Bitcoin Versus Facebook’s Libra Coin: Is Libra A Real Cryptocurrency?
By Mr Barkers on ALTCOIN MAGAZINE
This Article Consists of Five Sections:
- Introduction
- What is Libra
- Bitcoin: The Basics
- Properties of a Cryptocurrency(aka “ Crypto Asset”)
- Conclusion
Introduction
The entire blockchain and cryptocurrency space were buzzing with major excitement earlier this summer. The launch of Facebook’s Libra white paper spread a high-speed crypto bug throughout the blockchain ecosystem. The heated topic surrounding Libra has become almost contagious and a hotly debated issue on every major social media platform from YouTube to Steemit. Market watchers hold different views across the Bitcoin core, mainstream media, Wall Street and the entire cryptocurrency field on whether Libra will help propel Bitcoin even further on its global journey of mass adoption or become a stumbling block to the current evolution of the digital age of decentralized money.
There are a myriad of questions surrounding the announcement of Libra. What exactly is Facebook’s Libra coin? Can it be categorized as a cryptocurrency? What are the fundamental similarities or differences that exist between Libra and Bitcoin? By clarifying these points, we can evaluate the true impact Libra will have on Bitcoin, cryptocurrency, and blockchain mass adoption.
What is Libra?
The architects of the Libra white paper cherry-picked the most innovative properties from state-of-the-art blockchain projects in the field to include in their proposal. They borrowed the virtual machine concept and the execution of smart contracts and gas from Ethereum, poached Merkle trees from the Bitcoin and Ethereum blockchains, and copied the concept of Proof of Authority consensus from EOS.
Facebook plans to issue Libra and develop its own blockchain, with rumors of a public launch date scheduled for the first quarter of 2020. It has a first-mover advantage and currently enjoys 2.7 billion active users engaging on its platform around the globe; this represents one-third of the global population. Facebook’s second platform, WhatsApp, boasts of 1.5 billion active users that are based in 180 countries. These statistics are unprecedented. No central bank or investment bank has this type of market share, analytics, banking reach, or retail market domination. Facebook is now a practical threat to central banks.
Libra is positioned as a stablecoin, described as a cryptocurrency based on a basket of currencies just like the Special Drawing Rights (SDR) of the International Monetary Fund (IMF). The SDR derives its daily value from five major global currencies: Pound Stirling, US Dollars, Euros, Chinese Renminbi, and Japanese Yen. Libra adopts a similar model with its currency tied to low-risk securities such as sovereign bonds, government-issued currencies (e.g. Euros, US Dollars, Pounds) and possibly an asset such as Bitcoin in the near future (note this is not currently documented in the white paper). Facebook seems to be interested in facilitating global financial inclusion, to bridge the gap between the global banked and unbanked communities and bringing banking and financial market access closer to an estimated 1.7 billion unbanked population. If this occurs it is likely to take a significant portion of the market share from international global remittance markets currently dominated by MoneyGram and Western Union, worth an estimated $689 billion in 2019 according to the World Bank. It is possible that Libra will become a hedge against price volatility in currency markets. This is an important feature embedded in any stablecoin. Therefore Libra could easily become a safe haven for currencies with huge volatility and those that suffer being debased, or hyperinflated by corrupt or irresponsible governments, for instance, the Turkish Lira or Venezuelan Peso.
Bitcoin: The Basics
In order to compare the two coins, we need a brief reminder of what Bitcoin is. Bitcoin is defined as a security truth system that confirms certainty, validity and simultaneously eradicates financial fraud and human dishonesty “ Dan Tapiero”. Bitcoin is the new monetary system of our digital age. It is unique as it functions concurrently as a currency and a payment system. It is the most secure network and most exciting form of sound money invented since the existence of gold. Bitcoin is a trustless system (i.e. you don’t have to trust an intermediary or third party to send or hold your Bitcoin) that is wrapped up in software code. The Bitcoin software is powered by blockchain technology. A blockchain is an accounting system or ledger which is timestamped and immutable in design. The Bitcoin software can be downloaded and stored on electronic devices (e.g. smartphones, laptops). Once installed, users have issued a “wallet” which essentially replaces a traditional bank account. All transactions can be made from this wallet and anyone can take part in the peer-to-peer economic activity.
