The Libra Opportunity – Facebook

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Facebook and the newly created Libra Association, announced a “cryptocurrency”. They have taken care to address issues with current digital currencies like intrinsic value, price stability, separate security to fund the business,wallets and validators.

Facebook is hoping to leverage its massive user base(2.4 Billion) to develop a moat in the ever growing digital asset space. They announced the creation of a subsidiary, Calibra(registered as an MSB), that will develop a custodial wallet to interact with the Libra Blockchain.

What is Libra?

Libra is announced as a stable cryptocurrency, backed by a reserve of assets. It is built & transacted on a permissioned,blockchain run by members of the Libra Association.

Structurally, Libra is a Money Market Fund, Bitmex Research have compared the Libra to a Fixed Income ETF. The Libra reserve is a group of low yield assets in a bank. Any profits from management of funds, if left over from the operations, go to members of the Libra Association. The Libra Blockchain keeps track of public ownership of fractions of this reserve.

How does it work ?

Libra has a single versioned state that is replicated among its nodes(called validators) who validate transactions. Libra says it is built “on a blockchain with security in mind” even though there is “no concept of a block of transactions”. There are however, blocks of commands, and these blocks are chained in between state changes.

Because consensus only needs to be achieved between the validators, and there’s no time-lock, Libra is promising transaction speed of 1000 transactions a second.

The code for a testnet has been open sourced under the Apache-2.0 license, and analysts have already started experimenting with it.

Separation of Entities

The relationship between Facebook, The Libra Association and third parties is structured to give maximum flexibility around regulatory issues.

Calibra, Facebook’s subsidiary will be a custodial wallet and require KYC to access Libra. However users cant get Libra tokens directly from Facebook or the association. Libra tokens will be made available via third parties who are responsible for complying with local regulations like KYC/AML.

The Libra Association itself has two roles getting members to consensus and managing the Libra reserve. In the initial roll out, the Association will also be in charge of recruiting validators & fundraising. Each member of the association has one vote (which they can delegate). Proposals need two thirds majority to be implemented.

Libra is targeting 100 validators by launch, this decentralized, arms length relationship with its main distribution mechanism, Facebook’s 2.4 billion user base, is what Libra hopes will convince people that it is really independent of Facebook.

The Opportunity

Payments – creating a low friction platform to enable payments on a global scale is the opportunity for most digital assets. Libra with Facebook’s user base is uniquely poised to deliver on this promise.

Merchant adoption – the next rung up would be use of Libra token to pay vendors and Businesses, this will likely need the payment partners to play with fee mechanisms.

Identity access for partners – a much overlooked goal for libra is to build an identity platform. Libra sign on will be massive if it works.

Base layer for new financial services – If Libra can generate developer interest, all of the interesting applications being built on dApp platforms now, will be built on Move and the Libra blockchain.

Competing with Fiat currencies – This will come much later if Libra succeeds, creating a financial jurisdiction(walled garden) at internet scale.

Roadblocks

Within a week of launching a whole host of politicians, central bank heads and leaders in International finance have come out with frustrations from their part.This is entirely expected, the whole point of Libra is to work on a global scale and remove much un-needed friction in payments. This erodes some power away from legacy chokepoints and they will complain.

Even though Facebook has said the Libra blockchain will have pseudo-anonymous ID, the vast majority of on ramps will force KYC on users. The fear that this data coupled with Facebook’s own social graph is raising privacy and surveillance concerns.

If Libra is successful and gives people a more stable alternative to local currencies, It might lead to a Libra-isation of weak country money, where Libra becomes the standard and further weakens the local currency.

Open Questions
  • How is ownership of the Libra investment token distributed?
  • Which third parties are allowed to audit the minting of tokens and reserve?
  • How much of Facebook’s data can validators, third party developers access?
  • Like any digital asset, what are the tax implications of holding and transacting in Libra?
Finally

Even though Facebook has laid out plans to decentralize Libra, it remains very much a Facebook Initiative for now. Libra’s success comes down to the following

  • Can Libra successfully separate itself from Facebook?
  • Can they get a go ahead from regulators?
  • Can they get users to adopt this digital asset without fear or surveillance?
  • Can they get developers to build on top of Libra?

Facebook and Libra have entered the digital currency space with a clear view of working within current regulations and building a massive platform for global value transfer. If successful, they will have beaten the so-called altcoins & stablecoins at their own game.