Facebook: Libra Cryptocurrency

The social media’s company move into cryptocurrency

If you are into cryptocurrencies, chances are that your timeline and newsfeed has been flooded with news about Facebook’s Libra aka GlobalCoin.

People all over social media, podcasts, forums have spent the last week and a half furiously debating the pros and cons of Libra It has been called everything from a blatant attempt to control cryptocurrencies by a big enterprise to a vehicle that will make cryptocurrencies mainstream and drive adoption. So, in this guide, we are going to be telling you all that you need to know about the cryptocurrency while keeping a neutral stance.

We will give you a brief history of the coin, the opportunity that Facebook has to help the unbanked, the Libra blockchain, and Libra’s stablecoin structure.

A brief timeline

To say that Facebook has had a rough 2018, will be a gross understatement. In March 2018, Facebook was rocked by the Cambridge Analytica scandal. Over 50 million Facebook users got their private data compromised in one of the worst data privacy breaches in history. Facebook’s stocks dropped by a staggering 20% as the company lost $120 billion in value. However, it was in the middle of a terrible 2018 that the first seeds of Libra were planted. In May 2018, it was revealed that Facebook is establishing a blockchain division which would run under the supervision of David Marcus, who had earlier overseen the creation of Facebook Messenger. This happened four months after CEO Mark Zuckerberg stated in his new year resolution post that he wanted Facebook to “go deeper and study the positive and negative aspects of” cryptocurrencies.

What is Facebook Libra?

According to the white paper, “Libra is a simple global currency and financial infrastructure that empowers billions of people.” Libra has five essential components/features:

• Built on a secure, scalable, and reliable blockchain.
• It is a stablecoin which is backed by a reserve of assets.
• It is governed by the independent Libra Association.
• Uses the LibraBFT consensus mechanism.
• Smart contract coding is done through “Move” programming language.

Facebook aims to have 100 members in its Libra Association before the launch, which in on first half of 2020. Final decision-making authority lies with the association but Facebook will maintain a leadership role through 2019. However, the whitepaper states that once the network launches, all the members of the Association will have the same commitments, privileges, and financial obligations as any other Founding Member. All the peers will have equal governance power. Facebook has built a digital wallet called “Calibra” which will be used to interact with Libra. Users will be able to send Libra via their smartphones by using Calibra. To send funds to your Calibra wallet, Facebook will allow you to select from a list of partner payment providers, such as MasterCard, Visa, PayPal, and Stripe. People will also be able to turn US dollars into Libra for their Calibra digital wallet, by going to local or online currency exchanges.

Transaction Structure and Fees

A typical Libra transaction has the following components:

• The account address of the transaction sender.
• The public key that corresponds to the private key used to sign the transaction.
• A script coded in Move to execute the transaction along with the arguments (if needed).
• The gas price or the fees associated with the transaction.
• The gas limit of the transaction. This is the maximum amount of gas that the transaction can consume before it halts.
• An unsigned integer that must be equal to the sequence number from the sender’s LibraAccount.T resource. After this transaction executes, the sequence number is incremented by one.

Libra, like Ethereum, works on a gas model. As has been explained above, every single transaction and smart contract operation costs gas. The more complicated the smart contract, the more gas it will consume. The amount of gas consumed will be converted into Libra, based on the gas price which will then have to be paid by the sender. Each smart contract has a gas limit related to it. The contract will run until all the gas associated has been consumed, after which it will halt and revert back to its previous phase.

The model has probably been made similar to Ethereum to boost adoption. Since Ethereum is the most popular smart contract in the world, the developers will be able to use Libra’s system with relative ease because of the similarity. Libra also promises “low fees.”

Stablecoin Properties

Libra is going to be a stablecoin which is backed by the Libra Reserve, which is a reserve of real assets. The assets will be “a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.” So, let’s understand why Facebook chose a stablecoin structure and how it works.

A sound currency should fulfill the following three roles:

• Medium of exchange.
• Unit of account.
• Store of value.

The Three Kinds of Stablecoins

There are three kinds of stablecoins:

• Fiat Collateralized.
• Crypto Collateralized.
• Non-Collateralized.

#1 Fiat Collateralized

Fiat-collateralization is probably the most simplistic and straightforward execution of stablecoins. The way it works is pretty simple. A certain amount of fiat is locked up as collateral and coins are issued 1:1 against it. Instead of fiat currency, gold, silver, oil etc. can also be kept as collateral.

Tether is probably the best example of this and it also happens to be the most widely used stable coin. Libra is also a fiat collateralized stablecoin.

Unlike Tether, though, Libra’s value will fluctuate in the same manner that the U.S. dollar varies compared with the euro or yen on any given day. A system of exchanges will be established for users to convert fiat for Libra.

#2 Crypto Collateralized

Crypto-collateralized stablecoins are actually pretty similar to fiat-collateralized coins…with one major distinction. Instead of using fiat as a peg, they use another cryptocurrency.

