryptocurrencies are banned, Facebook can’t freely operate,
and heavy regulatory restrictions exist
to combat crime and money-laundering concerns.
On top of that,
Libra’s value is backed by major fiat currencies
making it inherently attached to their fluctuations.
Then we have the issue of privacy,
for which Facebook is already widely criticized.
Much like Bitcoin, Libra transactions are pseudonymous.
This means all transactions are public and visible to everyone,
but you can’t tell who sent what to whom,
since Libra addresses are just random letters and numbers.
However, if you take into account
that Libra wallets will require some sort of user verification,
you can easily see how financial information
can be constructed by certain entities like Libra wallets
and therefore possibly leaked.
Another important issue is the fact that Libra is a centralized,
also known as permissioned blockchain,
with intentions of becoming permissionless,
but it remains unclear how and if this transition will actually occur.
The financial interests of the companies behind Libra
may collide with this vision
if Libra becomes extremely popular,
and it requires a significant level of trust on the public’s part
to believe that those organizations would lobby for Libra’s vision
over their own interests.
Moreover, there are almost a dozen major unsolved issues,
clearly stated on Libra’s website that will need to be addressed
in order for it to become truly decentralized.
Some of the challenges the switch to decentralization presents includes
how to decentralize the reserve function,
how to scale the system so it will work fast enough
with more than 100 validators,
how to secure a decentralized network against fraud,
and most importantly,
the issue of decentralized governance -
how will decisions be made once there is no centrazlied council?
Bitcoin proponents would argue that if you want to create a decentralized coin,
you should make it decentralized from the get go,
since a decentralized model
is something that needs to be taken into account
when building the foundations for any blockchain.
One theory suggests that when building a blockchain
you’re ideally looking for three main elements:
1. Decentralization -
meaning anyone can participate and it's free for all.
Next, security -
Since these are digital currencies
you need to protect against double spending issues.
And scale -
You want the system to be able to have a high rate of transaction approval
so it can easily be adopted worldwide.
The problem is that by design you can only have two out of the three.
Currencies that are decentralized and secure like Bitcoin,
aren’t really scalable.
Currencies that are scalable and secure aren’t truly decentralized,
like Ripple and its XRP currency.
Currencies that are decentralized and scalable are inherently insecure
since it takes time for the data to travel between all participants in a large system,
and bad actors can take advantage of this lag in information.
In Libra’s case - while it is starts out as secure and scalable,
there’s no clear understanding of how it will become decentralized as well.
Finally, we have Libra’s governance model and regulation.
One of the most interesting points of criticism about this issue
comes from an article by Dmitriy Brenzon, a research partner at Zenith Ventures.
Brenzon says it is unclear whether the benefits of the public good
which Libra aims to serve, is a strong enough incentive
for competing organizations with conflicting priorities.
For example what happens if Calibra, the Libra wallet developer,
wants to launch in the same market as Celo,
a platform for stable, secure digital payments?
Celo is a portfolio company of Andreessen Horowitz and Coinbase,
which are part of the Libra council.
Or what happens if Vodafone,
another founding member of the Libra council,
wants to launch a Calibra competitor similar to M-Pesa,
a mobile phone based money transfer system?
Brenzon puts it this way,
“With only 28–100 Council members,
politics should be expected;
after all, there will be individuals from organizations
who know how to play that game.”.
His final point really hits the mark -
“What is the incentive for companies to participate,
and will it be strong enough to stand up against regulators and governments
when push comes to shove?
While Libra intends to create a network that operates across any country,
it’s actually creating a network that will have to comply
with every country’s regulatory regime.”
Several regulators from countries around the world
like France and Germany have already lashed out against Libra.
Subsequently, major council members
Visa, Mastercard, PayPal, Stripe, eBay, Booking.com and Mercado Pago
decided to withdraw their membership,
leaving Libra with no major US payment provider
and with hindered momentum.
As you can see,
there’s still a big question mark
on whether Libra will actually launch and if so,
how successful it will become.
But there’s no doubt about it:
Libra is a groundbreaking move on Facebook’s part.
It shows we’re entering a new world
where not only governments can create money,
but also corporates.
A lot of crypto-anarchists believe that
the world is already run by a corporatocracy -
companies that dictate national interests through lobbying,
and this is just another step towards increasing the corporate hold
over governments.
No matter how the Libra project pans out,
it's a statement that cryptocurrencies are the future of the global economy.
That’s it for today’s episode of Crypto Whiteboard Tuesday.
Hopefully by now you understand what Libra is -
A centralized, global, stable cryptocurrency project
set to launch in 2020,
headed by Facebook and a consortium of major companies around the world.
You may still have some questions.
If so, just leave them in the comment section below.
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Thanks for joining me here at the Whiteboard.
For 99bitcoins.com, I’m Nate Martin, and I’ll see you…in a bit.