Facebook’s Libra: When Engineering Takes Over Product
Mark Zuckerberg: We need mobile payments.
Overzealous Engineer: We can build our own crypto! Except it won’t be decentralized or permissionless. And it will perform worse than a database. But it’ll be a fun project!
How Libra Works
Using validator nodes from founding members, Libra looks to use a delegated proof of stake consensus model. Partnering companies vote on which blocks and transactions to allow, meaning an immense amount of power lies with any founding node and their single vote.
Users do not get to vote for who becomes a validator like in other DPoS crypto projects, so whoever FB decides to allow as a partner is in. So far, it’s mostly US-based companies like PayPal, eBay, Uber, MasterCard, Visa, Coinbase, and more.
The coin itself is a stable coin whose value is based on fiats like USD, JPY, EURO, GBP. If a user isn’t in one of those countries, I assume they will pay a premium to convert their native currency to one of those select fiats. When depositors trade cash for Libra, coins are created. When withdrawn, coins are destroyed. So speculators will not see any return on investment by buying and holding.
Facebook’s initial mobile wallet, Calibra, will ship within Messenger. Facebook will conduct ID verification to comply with Know Your Customer laws. This means you will need proof of ID to be able to buy/withdraw Libra coins.
Calibra is a custodial wallet, meaning users won’t control their own private keys, but an open source wallet will probably eventually be developed by someone. Transactions occurring with Calibra will be linked to your identity, so FB will know everything you’re doing. Like PayPal, a user could potentially be banned, or have their funds frozen or reversed.
The platform also supports smart contracts, with a programming language called MOVE.
Is Libra a threat to Bitcoin and other cryptocurrencies?
At its best, Libra is a more technical iteration of PayPal. Facebook wanted to get into the mobile payments game, so it needed a consumer friendly approach, meaning trade-offs favouring speed and scalability. Unfortunately this comes at the cost of decentralization, meaning the entire network can easily be coerced or shut down by the US government, or disrupted by hacking a handful of nodes.
Authoritative power over this chain is not distributed equally, despite having equal voting power between nodes. True power lies within whoever controls the most value, and this will undoubtedly be Facebook with its billion users. This means if there is any conflict or disagreement between validator members, Facebook always wins. The confusion and loss of value in being a minority fork will pretty much guarantee everyone falls in line with Facebook’s orders.
As the consortium is a registered corporation in Switzerland, it is unclear how one would gracefully (or hostilely) break away, or if a fork is even feasible given that the fiat-backed deposits are held by a centralized identity.
In the long term however, I can see Libra as being a beneficial gateway for introducing users to true cryptocurrencies. I do not see it being a threat to Bitcoin, because Bitcoin’s features of decentralization and permissionless participation make it a very different beast.
Bitcoin cannot be shut down or taken away. A coin’s value increases as more people use the network. And the currency cannot be hyper inflated by a government, deeming it valueless to its holders. Bitcoin can and will stand the test of time. Fiat currencies will not.
Unfortunately, Libra is not a cryptocurrency. It is an over-engineered solution looking to solve a problem.