However, we all know that cryptocurrencies are unstable, unlike fiat currency (comparatively), so how does this system work?

The answer to that question is “over-collateralization.” So, if you want $100 worth of stablecoins then you will need to deposit $200 worth of ether. It is not a straightforward 1:1 ratio.

Dai is an example of this kind of stablecoin.

#3 Non-Collateralized

Finally, we have the non-collateralized stablecoins. These are the coins who are not backed by anything. If you think about it, a privately issued, non-collateralized, and stable currency could pose a radical challenge to the dominance of fiat currencies.

But, how does one execute this?

Back in 2014, Robert Sams came up with the concept of Seignorage Shares and it is based on a straightforward idea. Create a smart contract which would act as a central bank with only one policy, issue a currency which will always trade at $1.

So what happens if the coin is trading at $2?

Since the price is high, the smart contract will automatically create more coins to increase the supply and dilute the price. The extra profit that would be left over in the smart contract, as a result, is called seignorage.

More on Libra’s Stablecoin design

A geographically distributed network of custodians will hold the assets included in the Libra Reserve. The custodians have investment-grade credit rating and will provide both security and decentralization of the assets. The interest on the reserve assets will be used to:

• Cover costs of the system.
• Ensure low transaction fees.
• Pay dividends to the investors (The Libra Association) who provided the capital to begin the jumpstart the ecosystem.

Libra users will not receive any return from the system. The rules of interest allocation will be set in advance and will be overseen by the Libra Association.

Why Facebook is doing this

The reason why Facebook is doing it is because they believe the plan has a chance of working. And if it is successful, it pushes an enormous amount of the regulatory responsibility (KYC/AML) of operating the on- and off-ramps away from Facebook and to the cryptocurrency exchanges where the Libra is traded. It’s letting the market figure out a way to give people access to the Libra that works, any way that works, just like it has worked for Bitcoin for 10 years. In fact, opening up the opportunity for anyone to run a Libra exchange means that there’s probably even going to be some exchanges that will try to avoid KYC/AML regulations altogether, furthering the Libra’s reach into the world.

Many cryptocurrency exchanges have been operating without licenses and without any particular regulatory oversight in the past, and some still do today. And whenever one gets shut down or implements KYC/AML restrictions, another one pops up somewhere else that doesn’t, sometimes by people who are unaware of the fact that they’re breaking any rules. And sometimes, not even the regulators in that region are aware whether any rules are being broken.

cryptocurrency industry)

In the grand scheme of things, a successful Libra is probably going to do more for Bitcoin in terms of warming users up to the idea of cryptocurrency than nothing has ever done in the past. Bitcoin increased in value by more than 10% over the past weekend, and is nearing a 15-month high. Moreover, since the Libra is a “stablecoin” at the mercy of central banking monetary policy, it doesn’t pose a significant threat to Bitcoin as an investment vehicle. Thus, a successful Libra is probably a net good for Bitcoin. That said, the regulatory response to the Libra during the coming year is going to carry significant consequences to the Bitcoin industry in the short-term, as I lay out below. I see four potential scenarios moving forward.

Scenario 1: No Libra Launch

Regulators put a stop to Facebook’s plans before they even materialize, citing privacy issues, or that they do not like the idea of Facebook sitting on such vast sums of reserves, or fears that the Libra would have a destabilizing effect on the economy. Everything goes back to normal.

Scenario 2: Libra launches, but with KYC

In this scenario, regulators are okay with the reserve structure but see through the Libra transparency-pseudonymity masterplan. The Libra Association can attempt to please regulators by restricting the blockchain to only process transactions coming from wallets that have been verified with government ID, such as Facebook’s own Calibra wallet. While this is a possible outcome (and technically easy for them to implement), it also eliminates the entire purpose of the Libra blockchain.

In this case, the Bitcoin industry could be in trouble as well, because it is currently exploiting that exact same transparency-pseudonymity loophole that allows it to fit nicely into the regulated financial market.

Scenario 3: Libra launches, without KYC (good for bitcoin case)

In this scenario, the Libra launches in the exact form as they envision it today. Ideally, this means that there isn’t anything wrong with the Bitcoin playbook either and we can all stop stressing. The Libra and Bitcoin can then compete with each other, or complement each other, on their own merits.

Scenario 4: Libra launches, without KYC (bad for bitcoin case)

In the worst case, regulators take note of the transparency-pseudonymity loophole, but notices that the Bitcoin project has a wildly different relationship to privacy compared to the Libra. In Bitcoin, the project’s developers and supporters are always seeking new and innovative ways to eliminate the effectiveness of the blockchain analysis firms. And there’s no “Bitcoin Association” you can regulate if things start going south. It is possible that the Libra brings so much heat to the cryptocurrency industry that in the turmoil that erupts, the Libra is the only cryptocurrency that survives the regulator’s scrutiny on the virtue of being the absolutely easiest cryptocurrency to control and surveil.