Facebook Libra is a permissioned global currency developed using blockchain technology and proposed by Facebook itself.
The first reports that the company was thinking about launching its own digital currency appeared as early as May 2018, but the official confirmation arrived a year later. Right from the start, financial regulators and governments, spearheaded by the US, voiced their concerns about Facebook’s meddling in the financial sector.
On the other hand, others have welcomed the idea of Libra reaching millions of unbanked people across the world who won’t have to depend on existing financial institutions or pay large transaction fees.
Despite strong criticism and lack of support, the Facebook team isn’t backing down from their proposal, and the launch remains scheduled for 2020. As the moment approaches, take the time to read our detailed guide on Facebook Libra and familiarize yourself with the technology behind it, the properties of the currency, the target market, and the major challenges.
How Did Facebook Get to Libra
Why would a social media company like Facebook decide to get involved in the crypto industry?
To answer that question, we need to look back on the events that happened in 2018.
The Cambridge Analytica Scandal
In March 2018, Facebook became involved in the Cambridge Analytica scandal, one of the largest privacy breaches to date. A former Cambridge Analytica employee revealed that the British firm was harvesting data from over 50 million Facebook users, with Facebook later confirming that the number of affected users is actually 87 million in total.
“In total, we believe the Facebook information of up to 87 million people — mostly in the US — may have been improperly shared with Cambridge Analytica.” Source: Facebook
The user data had been compromised for the purpose of building psychological profiles to influence elections worldwide, such as the 2016 U.S. presidential election and the U.K.’s Brexit referendum.
Facebook CEO, Mark Zuckerberg, was called to testify in front of the United States Congress on April 10th, 2018. He took full responsibility and apologized for this breach of trust, making a promise to reform Facebook policies. As a result of the scandal, the company lost $120 billion in value and the share price toppled over by 20%.
Considering the influence of Facebook as the leading social media, it wasn’t surprising that the share price quickly picked up after just two months.
“On Thursday, Facebook’s shares closed at $185.53, 0.2 percent above the last closing price before the story broke on March 17. Following the Guardian’s revelations, Facebook had lost $50 billion in market capitalization in two days and, at its lowest point, the company’s share price had dropped nearly 20 percent from its pre-scandal level. Following a series of public apologies and positive first-quarter results, it appears as if Wall Street has moved on from the scandal.” Source: Statista
The Cryptocurrency Trend
At the start of 2018, Zuckerberg disclosed his New Year resolutions in a Facebook post, where he mentioned taking an interest in an important issue, namely, the loss of faith in decentralized technology. Looking at it in retrospect, we can say it was there that he hinted at Libra for the first time:
There are important counter-trends –like encryption and cryptocurrency — that take power from centralized systems and put it back into people’s hands. […] I’m interested to go deeper and study the positive and negative aspects of these technologies, and how best to use them in our services.
Fast forward a year and a half later. It’s May 2019, and the Wall Street Journal has reported that Facebook is recruiting financial firms to invest in their newly announced cryptocurrency payment system. In June, the Libra whitepaper was published online, with details on the blockchain, the currency, and a smart contract platform.
Worried about the implications of such an ambitious project, the US Senate committee on banking, housing, and urban affairs wrote a letter to Zuckerberg, asking him to answer some questions about their project.
The Senate wanted to know how this system is going to work and would it comply with financial laws and regulations. Is Facebook going to store customer financial information? What level of privacy and security would the customers enjoy? And why launch a new cryptocurrency instead of using the US dollar in the first place?
By the time of the hearing, on October 23rd, several crucial payment partners such as PayPal, MasterCard, Visa, and eBay had withdrawn from the Libra project. Zuckerberg simply said that this was because the project was too risky and constantly scrutinized. But, according to him, that’s the price you pay when you’re bringing something new on the market.
However, he reassured Congress that Facebook won’t support the launch of Libra in the US or anywhere else in the world until the US regulators approve.
The Unbanked Population
At this point, you might be thinking that innovation can’t be the only incentive for Facebook, there must be more to it. And you’re right.
One of the strongest arguments in favor of Facebook Libra is addressing the issue with unbanked people. According to the World Bank’s Global Financial Inclusion database from 2017, which was based on information from 140 countries, more than 2 billion people around the world have no bank account.
