Cryptoeconomics — Part III: Facebook’s Libra Global Currency: Threat Or Opportunity?
Emulating Satoshi Nakamoto’s style, the Social Media Platform “Facebook” has recently released two whitepapers; a commercial and a technical one of their new blockchain protocol called “Libra”, along with their plans of having their own Libra token.
According to Facebook, Libra’s mission is to:
“enable a simple global currency and financial infrastructure that empowers billions of people”.
Users of the platform will be able to send and receive payments not only within the platform itself but also across the internet. This has a lot of implications considering that Facebook has over 2.38 billion monthly active users as of March 31, 2019. Meaning that if the release of cryptocurrency is successful, it could potentially benefit a lot of people.
Some of the companies that will join the platform include Visa, Mastercard, PayPal, Uber, Lift, Booking Holdings, and others. Each company will invest USD$10 million to become a “node” and together they will constitute a non-profit consortium called Libra Association (based in Geneva), which will govern the protocol. The money raised by the members of the consortium will be aimed to fund the development of the Token.
The company also announced that the access to the protocol will be initially permissioned, meaning that only selected companies and individuals will have access to it, however, they are planning to move towards a permission-less protocol within a period of 5 years after going live.
They have released a test-net environment that developers are able to perform test operations such as create an account, test payments, etc. This is doable by simply cloning their Github repository into their systems. Their plan is to go live on Q2 2019 with 100 nodes (validator of transactions).
Monetary Policy
Interesting enough, there is not a concrete monetary policy, as they mention:
Since Libra will be global, the association decided not to develop its own monetary policy but to inherit the policies of the central banks represented in the basket.
In their document “The Libra Reserve”, a secondary token called “Libra Investment Token” aimed specifically to pay dividends to early backers, will be one of the assets that back this reserve. They outline how the reserve works as the stability mechanism of the Libra currency and there will not be any limit to how many Libra tokens can be “minted” or “burned.”
“The reserve is the key mechanism for achieving value preservation. By fully backing each coin with a set of stable and liquid assets… The money in the reserve will come from two sources: investors in the separate Investment Token, and users of Libra.”
This means that, similar to other stable coins in the market, Libra will not only be backed by Fiat Currency, but it will also be constituted by a collection of “low-volatility assets” including bank deposits and government securities in currencies from stable and reputable central banks. Of course, this also implies the inclusion of low-volatility crypto-assets.
What does Libra mean for Bitcoin, Stellar and other cryptocurrencies
Although many people think that Facebook’s Libra might constitute a threat to other cryptocurrencies like Bitcoin, Stellar or Ethereum, I don’t think that to be the case. The Libra cryptocurrency has a completely different crypto-economic framework. First, the value of Bitcoin lays in its capability as a “store of value” (due to its scarce nature) and although it is not necessarily a currency, it certainly can be used as such. In the case of Stellar, even though it shares a similar vision (also being both managed by non-profit organizations), their approach and technology implementation differ in a significant way and it looks like it might face similar scalability issues that Ethereum has been working for years.
Conclusion
Facebook is a very idiosyncratic platform. On the one hand, I like the fact that I am able to get in touch with family and friends, but on the other hand, Facebook is known to have credibility issues while dealing with our personal data, which makes me think about the way of how they will handle the financial data of billions of people. However, this new development will certainly bring more awareness to the crypto space by contributing to its mainstream usage from potentially billions of people.
Further reading
An Introduction to Libra: https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/LibraWhitePaper_en_US.pdf
The Libra Blockchain: https://developers.libra.org/docs/assets/papers/the-libra-blockchain.pdf
The Libra Reserve: https://libra.org/en-US/about-currency-reserve/#the_reserve
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