One of the most enviable properties of Bitcoin is that it is not correlated to the traditional macroeconomy or financial markets. It is not correlated to traditional stock markets, bond markets, real estate, art markets or market for commodities. Bitcoin is an asymmetric return asset that exists as a parallel system offering a new exit strategy for anyone who desires to leave the flawed global financial systems and broken monetary system. Bitcoin essentially replaces the function of any central bank (such as the Bank of England or the Federal Reserve Bank); Bitcoin also replaces the functions of interbank messaging and funding networks (SWIFT and SEPA), payment processors (PayPal), automated clearing houses (London Clearing House [LCH]), and cross border financial services (Western Union).
Properties of a Cryptocurrency (aka “Crypto Asset”)
In order to thoroughly dissect, evaluate, and compare the Libra stablecoin/blockchain, it is imperative to understand the pillars and underlying properties of a cryptocurrency. A cryptocurrency is by definition a currency secured by cryptography to work as a medium of exchange within a peer-to-peer (P2P) economic system. Cryptocurrencies are also a new asset class that enables decentralized applications. They provide access to financial systems and markets without an identity and democratize access to credit, money, and banking.
Open Source
Open source is any program whose source code can be modified by anyone (a user or a developer). Open source is essentially any public good which is nonexcludable in an open network, for example, the Linux operating system.
Anyone can build or download their own Bitcoin wallet and be the custodian of their assets. This is not the case with the Libra wallet, Calibra, which will be completely centralized with Facebook taking ownership of users’ assets and private keys (passwords). This practice is no different from any traditional retail bank.
Any individual participating in the Bitcoin network can run his or her own full node. A node is a participant in the blockchain network that communicates with other participants to ensure the security and integrity of the system. Nodes essentially can choose to add a transaction to a ledger or fully ignore the respective transaction. The Libra white paper states that Libra nodes will be run by the founders of the Libra Association, a group of non- profit organizations, diverse businesses and venture capitalists and multilateral organizations such as Visa, Uber, and PayPal, each rumored to be contributing $10 million USD to control a node in the Libra ecosystem.
Governance
A true cryptocurrency has a robust open-source governance structure. This democratizes the network and encourages participants to engage in the development and strategic direction of open source projects. The idea is to attract and pool together the best minds in the IT industry (developers and project managers) to create momentum and develop cutting edge solutions through open source community collaboration.
In the Bitcoin network, governance is run by the Bitcoin Core developers’ team, miners associations, and the greater Bitcoin community. The philosophy behind Bitcoin’s governance system is to pursue a trustless system. Monetary systems have historically been run by central banks forcing participants of the system to trust a bank or third party to verify and validate transactions. Third parties or intermediaries exist to prove transactions are not malicious or fraudulent. The Bitcoin governance system is based on a set of verification rules by which a set of transactions and block verifications are implemented and enforced to create complete transparency in the network. If a user or community disagrees with the governance system of the blockchain they have the right to fork the code and start their own blockchain-based on their rules. The Bitcoin network has been forked on multiple occasions over the past 10 years due to divergent opinions within its community regarding scalability, speed, and privacy features; a typical example is Bitcoin Cash.
The Libra governance system will be entirely centralized despite the white paper stating the aim of making it more decentralized at some point in the future. Libra participants will have to trust any decisions made by the Libra Association and hope they don’t breach any rules of the network.
Decentralized
A decentralized network is a P2P application that runs on a P2P network rather than a centralized computer. This allows the software to run without being controlled by any central entity.
There are rumors that the Facebook Association is made up of 100 businesses each contributing a share of $10 million to buy and run a node in the Libra ecosystem. In contrast, the Bitcoin network has approximately 100,000 full nodes being run for free by anyone, irrespective of geographical location, race, religion, or political philosophy. There are no restrictions to running Bitcoin’s software, meaning any individual can choose to download and run a node on their computer as long as they have 2GB of RAM, hard drive space available (250GB), 2–3 GB of monthly bandwidth, an Internet upload speed of at least 400 KB per second and a constant source of electricity.
