On the 11th of April 2018, Mark Zuckerberg appeared in front of Congress to answer questions regarding user privacy in the wake of the Cambridge Analytica Scandal. As he gazed upon his interviewers he may well have imagined Lady Justice, scales in hand, trying to bring some accountability to the reckless Social Media giant.
Maybe it was here – sitting in front of the Congress members – that Zuckerberg realized what he should name Facebook’s new cryptocurrency: Libra.
In ancient Rome and Greece, Libra has deep associations with the concept of justice. The fact that Facebook – a company constantly embroiled in legal battles – should unwittingly name its token after a representation of justice, is telling for the Libra project as a whole.
To make the point further, Libra is often depicted holding scales, a symbol for balance. Ironically, Facebook represents the antithesis of balance, controlling roughly 66% of the social media market and buying up any competitor that might threaten its hegemony. And now, as The Atlantic puts it, “one of the world’s most distrusted companies, wants us to trust its new Libra cryptocurrency.” We shouldn’t fall for it.
What is Libra?
According to the whitepaper, Libra aims to provide a global currency and financial infrastructure to empower billions of people. The idea is that individuals all over the world will be able to send each other money and access basic financial instruments through the power of the internet.
The internet of money is finally here… if the Libra whitepaper is to be believed. Those of us who have spent time in the blockchain space might wonder if a better solution might not already be at hand?
Cryptocurrencies like MakerDAO, for example, already provide an international stable coin with a viable governance system. Facebook is either ignorant of this fact or hopes that its gigantic user base is.
When it launches, the Libra ecosystem will consist of three key components:
- The Libra blockchain
- A reserve of assets designed to give intrinsic value to the coin
- The Libra Association which will be in charge of governance
For you and me, this means that the Facebook team is building a new blockchain to support its stable coin called Libra. The Libra Association will be in charge of governing the token, while the reserve will ensure that the token price remains relatively stable.
The native wallet, Calibra, will make funds accessible through WhatsAPP, Facebook Messenger and a separate mobile APP. Although Libra has all the hallmarks of a cryptocurrency – including a whitepaper, wallet, blockchain and buzz-words – it’s closest relative is really WeChat’s payments feature.
WeChat is China’s most popular chat and payments APP, logging over 1 billion active users per month. Interestingly, the Chinese platform launched its wildly popular payment service way back in 2013, meaning Facebook is lagging far behind.
What is the point of Libra?
This is a very good question and the answer will depend on your opinion of Facebook. It’s fair to assume that everyone with an internet connection has heard of Facebook and most of us bring personal experiences to the table.
Those who see Facebook as a force for good in the world, connecting friends and families, will likely believe the whitepaper. Here Libra is portrayed as the next step in the evolution of money. As a milestone for financial inclusion and a powerful new tool to help billions of people all over the world.
Observers with a more negative disposition towards Facebook will see the Libra project as a frightening next step by Zuckerberg and his team to invade every aspect of our lives. They may rightly ask if a corporation with such a long and checkered history of mismanagement should really be entering the payments industry.
The truth is likely somewhere in the middle. Facebook’s worldwide market share fell by 10% in 2018 and it seems clear that an impactful new feature is needed. Giving billions of people the power to send funds across borders with low fees and low latency will undoubtedly have a huge impact.
What is also beyond doubt, however, is that Libra’s success would strengthen Facebook’s already worrying grip on modern life.
How does the Libra blockchain work?
The notion that Libra is a wolf in sheep’s clothing is further amplified in the technical whitepaper. It is striking to find the word “user” often replaced with commercial terminology. “Clients of the Libra blockchain” is just one example showcasing how Facebook thinks about its network participants.
From a performance perspective, Libra falls short of expectations. Given Facebook’s almost limitless resources, it’s curious to read that the protocol is only capable of handling 1,000 transactions per second. EOS, IOTA and Ripple can all handle more. The whitepaper suggests that the capacity can be increased in the future, but the blockchain space has taught us that it’s much easier to talk the talk than walk the walk.
Interestingly, the whitepaper states that the relatively weak performance of the Libra blockchain won’t be an issue, because most transactions will be conducted off-chain. If this is the case, one wonders why a blockchain is necessary to begin with.
Visa alone processes around 24,000 transactions per second. With Facebook’s unmatched user base in mind, it’s fair to assume that it will reach Visas transaction volume relatively quickly. If less than 5% of all transactions are on-chain, then launching a full-blown blockchain seems like overkill. Why not just use a standard financial database?
