Libra — Facebook’s Crypto Play Explained
What is Libra?
Libra is the cryptocurrency and blockchain currently being developed by Facebook, which is scheduled to launch in 2020. Users will be able to purchase Libra, which they can send to friends or use to purchase items from participating companies.
If Bitcoin is digital gold, then Libra is the digital dollar.
Unlike most cryptocurrencies which are incredibly volatile, Libra’s value will be backed by the Libra Reserve. Every time new Libras are purchased, the value of those tokens will be held in the Libra Reserve with equivalent, low risk investments. When Libras are sold back, the assets held by the Reserve are also sold and the value is given back to the customer in their local currency.
If $10 worth of Libra is bought, $10 will be invested in a low risk asset that will be held by the Libra Reserve until it is sold back.
This way, the value of Libra should remain fairly constant in comparison to the dollar. Users will be able to feel comfortable using Libra without the fear that its value could disappear in an instant — like with other cryptocurrencies. The lack of volatility means that Libra is not an exciting investment opportunity for the general public.
While Facebook is creating Libra, it will share control of the network as a member of the Libra Association, which will also include companies like Visa, PayPal, Uber, eBay, and Coinbase, as well as, prominent Venture Capital firms such as Andreessen Horowitz and Thrive Capital. Each of these partners invested a minimum of $10 million and agreed to act as nodes on the network.
Nodes verify transactions and maintain the payment history of the network. This is similar to the role of miners for Bitcoin.
Facebook hopes to have 100 members of the Libra Association when the platform is launched. Each company involved will have equal voting rights and be responsible for helping to grow Libra. They will also earn interest off the returns from the low risk investments held by the Libra Reserve.
What is Calibra?
Calibra is the digital wallet which Facebook users will be able to use to send and receive Libra on the Facebook network of apps, including Messenger and WhatsApp. Calibra will also offer its own stand alone app for people without Facebook accounts. While Calibra is a subsidiary of Facebook, it will not share user data with Facebook without customer consent. Specifically, payment records from Calibra will not be used to improve Facebook’s ad targeting.
Calibra will not be the only way to use Libra. Libra’s technology will be open source, so that other companies will be able to integrate Libra onto their platform. The Libra Association will offer incentives to companies that create popular wallets for its users.
Why is Libra Better than Normal Money?
The main hope for Libra is that it will offer lower transaction fees than credit cards. This would be very attractive both for customers and merchants. Libra claims that it will only have minor fees to discourage spam payments that slow down the network, however, it is yet to be revealed how minor these fees will be. Even if Libra charges the same amount as credit card companies, it will be ideal for international payments which are often slow and expensive.
Libra could also offer a more seamless online payment system. Instead of having to go through the lengthy credit card checkout process on most websites, users could easily transfer funds from their Libra account with online wallets. The Libra Association will provide incentives to merchants who accept Libra, which means companies will likely offer customers discounts for using it.
If Libra is successful, there could be a future where it replaces credit cards for online transactions and Venmo for mobile payments.
In Libra’s white paper, another point of emphasis is connecting the millions of people around the world without access to financial services to the cryptocurrency. Libra would be free to join for anyone who has internet access. This should appeal especially to those who cannot afford to have a bank account. Companies like Facebook may, one day, offer similar services to a bank through Calibra.
How Does Libra Compare to Other Cryptos?
Libra is more like PayPal than Bitcoin
One of the fundamental values of Bitcoin and most cryptocurrencies is that they are decentralized. Libra is the exact opposite. The future of Libra will be controlled by the 100 mega-wealthy members of the Libra Association. While Bitcoin purists scoff at the idea, this centralization provides the trust and stability that could convince the general public to use a cryptocurrency. The Libra Association is supposed to begin decentralizing the platform five years after it is created; however, it is hard to believe that the members of the Libra Association will want to give up control if it is successful.
A benefit of Libra’s centralization is that it will improve transaction speeds. When Libra debuts in 2020, it is expected to handle 1,000 transactions per second (TPS). In comparison, Bitcoin only processes 7 TPS while Ethereum is at 15 TPS. This means that Libra should be able to support mainstream adoption.
Libra’s white paper promises that the cryptocurrency will eventually support smart contracts, but it is expected that it will take years to implement.
Smart contracts are digital, self-executing payments. Check out this article to learn more:
What Does Libra Mean for the Future of Cryptocurrencies?
While cryptocurrency traditionalists will reject it, Libra could be the gateway to mainstream adoption of cryptocurrencies. Since Libra has the backing of many established companies, people are more likely to trust it than they would a cryptocurrency with an unknown creator, like Bitcoin. If Libra is successful, it could lead people to begin using other cryptocurrencies. However, if Libra is too successful, it could dominate the market with people only using one cryptocurrency. Another possibility is that if Libra fails or has security issues, it could permanently ruin the reputation of all cryptocurrencies for the general public.
Whatever happens, this is clearly an exciting time to be a part of the crypto world.
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