Permissionless
Permissionless simply means the network is decentralized and has no central figure to create a set of rules. It also means there are no barriers to entry or exit for any individual who wishes to participate in or leave the network.
Libra coin is far from being permissionless. Facebook will have to seek permission from different global jurisdictions to operate. It is therefore subject to different government regulation depending on the region, country, and continent. Compliance and risk structures set by international agencies and governments make rules across countries that are non-standardized and thus very murky. Know Your Client and Anti Money Laundry laws will determine the amount of data that has to be collected on any individual who desires to participate in the Libra network. This includes information on address, date of birth, phone number, parents name, social security number, and don’t be surprised if they ask for your blood or DNA samples (not currently a prerequisite but you get the idea). In comparison, the Bitcoin network is absolutely permissionless. No one needs to be pre-vetted to take part in the Bitcoin revolution; all you need is to download the software and you are ready to go.
Borderless
Borderless means a crypto asset has the ability to be moved or transferred swiftly across regional and continental borders in a frictionless manner. Countries and corporate entities that have been placed under embargoes or sanctions by the EU, US, and/or UN are cut off from the global financial system of the West. This includes countries such as Iran, Syria, Sudan, Cuba, North Korea, and Myanmar, making it extremely difficult to send funds from any centralized financial institution (e.g. banks, Paypal, Western Union) to family members or friends in these counties through traditional financial institutions. It also means if you are a citizen of one of these sanctioned countries, it is extremely difficult if not impossible to open a bank account in a Western country.
Libra suffers this same fate as it is a centralized blockchain and will exclude any sanctioned country just like a traditional bank. Bitcoin, however, is totally borderless; all that is required is an internet connection, wallet, and private key.
Private
Privacy is not a human privilege but a fundamental right. Describing a crypto asset as private means any participant has complete control over their data and decides what information they decide to keep private and what information they decide to share in public or with a third party.
With Libra, all personal details will be attached to the Calibra wallet and essentially entrusted to a third party. With Bitcoin, no information is attached to a wallet except for a public key, which is necessary for peer-to-peer transactions between parties. Swiss banking used to be the most enviable cornerstone for private and secret banking globally. However, this niche market has been slowly dying over the past decade as the US has pressured and intensified regulation forcing most of the private banks in Switzerland to register with Financial Industry Regulatory Authority, essentially divulging all information on their clients. Bitcoin restores privacy in banking and is the new Swiss account of our era.
While Bitcoin is described as a pseudonymous currency, which means it does not provide absolute privacy features to conceal its IP address, it still creates privacy as long as the Bitcoin is transferred from an independent wallet and not from a centralized exchange like Binance.
Security
Security is the underlying architectural structure and pillar for any system. It ensures that a crypto asset cannot be hacked, breached, or compromised by malicious agents or vulnerable to DDOS attacks or ransomware. A centralized data center creates a huge honey pot for hackers. Why take the risk of robbing a bank when you can steal millions of dollars online while wearing your pajamas?
Since Bitcoin’s inception in 2009, the network has never been hacked despite numerous attempts to breach the network. Bitcoin has therefore passed the litmus test as a very secure cryptocurrency and blockchain. Facebook has suffered several hacks and a breach of customer information and passwords. The recent Cambridge Analytica firm scandal of 50 million Facebook users’ data breached has generated gross mistrust on Facebook as a gatekeeper of billions of personal data. Market watchers and politicians in Washington are skeptical whether data will be secure into the hands of Facebook or Libra.
Investment
An investment represents an asset or item acquired with the goal of generating income or appreciation. With cryptocurrencies, many become miners as a way to invest. Mining is the verification of transactions on the blockchain network in which transactions are added as entries into the blockchain ledger.
On the Bitcoin network, miners provide security, generate new Bitcoin and confirm transactions to sustain the network. Miners are incentivized to purchase hardware equipment, buy software, and utilize electricity through the promised reward of a share of future profits.
All Libra coins will be pre-mined which will eliminate miners from gaining economic value from mining. Members of the Libra association will be paid a fee or interest for validating all transactions.