The answer may well lie within the international regulatory landscape which would likely strike down any attempt by Facebook to operate like an international bank. Digital assets provide an interesting grey area for Zuckerberg and his team to test.
While Facebook's Libra doesn't compete against any open, public, permissionless, borderless, neutral, censorship-resistant blockchains, it *will* compete against both retail banks and central banks. This is going to be fun to watch.
— Andreas M. Antonopoulos (@aantonop) June 18, 2019
In fact, Elaine Ou even suggests that Libra is an outright sacrifice to the regulators, designed to gauge their receptiveness to the idea. According to her article in Bloomberg, Libra simply doesn’t work and even utilizes features which don’t exist. Ou states:
“The documents not only describe a lot of functionality that hasn’t been built but also refer to major architectural features that have yet to be invented.”
In theory, Libra’s approach sounds eerily similar to that of VeChain. Vetted Validators run a distributed proof-of-stake consensus algorithm in order to agree on an ever increasing record of transactions. In the case of Vechain a validator must own at least 1 million VeChain tokens (~$10,000).
In the case of Libra, prospective validators must join the Libra Association by paying a membership fee of $10 million (!!!). Additionally, two of the following three requirements need to be fulfilled. A validator is a corporation which:
- Has a market value of more than $1 billion USD OR generates more than $500 million in customer cash flow.
- Is able to directly reach more than 20 million people a year.
- Is recognized as an industry leader (by being included in the top 10 Fortune 500 companies for example).
If Libra succeeds, a new oligarchy will emerge in the blockchain space.
If Facebook can pull off this ambitious scheme, it accelerates the inevitable collapse of the long tail of sovereign currencies
— nic carter (@nic__carter) June 18, 2019
How is Libra governed?
This brings us to the critical question of governance. We have plenty of stable coins already, but it is their governance that determines their future success. On a spectrum on which Tether and MakerDAO stand diametrically opposed as to how governance is done properly (I’ll let you figure out which is good and which is bad), Libra stands much closer to the former than to the latter.
Facebook’s cryptocurrency is governed by the Libra Association. Only corporations or investors with more than $1 billion under management are free to join, and they must fulfill two of the three requirements outlined above.
Each member has a seat on the council which votes for the Associations’ managing director. Whoever is chosen then appoints an executive team and elects a board of representatives. One is reminded of an 18th-century gentlemen’s club, in which the super-rich carve up the world and distribute it amongst its members.
Publications like Techcrunch, are quick to point out that voting rights are fairly distributed and members may not control more than 1% of the total vote – even Facebook. What organizations like the EU and UN show us is that smaller players will often follow the powerful in order to curry favor.
It is very hard to believe that Libra would ever be allowed to walk down a path which Facebook does not approve off. To think otherwise is naive in the extreme. With that in mind, Libra’s governance seems like little more than a facade.
How does the value of Libra remain stable?
In its whitepaper, Libra acknowledges the existence of Bitcoin but deems it unsuitable due to its high price volatility. It goes on to say, that a stable coin is needed in order for the internet to reach its full potential and for those who are unbanked to be included in the modern financial system.
Facebook's Libra coin isn't for Bitcoiners. We're already down the rabbit hole…
…but when our no coiner friends start using it, which they will, we have them one step closer to Bitcoin. This is an opportunity.
— Peter McCormack (@PeterMcCormack) June 18, 2019
But how does it aim to achieve price stability?
In essence, Libra will operate like a Medici Bank from the 15th century. Customers deposit their fiat currency in exchange for a new type of currency. In the case of the Medici’s it was the florin, whereas Facebook will be issuing Libra tokens.
The Libra Reserve then secures its holdings with bonds and low-risk investment opportunities. This ensures that the Libra can always be exchanged back to the original fiat value, essentially pegging its value and creating a stable coin.
Facebook will become Facebank…
Conclusion: What is Libra?
Libra has the potential to improve the lives of people all over the world, and for this reason alone we should give it a chance. It is without question that a frictionless, free payment service has the potential to do a huge amount of good.
After all, that is why cryptocurrencies went from an obscure idea to a billion dollar industry in just 10 years.
That being said, Libra is not a cryptocurrency. It’s a payments feature for WhatsApp and should be treated accordingly. Finally, it is prudent to treat Libra with strong prejudice. Facebook has shown time and again that it cannot be trusted with customer data, which should disqualify it from handling payments.
Once Libra goes live, keep transaction amounts low until it has proven itself to be trustworthy.