The survey shows that more than 20% of unbanked adults receive wages or government transfers in cash, and many people in developing countries pay bills and school fees in cash. The biggest potential for growth and reaching the unbanked people is seen in India, which represents 21% of the world’s unbanked population, and China, with around 12%.
Reasons for not having a bank account. Source: World Bank
But how is Facebook Libra going to change that? Well, let’s begin with the fact that more than 3 billion people in the world use smartphones. Next, in October 2019, it was estimated that Facebook had 2.45 billion monthly active users which makes it the biggest social network worldwide. Out of all these users, 269 million are from India, with the US users following closely with 183 million users.
“The number of smartphone users worldwide today surpasses three billion and is forecast to further grow by several hundred million in the next few years. China, India, and the United States are the countries with the highest number of smartphone users, with each country easily surpassing
the 100 million user mark.” Source: Statista
Having so many users, who despite the disclosed privacy issues still trust your network, let us speculate that the majority will see Facebook Libra as a reliable payment option. It was the ideal financial game-changer for Facebook, during these troubled times, and a way for the platform to become part of an industry that’s on the rise.
Facebook market capitalization throughout the years. Source: Quora
Facebook Libra Explained
The white paper defines Libra as “a simple global currency and financial infrastructure that empowers billions of people.” Its most important properties are stated as follows:
- Built on a secure, scalable, and reliable blockchain.
- Backed by a reserve of assets.
- Governed by the independentLibra Association.
- Secured with the LibraBFT consensus mechanism.
- Smart contracts are done in Move – a new programming language.
The Libra Blockchain
Libra uses a slightly different blockchain from the Bitcoin prototype. The users who volunteer to keep the Bitcoin blockchain running, i.e. the miners operating the nodes, employ the proof of work consensus method to verify transactions and create new blocks, regulating the total number of coins in circulation and bringing security to the network.
Like Bitcoin, Libra Blockchain also functions as a public digital ledger that permanently stores each and every transaction. It’s pseudonymous and encrypted, so users can use addresses that won’t be traceable to their real identity.
On the other hand, the Libra database can handle up to 1,000 transactions per second! In comparison, Bitcoin and Ethereum are designed to process only 7 or 15 transactions per second, respectively.
Another major difference is the fact that Libra is not going to be absolutely decentralized at first. The blockchain will be operated by a group of validators, who are also the founding members of the Libra Association (more on the association below!), and each of them has already invested $10 million to gain the right to operate a node.
This makes Libra a permissioned payment system because, as stated in the white paper, the permissionless systems like Bitcoin haven’t proved to be secure or efficient enough. When a large number of nodes join a network, they slow it down without exception. However, the long-term goal of the project is to make that transition:
“The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network. One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem.”
The Libra Blockchain protects its data with Merkle trees, hash trees used by many blockchains that allow for secure verification of large data structures. Once built into the code, they can detect any changes made to the existing data.
An example of a binary hash tree. Source: Wikipedia
The LibraBFT Protocol
The Libra Blockchain is maintained using the LibraBFT protocol or consensus method based on the Byzantine Fault Tolerance system to facilitate an agreement between the validators. This means that only two-thirds of the validator nodes should agree on the legitimacy of a transaction for it to be approved.
The transaction validation occurs in rounds where one validator node, the leader, proposes a new block and waits for approval from the rest of the nodes. If the block is valid, the nodes will sign off on it, and then group the votes into a Quorum Certificate (QC) broadcasted to the rest of the nodes.
The Move Programming Language
Move is a new programming language that makes it possible to create smart contracts on the Libra Blockchain. Drawing on security breaches from the past, the newly designed language makes it easier “to write code that fulfills the author’s intent” (Libra White Paper), with lesser bugs in the process.
The primary function of Move is to transfer Libra coins from one account to another and prevent them from being cloned. According to the same source, Move “enables resource types that constrain digital assets to the same properties as physical assets: a resource has a single owner, it can only be spent once, and the creation of new resources is restricted.”
Thanks to Move, Libra will be able to implement its security policies and develop its blockchain network even more. It will keep validators in check and digital coins safe from being misplaced or duplicated.
