Facebook’s Libra Cryptocurrency Explained

by William

On Jun 18, 2019, Facebook announced Libra. It’s a virtual currency or cryptocurrency even though some people do not agree with that definition.

Anyways, in Facebook’s vision, Libra should become a global currency for billions of people especially those in developing countries where there is no access to banks or financial services.

The idea is that Libra will be like digital money which people can transfer to other people or simply use to buy stuff.

Facebook’s CEO Mark Zuckerburg is not doing this alone, a bunch of Silicon Valley hotshots are also on board with the plan.

Libra will be governed by the Libra association which is a Swiss group including twenty-eight members. Among which Facebook’s subsidiary Calibra, Uber, PayPal, Mastercard, VISA, Spotify, and many other household names in technology and finance.

So how will this work? Libra’s White paper a sort of technical manifesto, says it will run on a blockchain.

A quick rundown of what a blockchain network is.

A blockchain is an infrastructure on which cryptocurrency takes place. It is a digital and changeable record of all the payments ever made in a cryptocurrency. The crucial thing is that a blockchain is decentralized. That is, the transactions are processed and verified by a swam of computers rather than a single device, arbitrator or central bank.

These independent computers are called nodes. Such a decentralized structure is great for security as there is no single computer to be hacked and also to guarantee that governments can’t block transactions simply by forcing an entity to do so.

It is a very good libertarian anti-state, anti-bank tool. On one hand, it is great and on the other hand, lack of mediation can quickly become a tool for organized crime.

Oh! By the way, Bitcoin was the first-ever cryptocurrency created with blockchain technology.

However, the Libra blockchain will not be decentralized the way Bitcoin is. The big difference is that on the Bitcoin blockchain anyone can theoretically run a node even if its very expensive whereas Libra’s nodes will be run only from the servers of the members of the Libra association Facebook, Uber, PayPal, Mastercard, VISA, Spotify, and the others.

Now, none of these companies will individually have much to say about how payments are processed and verified. It will be a collective effort. Which is good according to the blockchain ethos.

However, the more libertarian cryptocurrency fans recent that Libra will be controlled by a club of mega-corporations. They also fear that the Libra association could buckle under pressure if, for instance, a government can order it to block a transaction.

Facebook’s official reason for this makeup is that a fully decentralized model will not be powerful or fast enough to deliver the global financial infrastructure Libra aspires to become.

The issue of scale is one of the main challenges confronting decentralized cryptocurrencies. Decentralization makes the system vulnerable to hacks or shutdowns but this also takes time.

For example, the Bitcoin blockchain can only process about 7 payments per second. In comparison, the centralized VISA payment network can support up to 24000 payments per second.

Initial Libra will be able to handle up to 1000 transactions.

According to the Facebook, over the next 5 years Libra will shift from the currently proposed module also called permissioned blockchain to a totally decentralized or permissionless blockchain.

Of course, there is no guarantee that this plan will ever happen.

Here’s another issue Facebook says it is tackling. One big problem with cryptocurrencies is that the value can be quite unstable. For example, over the course of 2017, the price of Bitcoin swung between $900 – $20,000.

That is great news if you are a speculator but it is not ideal for launching a global payment network for Facebook’s 2.4+ billion users.

That’s why Libra has been designed as a “Stable coin” meaning the value of Libra will be tied to the value of real-world assets. That is, the members of the Libra association will store a pool of currencies like the USD, Pound Sterling, Euro as well as Low-risk government bonds or securities.

The value of the pool of currencies will determine the value of all the Libra currency in circulation. Every time a user trades cash for Libra through an exchange that cash will be added to the Libra association’s reserves.

At this stage, there isn’t much left we know about Libra but we do know that Facebook’s Calibra will launch a Libra wallet allowing users to exchange Libra through messenger, Whatsapp or other standalone apps.

Furthermore, since its inception, and the denial by the US Congress to give the green light on the Libra currency, the crypto currency’s status is now in limbo. More on this here.

Moreover, regulators frowned upon the move, France, in particular, is strongly against the idea as it says only governments can make money.

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