Facebook’s Cryptocurrency [Libra Explained]

by Deyan G.

How about a look into the future of money?

This future is a lot closer than you think – just a few months away.

Then, a new player will emerge and try to change the game.

Today we’ll reveal some of the mysteries, enveloping Facebook’s new offspring – their brand new, shiny, and ambitious cryptocurrency.

In June, the most significant social network announced the new coin on the block – Facebook’s cryptocurrency.

Named “Libra,” it dreams of mainstream adoption and evolving into the new medium of payments.

Considering there are more than 2.7 billion Facebook users worldwide, the new coin has all the chances to achieve its full potential.

Facebook joined forces with 27 organizations to introduce the new cryptocurrency to the world in 2020. One of their objectives is to make it a new medium of payment for everyone, including the 1.7 billion unbanked adults.

The goal is set as high as it could get.

But is it achievable?

Only time will tell, but this article will shine some light on the new Facebook cryptocurrency and its inner workings, so you can form an opinion about it.

What Is Libra?

Mark Zuckerberg wants to make financial transactions as easy as sending a message or a picture. He summarized what the upcoming Facebook crypto is about in a post on Facebook. This is the highlight of his words:

“Libra’s mission is to create a simple global financial infrastructure that empowers billions of people around the world.”

The new digital currency is blockchain-based, backed by a “basket” of fiat currencies, and is undoubtedly the most anticipated of all up-and-coming cryptocurrencies. Its creators intend to build a bridge to connect Cryptocurrency Land to the Fiat Money kingdom.

For more than a decade, since Bitcoin appeared, there’s been a gap between traditional and crypto currencies.
Well, Libra aims to fill in that gap combining blockchain’s security, decentralization, and back the coin by actual cash. 

In theory, Libra has the potential to change the financial world as we know it. Click To Tweet

But first, let’s see what Facebook’s cryptocurrency is all about, and how it’s going to work.

How Will the New Facebook Libra Work?

So far, we know that Libra plans to enter the cryptocurrency market with a bang and become the new online and offline cash.

Although it will differ from other cryptocurrencies, it will still have the standard cryptocurrency features:

  • Blockchain-based
  • Available to spend via crypto wallets
  • Decentralized

Each of these components are similar to what we’ve seen so far, but Facebook modified them to make the new cyber currency stable and able to support billions of users.

Anyway, Libra won’t launch until mid-2020, but we already know how its main components will function.

The Libra Blockchain

It’s inevitable to talk about Facebook’s cryptocurrency and not compare it to Bitcoin. The most popular cryptocurrency vs. the new blockchain currency – what are the differences?

First of all, while Bitcoin’s blockchain is permissionless1Everyone in the network is allowed to validate transactions and mine coins., Libra’s will be permissioned.

In simple words – only a group of selected entities (the founding members of the Libra Association) can mine Libra coins and validate transactions.

And speaking of transactions, Libra will have a considerable advantage over the current cryptocurrency champion.

How Fast Will the Libra Blockchain Validate Transactions?

Unlike Bitcoin, the Libra blockchain will validate transactions much faster – Facebook anticipates around 1,000 validations per second.  On the other hand, the Bitcoin network can verify only seven transactions per second.

In terms of speed comparing Libra to Bitcoin is like comparing a 2018 Ferrari to a 2008 Honda. Click To Tweet

So, Libra offers a fast network with an average latency of about 10 seconds. The Bitcoin blockchain clocks at 10 minutes.

Still, all the speed in the world won’t matter without a high-level security system in place to ensure transactions.

Facebook Libra’s Transaction Security

Similar to Bitcoin, users won’t be able to double-spend Libra coins. Facebook’s cryptocurrency will count on its in-house Move language to secure and manage the blockchain.

The similarities don’t end here. Like Bitcoin, Libra will use the Merkle tree2The Merkle tree represents a massive structure of data blocks, where each branch contains a different set of blocks (leaves). Each leaf contains the information (hash) about the other leaves in the branch. structure for its blockchain. Every transaction will represent a “leaf” in the tree.

Even though it is based on the same principle model, the Bitcoin’s structure differs a bit. Still, Libra tries to optimize the model of the Bitcoin blockchain network to reduce latency and the amount of disk space a node needs.

The nodes, unlike Bitcoin, will have to meet specific requirements to join the network.

Libra Blockchain Nodes

For those of you who aren’t that familiar with blockchain terminology, here’s a quick overview of a node:

A node represents a device that stores the blockchain data and validates transactions.

For its efforts, the node receives a reward, also known as a fee, a percentage of each transaction.

In Bitcoin’s case, everyone could become a node if they have enough computing power. That is the only requirement.

Facebook’s Libra is another case altogether. Only the members of the Libra Association can act as nodes. Which brings us to a reasonable question.

Is Facebook’s Cryptocurrency Decentralized?

Yes.