Risk & Valuation
Risk
Counterparty risk is defined as the likelihood or probability that one of the parties involved in a transaction might default on its contractual obligation. Counterparty risk cut across different assets classes for instance loans, lines of credit, commodities, currencies, derivatives, equities, and bonds.
Libra transactions will be subject to counterparty risk. Participants in the Libra network will have to place all their data, information, and transactions in the trust of a regulated Libra network with members from the old guard of a broken monetary system such as Visa or Mastercard. It seems to me there is a lot wrong with this picture. Bitcoin has zero counterparty risk as it’s a trustless system that has no central figure and doesn’t need a third party to store or validate data, transactions, or information.
Valuation
The second feature that gives Bitcoin value is its anti-inflationary policy, which is immutable. Bitcoin is the purest form of a free market. The equilibrium price of a Bitcoin is determined by the velocity of supply and demand for the asset. In addition, only 21 million Bitcoin will ever be minted of which 85% have already been mined. This creates scarcity, which makes the asset very valuable. This also eliminates shadow inflation and hyperinflation created by central banks through the manipulation of interest rates to control the money supply. This is not the case with Libra. Libra could easily be hyperinflated. Until an official forensic audit or stress test is conducted it will be difficult for the general public to know if Libra coins in circulation are backed by 100% by underlying assets. This flaw in Libra essentially replicates the flaws of our current. fractional banking system.
Conclusion
Libra is not an organic cryptocurrency because it is proprietary privileged and most importantly ownership of units cannot be proved cryptographically. Libra can be described as a digital SDR like currency, which uses a blockchain to store a fungible ledger of transactions and associated data. In short, Libra is a digital SDR masquerading under the disguise of being cryptocurrency. An authentic cryptocurrency, like Bitcoin, will always be an open-source, decentralized, permissionless borderless, private, secure, risk-free asset and valuable. It is also censorship-resistant, immutable, scarce and deflationary. There are two viable outcomes for the Libra project: it could be either be dead on arrival or could be implemented and flourish.
The first scenario is a possibility because Libra requires a license from any country or region under whose jurisdiction they wish to operate. In the U.S., they will need to receive a green light from the Securities and Exchange Commission and the Federal Reserve in order to be fully operational. Libra’s first big regulatory test took place on July 16, 2019, on Capitol Hill: the Senate Banking Committee grilled Libra CEO David Marcus about plans for initiating and building the project. The meeting did not go well and it is safe to say none of the senators seemed particularly friendly toward or excited by the project’s prospects. Most kept making reference to Facebook’s past security breaches and data that was stolen and used by Cambridge Analytical.
The second scenario could be realized if Libra gains its license from the government of a smaller, developing country in Africa, Asia, or South America and scales the project up by applying to several small countries over a period of time. Libra is being followed religiously by all major Silicon Valley titans, e.g. Amazon, Google, Apple, Netflix. It is seen as a social experiment whose outcome the giants of Silicon Valley are anxiously monitoring. Walmart has also filed a patent to create a stablecoin and build its own blockchain. The CEO of Huawei has also been following the Libra project and has said The People Bank of China could initiate their own version of Libra even before Facebook. His argument is China has already built the infrastructure for Wechat pay and Alipay and has a competitive edge to start ahead of Facebook.
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There is a strong sense of belief by some advocates across the cryptocurrency space that mass adoption of Libra will automatically reflect in the mass adoption of Bitcoin. Some believers state that even if 10% of Facebook’s active users adopt Bitcoin, that will lead to a network effect essentially increasing the Bitcoin network by 200 million new entrants. Market watchers also believe that once Bitcoin goes mainstream this will create a domino effect and ignite interest in other alternative cryptocurrencies. The word cryptocurrency had a negative reputation from its inception. It was strongly connected to nefarious platforms such the Silkroad; darknets for facilitating money laundering and drugs. Libra mass adoption will give it a new facelift, a stellar trademark, and a brand new beginning to clean up all traces of its initial negative public perception circulated by elements of the mainstream media. Thus Libra could just be the biggest key to unlocking the Bitcoin genie leading to mass adoption of Bitcoin, cryptocurrencies and blockchain technology.
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Big thanks to Stephanie Amarteifio, Valerie Findlay & Seliana Kaguamba for your invaluable insights and objective feedback!
