Facebook’s Project Libra was made public yesterday. It carefully addresses all the main flaws of current cryptocurrencies like Bitcoin and Ethereum by starting with a less decentralized model. It begins with transactions and will extend to also deliver the store of value and smart contract use cases. Facebook has also proactively addressed the dominance and privacy concerns lately associated with it. Libra could allow Facebook to add full and extensible financial services capabilities to its properties, creating an “Internet of Value” which Facebook will steer.
What is Libra?
Project Libra’s whitepaper was published yesterday (June 18th) causing a significant splash. Libra is a foundation backed by ~25 high profile organizations (from Visa to Uber) which will put out a decentralized database for transacting on programmable financial assets. The starting point is financial transactions through Libra coin, a stable coin fully backed by a basket of currencies and treasuries. The end game is fully programmable decentralized digital assets through the Libra decentralized database and the Jump programming language. The testnet “Libra Core” is already out for testing, and the live service will be operational in 2020.
So Facebook has put out another cryptocurrency into a crowded market of thousands of cryptocurrencies without significant adoption. Is it different to the others? Can Libra work where countless others have failed?
Can Libra become the crypto killer app?
After substantial hype in 2017, cryptocurrencies failed to live to their transformative potential in 2018 and 2019. The “Internet of Value” is not taking off even if crypto prices as on the rise again. A host of problems have plagued the key cryptocurrencies, with no solution in sight. First, lack of adoption because of missing use cases and a daunting UX for non-technical users. Second, high volatility making crypto mainly a speculative domain, increasingly regulated by the likes of the SEC. Third, the environmental and energy cost of proof-of-work. Fourth, lack of legitimacy and support by large institutions. Finally, complex governance that has prevented Bitcoin and Ethereum from adapting to user needs like transaction volume and fast transaction finality.
Libra’s design choices carefully address each of these problems making it a promising attempt at driving crypto mass adoption and creating the Internet of Value:
- Adoption. Facebook is focusing first on the everyday problem of payments, with fancier use cases as future extensions. It is hiding the complexity of crypto by integrating the functionality in its own apps, and those of other Libra Founding members. It is also jumpstarting adoption by going for a huge global audience of users in those apps.
- Volatility and financial security status. Libra is a fully backed stable coin based on a basket of currencies and treasuries. This will be potentially more stable than any of the current fiat currencies, providing a global and safe store of value. At the same time, this minimizes the risk of the SEC considering Libra a financial security, as there is no expectation of Libra appreciation, even if the project’s adoption is massive.
- Energy cost. Facebook has chosen a less decentralized consensus protocol based on a limited number of validators. This eliminates energy consumption as an issue. While it might be ideologically less appealing to crypto fans, the Founding members are credible institutions that should instil trust in mass market audiences. Over time it will evolve to proof of stake as Ethereum is doing, satisfying decentralization without incurring excessive energy consumption.
- Legitimacy. The combination of a stable coin that eliminates speculation and the highly reputable founding members creates instant legitimacy. The way the system works it should be easy for Facebook to continue to extend Libra’s validator base as the downside of not participating is significant especially with FOMO (fear of missing out), while the cost is limited.
- Governance. Libra’s roadmap already incorporates all enhancements that Bitcoin and Ethereum wish they could incorporate, with a well thought out technical design that seems state-of-the-art. It starts with 1000 transactions per second in the main chain and 10-second finality, ready for real-world usage and easily extensible. At the same time governance through a set of business-oriented entities will ensure it quickly aligns to user needs
Overall Facebook has done a thorough job at addressing current crypto pitfalls credibly, to create a potential killer app for crypto adoption. In order to do this, it has reduced the decentralized ideological purity of other crypto attempts, something that governments and the mass market will probably see in a positive or neutral light. Only time will tell, but Libra could take to the mass market the key use cases of Bitcoin, Ethereum and other top cryptocurrencies creating the decentralized “Internet of Value”.
However, Facebook is under a lot of pressure lately. Will governments allow Facebook to take over financial services and access that data? Will Facebook’s reputation allow it to launch this effort?
Will Facebook be allowed to carry out Libra?
Facebook is currently under significant public scrutiny both in terms of its market dominance and due to privacy concerns. Libra’s design addresses both issues proactively, while at the same time creating some opportunity for defending the integration of the top Facebook properties.
In terms of market dominance, while Libra has been conceived and driven by Facebook it is a Swiss foundation with a broad set of founding institutions. It cannot be said that it is under Facebook’s control or part of Facebook. In a way, Facebook has proactively open sourced Libra with many credible partners to avoid any concern of market dominance. Thus the financial infrastructure it creates is open for anyone to use
In terms of privacy, all of Libra’s transactions will be based on public key cryptography making users anonymous except for the validator that offers the user the interface. Thus, Facebook will not have any privileged access to Libra transaction information beyond that of any of the other founding members. On top of that, Facebook has committed not to use the information from the financial transactions in which it acts as an interface for advertising purposes.
On top of this, Facebook’s wallet Calibra, could potentially be the glue that makes Whatsapp, Facebook and Instagram difficult to untangle. Or at least keeps them connected even in a break-up scenario.
So Facebook is trying to create the decentralized “Internet of Value” crypto enthusiasts have talked about, and has open sourced it to make it politically viable. Can Facebook make money out of this?
How can Facebook profit from Libra?
Tencent’s WeChat and Alibaba represent clear evolution models for Facebook. The Chinese internet giants have been allowed by regulation to take over more and more of the financial services sector in China through technology. Facebook could find a large profit pool to finance its new privacy-oriented social and communication networks vision in this model.
With Libra Facebook is trying to create an open-sourced Internet of Value that anyone can access. Facebook will not be able to make money from the underlying infrastructure. However, the Internet of Value it has designed is uniquely suited for its own properties. Whatsapp, Messenger, Facebook and Instagram are all uniquely suited to integrate financial services and profit from it. The relatively high entry barrier to participation (~10 million USD according to the press) will limit the number of startups that can enter, at least initially. Giving Facebook a headstart that will be difficult to recoup. The other founding members, while credible institutions don’t have the deep pockets, technical expertise and unrivalled user reach that Facebook has.
So Facebook is attempting to create an open sourced financial piping for the Internet of Value. If history is any guide it should be able to profit from it by building over-the-top applications on top, much as it has done with internet connectivity. This time it has the added advantage of having shaped the ecosystem from the start, probably designing it to maximize its potential to profit and alignment with its vision and values.
Libra could be one of those industry shaping moments like Android was. Of course, it can also become Google + or Apple Newton just to name a few failed attempts at making a dent on the universe. However, one can’t fail to be impressed by the thoughtfulness and comprehensiveness of Facebook’s Libra which brings together strategy, technology and finance to create something potentially transformative for the world and lucrative for Facebook. At the same time, we were already worried by the Big Tech firm dominance and Blockchain was the magic sword that was going to slay the dragons. If Facebook’s attempt to repurpose the sword works the dragons might get even bigger and more powerful.