And no.

On paper, Facebook’s crypto is decentralized – there isn’t a single company in control of the cryptocurrency. So far there are 28 partners (including a Facebook subsidiary created to provide financial services with Libra coins) which can reach consensus, thus making the Libra blockchain work.

Each of these companies has one vote regarding the coin’s future and how the Libra system will work. So, in theory, it’s democratic and somewhat decentralized.

Look, generally, for a network to be decentralized, there shouldn’t be a single entity in charge. In Libra’s case, a select few make the decisions. If you want to participate in the network, you can buy Libra. This allows you to become part of the system, but only as a client.

This is the most significant difference between other cryptocurrencies and Libra. If your sole interest in altcoins is to trade or invest in cryptocurrency, then Libra is as good as any altcoin. But if you want to contribute to the network and receive rewards, it’s a whole different story.

See, if you decide to participate in Bitcoin’s blockchain, you have the same abilities and responsibilities as everyone else in the network. In the Libra blockchain, you are only the consumer of a service which the organizations mentioned above govern.

This doesn’t mean Bitcoin is better. Far from it, as it has its well-known flaws. Libra represents a different concept of a blockchain-based, decentralized cryptocurrency. And “govern” is the keyword.

But it gets better:

Let’s talk about the wallet.

Although the Libra blockchain is open-source, and everyone could develop blockchain wallets for Libra, Facebook has the upper hand with its very own crypto wallet app.

Calibra – the New Facebook Cryptocurrency Official Wallet

Facebook cryptocurrency wallet

Source: Facebook Newsroom

Facebook created a subsidiary company called Calibra that develops a Libra cryptowallet.

The wallet will be integrated into WhatsApp and Messenger but will also function as a standalone app. Users will be able to use Calibra to make peer-to-peer transactions and day-to-day payments to vendors who accept the Facebook crypto. You’ll also be able to spend your Libra coins directly on the Facebook market.

Facebook cryptocurrency wallet demo

Source: Facebook Newsroom

However, these transactions won’t be free, for the most part.

Libra’s White Paper is vague about fees at this point, but the document claims transactions will have zero or low transaction fees. These charges will support the Association members and cover the costs of maintaining the network.

Calibra, as a company, will have one vote in the Libra Association, as well as the other 27 companies who have already backed the project.

So far, so good.

But the question remains – what else could we do with the Libra coins jingling in our digital wallet?

How Can I Use Libra?

Facebook Libra intends to become the first mainstream cryptocurrency. That’s why it will allow all kinds of payments.

By now, these are the potential Facebook cryptocurrency use cases:

  • Peer-to-peer funds transfer
  • Online payments
  • Brick-and-mortar payments
  • In-game and in-app purchases

At the end of the day, that’s all you need, isn’t it?

If all goes well, you’ll even be able to apply for a loan or credit via Calibra.

The good news is that unlike other cryptocurrencies, Libra is backed by companies. This comes to show there are already businesses who have decided to accept Libra payments, even before its official launch next year.

These companies don’t back Libra with their brand name alone. Each of them has invested at least $10 million in the venture.

What Is the Libra Reserve?

One of Libra’s distinctive traits is it’s backed by a “basket” of assets. This so-called basket includes bank deposits and government securities, thus ensuring Libra’s stability. The coin’s value will be guaranteed by a combination of currencies, such as the dollar, euro, and yen. This can solve one of the significant problems other cryptocurrencies face – volatility.

In theory, the Libra you have today will have the same value tomorrow. Click To Tweet

Each of the founding organizations will fund the Reserve by investing at least $10 million. Facebook hopes that by the official launch of Libra, the number of organizations participating in the project will reach 100. If all goes as planned, the first Libra coins will be backed by at least $1 billion.

The other contributors to the Libra Reserve will be the Libra users themselves. Each new Libra coin purchased with fiat currency will further increase the amount in the Reserve. These assets will generate interest, which will maintain the network and pay dividends to the Libra Association members.

Who Are the Libra Association Members?

Facebook Libra Association

Source: Libra.org

The Libra Association is a non-profit organization based in Geneva, Switzerland. This is one of the top five countries, which are perfect for a blockchain business.

Created by Facebook and its partners, the Association will control, maintain, and improve the Libra network.

So far there are 28 founding members, including Facebook’s subsidiary Calibra. To recapitulate, each of them contributes with expertise to the project (besides the $10 million investment) and has the right to vote on decisions concerning the new network.

The list of founders includes companies like Visa, Mastercard, PayPal, Uber, Lyft, Spotify, eBay, Vodafone, and Coinbase.

Since Coinbase is on the list, you’ll be able to use Libra to exchange with any cryptocurrency or fiat money.

However, rumor has it Facebook has reached out to Gemini as well. The Winklevoss twins commented that they’d have to be “frenemies” with Facebook, because of Mark Zuckerberg’s desire to climb on the cryptocurrency stage.