The Libra Association
Although the initial idea for Libra came from Facebook’s team, the company won’t be its sole authority. Facebook created the independent not-for-profit Libra Association and recruited 28 organizations, or founding members, from diverse industries, who joined the association.
The Libra Association is located in Geneva, Switzerland, a crypto-friendly country and a leading innovator. The role of the founding members is to oversee the expansion of the Libra network, the Libra reserve, and governance rules. They’re entitled to a share of the dividends from interest earned on the reserve based on their starting investment.
Here’s a list of the initial group of organizations by industry:
- Payments: PayU (Naspers’ fintech arm);
- Technology and marketplaces: Facebook/Calibra, Farfetch, Lyft, Spotify AB, Uber Technologies, Inc.
- Telecommunications: Iliad, Vodafone Group;
- Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings;
- Limited Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures;
- Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking.
However, four months after the Libra White Paper was published, the project received a huge blow as seven founding members – mostly payment firms – who decided to jump ship. In their public statements, the companies expressed their worries that Libra is still unable to meet regulatory criteria, but that they’re fully supportive and will keep following its progress and consider rejoining.
Libra As a Stablecoin
To measure a currency’s standing, you should see how it delivers on its three purposes: as a unit of account, a medium of exchange, and a store of value. The biggest challenge for cryptocurrencies is how to be considered proper mediums of exchange and stores of value being highly volatile.
Luckily, it’s intended for Libra to retain a largely stable value, but the starting value hasn’t been decided yet. It would probably be close to the value of one dollar, euro, or pound. The value of the coin is backed by those low-volatility fiat currencies, in the form of bank deposits and short-term government securities.
The idea is to be able to exchange your local fiat currency for Libra, and vice versa, using special digital wallets, on your computer or via mobile app. Apart from third-party wallets and current crypto exchange platforms that offer their own wallets, customers can use the newly launched wallet by Facebook – Calibra.
Calibra is a digital wallet solely for Libra coins, where you can store your coins or cash them out via Messenger with just a few taps on your phone. Calibra also offers the option for money transfers on WhatsApp. Sending money will be just as easy and quick as sending a text message.
You can pull money out of your Libra balance and spend them for all sorts of services online or in shops, provided they accept the currency.
The Libra Reserve
As a stablecoin, Libra is backed by a reserve of real assets which means that those who own this currency can easily exchange it for a fiat currency according to the exchange rate. This is very important for a currency to become widely accepted and trustworthy.
Every time someone wants to exchange their USD or EUR for digital coins, their money goes into the Libra Reserve and they get newly minted Libra coins. How are security and decentralization achieved? A geographically distributed network of custodians with investment-grade credit rating guards the coins in the Reserve.
Interest on the reserve assets will be used to cover expenses, maintain low transaction fees, grow the network, and pay dividends to the founding members as mentioned. There will be no return for Libra users.
The transactions on Libra come with a small transaction fee, usually no more than a few cents, which are paid for “gas”. The purpose of gas is to cover for the computational and storage resources used by the validators, regulating demand, and preventing denial of service (DoS) attacks.
The gas required depends on the transaction size and execution costs, as well as the current user demand on the Libra network.
The Future of Libra
Libra holds the potential to provide billions of people around the world with access to a more inclusive, more open financial ecosystem. (David Marcus, Head of Calibra, Facebook; Source: Libra)
Today, the future of Libra remains very uncertain. The first major challenge is the possibility of not being recognized by financial regulators. Since the October hearing, senators had been working on a new bill announced a month ago under the name “Managed Stablecoins Are Security Act of 2019”. This bill classifies digital currencies as securities and imposes even more regulations they need to comply with.
Another serious threat comes from overseas, as China plans to launch its own digital currency as well. If US regulatory laws halt Libra, China might win the race for a global currency.
It remains to be seen whether 2020 will be a pivotal year for Libra and its mission for a more sustainable financial system. The financial struggles of migrant workers, unbanked, and poor population might not be that obvious to people who have the privilege to live in developed countries.
Libra might really offer solutions to people living on the margins of society, those being robbed and not having online fund storage to retain their credit, or those paying extreme service fees, to name just a few target cases.
Let’s see if Libra can pull it off.