The Digital Currency market is about to change significantly. There’s been an astronomical number of Stablecoins pop up in recent times with Coinbase, Gemini, J.P Morgan all starting their respective journeys. Now Facebook, in coordination with 28 (100 by launch) large tech companies, seen here, are entering the scene with Libra, but Libra has a twist.
Libra is launching a new digital currency in 2020, with a price point of $1 maintained by a reserve of underlying assets & fiat currencies. However by combining new technology and traditional banking techniques Libra has managed to make a bank, not look like a bank, sort of…
The idea of a Discount token inside of the world of tokenisation isn’t a new one, shout out to CoinFund for this article & definition of a Discount token, “Simply, token holders are entitled to a perpetual discount on services but structured in a way that the discount is mathematically equivalent to a revenue or fee royalty but only if you utilize the services.”
Now, imagine a world where your average spending currency, was a discount token, for everything.
In the Libra system, the total discount that could be offered to token holders is directly proportionate to the amount of Libra tokens minted, because more capital in the reserve translates to more revenue generated from this capital. However, Libra is not a single company providing a discount on a single product or service, Libra is a consortium of the largest companies around the world, meaning the scale of this discount model could match the market size. This doesn’t mean all discounts will be passed on through to the end user in a universal way.
This is because Libra has also introduced the ‘Libra Investment Tokens’ that give holders “proportion of the dividend they earn off of interest on assets in the reserve”. Meaning the more capital in the Libra reserve the more dividends these investment token holders receive (currently only Libra Association members from what we know, Uber, Mastercard, Vodafone to name a few). These Association members now have a direct economic incentive to on-board as many people as possible to the Libra currency & platform.
How would these companies get as many people adopting Libra dollars as possible? You guessed it right, discounts.
Mastercard, Uber, Vodafone, eBay, nearly all association members already have some type of internal currency, in fact Uber already offer a discount for using it. The move these companies are taking is essentially from using a centralized database for their currency that is likely under-utilized to a slightly less centralized database where the assets on the balance sheet (The Libra Reserve) can be utilized for maximize profit.
Lets assume there are 100 initial Association members, and each association member holds 1/100 of the Libra Investment tokens. $100 billion worth of Libra tokens are minted and therefore the same value of currencies & assets are held in the reserve (For context, this would place Libra just below the average amount of assets held by the Top 100 largest banks in the USA). At a 5% p.a. interest rate on this $100 billion, each Libra investment token would receive $50 million per year in dividends.
This, coupled with the ability to track and and monetize all spending data from all purchases with Libra makes a compelling value proposition to Libra association members. There’s still been very little said about who will profit from this spending data, however if Facebook are building another ‘free’ product, as the quote goes, ‘if you’re not paying for something, you’re not the customer; you’re the product being sold’.
It does however seem highly likely that these dividends and the majority of revenue from Libra will be heavily reinvested into reward programs & other incentives to hold & spend Libra. This reinforces the plan Libra have structured, for individuals to reorganise around a new type of bank, one that passes on the profits through discounts and consumer satisfaction increases.
This is going to seriously challenge the banks, but they were already lost in this new world. More interestingly it’s also going to seriously disrupt the market for Stablecoins & centralized networks like Ripple, Stellar, EOS, NEO etc. More decentralized networks won’t suffer so severely from the challenge of Libra, because these networks hold their value in their reliability and network resilience. The attribute that the Libra Association can ‘mint Libra, Libra Investment tokens or to pay a founding member from the incentive pool’ is one that Ethereum & Bitcoin don’t share.
Thinking about the consumer journey over the last twenty years, we’ve moved from exclusively traditional banking infrastructure to products like PayPal, then to products like ApplePay & Monzo, finally we arrive to today’s next step in this journey, Libra.
The word ‘cryptocurrency’ is mentioned twelve times in the Libra whitepaper, Facebook, Libra & the consortium of Fortune 100 companies could have completely ignored the word cryptocurrency and called Libra a ‘New payment network utilizing blockchain technology’ instead, they use phrasing directly associating and comparing Libra coin to a cryptocurrency.
Here at Axia Labs, we look forward to a future where ERC wrapped Libra coins are used as collateral on MakerDAO and Dharma that drives decentralized finance. Where ETH/Libra & BTC/Libra trading pairs will become a common sight and where Libra brings mainstream on-boarding to cryptocurrency.
If I was trying to architect a long term vision of how we move from centralized state controlled currencies into more open and decentralized forms of finance, this would make sense as the logical path of history.
Axia Labs is a research & advisory collective focused on cryptoeconomics & governance. Working to shape the tides of this new economy towards a more equitable and open future.