If you haven’t heard of the Winklevoss twins – they sued Mark Zuckerberg for stealing their idea for Facebook, thus winning a $65 million settlement. They risked and used some of this money to purchase 1% of all bitcoins, back when their price was about $8-$9 a coin. This move made them the first cryptocurrency billionaires, once bitcoin’s price flew sky high, reaching a five-digit value.

*Interesting fact – The FBI owns 1.5% of world’s bitcoins.*

The grudge between the Winklevoss brothers and Facebook’s CEO continues, but Mark Zuckerberg will have to reach out to them to make Libra mainstream.

Why?

Because the authorities will regulate Libra, and Gemini is known as the first regulated cryptocurrency exchange company. If Zuckerberg manages to bury the hatchet, he’ll increase Facebook’s revenue even more.

How Will Facebook Benefit from Libra?

Have you heard of WeChat?

If you haven’t – WeChat is like Facebook’s Messenger in a way, only that it’s used mainly in China.

The application has its own online payment system, chat, and social network – all bundled in one. WeChat users can purchase goods and services quickly and easily, through the app.

Facebook wants the same all-in-one app, only on a global scale.

This will allow Facebook to display ads on WhatsApp and Instagram and let users pay directly for products and services through the app. If Facebook manages to institute Libra, it’ll be able to gather even more data on its users’ shopping preferences. FB will target their ads even better with this data, thus generating more revenue. It’s no secret that 98% of Facebook’s revenue comes from ads.

To reap the rewards from Facebook’s crypto, the Libra Association has yet to prove that Libra is better than the best cryptocurrencies of today.

How Will Facebook’s Cryptocurrency Impact the Others? 

Although Libra will launch at some point in 2020, the cryptocurrency market responded positively to its announcement. At the time of writing, almost all cryptocurrencies’ prices are up by around 3%, and bitcoin’s value has surpassed $10,000 for the first time since March 2018.

If Libra manages to spur global adoption, it will increase cryptocurrency awareness and understanding. This may open the door for other cryptocurrencies as well.

On the other hand, Libra could easily have a negative impact on the competition as well. Considering the possible mainstream adoption, many of the nearly 35 million cryptowallet owners may switch to Libra.

Libra’s presence can easily help but equally easily hurt other cryptocurrencies. It certainly is a challenge to the current status quo.

Concerns Regarding Libra

“Don’t trust the person who has broken faith once.” – William Shakespeare

Cryptocurrencies and fiat money are all about trust. We believe they have value – therefore, they do.

And as we all know, Facebook isn’t exactly the paragon of trustworthiness.

The social network is often under scrutiny about data handling and protection.

The Cambridge Analytica scandal still echoes in the online space.

The US Senate is also concerned about the new Facebook cryptocurrency. The senators want to postpone Libra’s launch until they’ve received the answers to their seven-questions letter.

Now, even though David Markus, head of Calibra, gives an interview after interview, explaining that Calibra isn’t de facto Facebook – this doesn’t ease the privacy concerns. Many people worry that financial data obtained by Calibra will be used by Facebook for better ad-targeting (hence, increased profits.)

David Markus claimed in a CNBC interview that financial and social data will not commingle, and Facebook won’t have access to the financial data of Calibra users.

Although Facebook’s Calibra, in theory, is an equal member of the Libra Association, it was Facebook’s developers who created the network. That also plants some doubts if all organizations are equal, or Mark Zuckerberg will have the final say regarding Facebook’s Libra management.

Decentralization or Consolidation?

Facebook promises that Libra will exist in a decentralized structure. Instead, it may turn out that the new Facebook cryptocurrency could empower Mark Zuckerberg even more. He already has the key to access the personal data of billions of users, but Libra can potentially give him even more – their financial data.

On top of that, if Libra becomes as widespread as its founders desire, that could give Facebook’s CEO the power to control the currency itself. Mark Zuckerberg could “own” Libra and Facebook users, since he’ll have an even clearer picture of his audience’s habits and desires.

new cyber currency goals

One thing is clear: if Facebook’s Libra manages to become the first mainstream cryptocurrency, it will disrupt the traditional money system. And it will face opposition. Especially from companies in the remittance market, which will fall casualty to Libra’s expected low fees. In fact, Western Union’s stock price fell by 2.64% after Facebook’s announcement of Libra.

Conclusion

Libra is set to launch in 2020, but it already looks intriguing.

Backed by fiat money, blockchain-based, and involving many billion-dollar companies, Libra could become a game-changer in the financial world of today.

There are many concerns regarding privacy and control, which make this, otherwise, promising project taste a bit sour.

So, will the new Facebook cryptocurrency become the new medium of payments?

Only time will tell, but a year before its launch it’s already making waves.

Share your thoughts on Libra in the comment section below.

Till next time!

 

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