Why Is Facebook Releasing The White Paper For Their ‘Blockchain’ Project Libra Now?

Facebook finally released their much anticipated white paper on Project Libra, which may come as a surprise for those unfamiliar with it all.

Facebook has shared the white paper for project Libra and the initial group of foundation partners (source)

Facebook finally released their much anticipated white paper on Project Libra, which may come as a surprise for those unfamiliar with the blockchain scene. It’s not customary for the large tech companies to release information about a product without any demo to share, even if it is years away from the full release. However, Facebook took a route customary for blockchain projects because it has realized that timing is now pivotal for Facebook’s plans to succeed.

So Why Was It Important That Facebook Announces Their Plans Now?

This question is essential, as Facebook’s project Libra is not even a blockchain — it is a single Merkle tree. The reason behind this decision was because blockchain has an inefficiency of having to fetch and process all intermediate ancestors just to verify information in an ancestor block. Hence, it’s important to question why Facebook is announcing its plans now.

A Merkle tree shown in their technical white paper (source)

Firstly, regulations are not yet settled with bitcoin and token taxation act has been reintroduced. This bill defines a new term, “digital token,” which excludes tokens from the definition of security. Remember how not being able to avoid unregistered securities status for bond and share tokens made Basis’ Stablecoin subject to transfer restrictions, which made them shut down their $133M venture shut down?

The reason why this bill is considering excluding digital tokens is that in decentralized networks, there is no centralized power that can cause a risk of information asymmetry between the investor and the promoter.

Hence, this gives many tokens the opportunity to grow in the states before Facebook releases their Stablecoin. Facebook knows the value of network effect and that it’s hard to get users once they stay loyal to a specific product, which is why they wanted to give a teaser for people to look forward to.

This could be a game changer in the states (source)

Secondly, decentralized exchanges (DEX) are now making Stablecoins themselves. This could possibly be a problem for Stablecoin projects, as the main goal of DEX is to offer an easy experience for the user and having multiple products serving a similar purpose might be confusing for new users. A DEX could possibly abstract out the brand and diversify where the users’ money go when they decide to buy a Stablecoin through a DEX.

This is what stablecoin projects (originators) want, with DEX being the Issuer. However, this might not be the case (source).

To better understand this, let’s imagine that you decide to buy a stable pound at Binance, one of the leading DEX today that is also making their own Stablecoin. If you had to choose amongst hundreds of different Stablecoins, then how do you minimize the risk, which gets even harder for new users?

Rather, people may prefer to have Binance do all the work behind the scenes (diversifying amongst top Stablecoin projects) making it easy to use. Unless people feel a strong urge that a specific Stablecoin is worth investing in, they may choose to trust Binance to do the heavy lifting for them.

But we may end up with this (source)

Although Binance’s original plan is to peg British pound to their Stablecoin, this alternative could work in their favor. Binance will be able to facilitate multiple currencies and become validators across multiple Stablecoin projects.

Binance already invested in Terra and began trading Stably USD on their DEX. As many Stablecoins utilize Proof of Stake protocol, Binance will gain a voice in the governance of the Stablecoin and receive rewards for being a validator. This fee, in turn, could be used to mitigate any risk by ensuring that there is enough collateral in case one of the Stablecoin projects fails.

Hence, for Facebook to win user adoption, it must ensure that users are not too loyal to current Stablecoin projects or have DEX abstract the branding of Stablecoins. By announcing Facebook’s plans, Facebook has set a higher standard for other Stablecoin projects, as one bad experience may have the user leave believing that Facebook could do it better.

Despite being late to the blockchain game, Facebook’s brand makes it stand out (source)

Facebook knows that when it comes to Stablecoins, playing the winner-takes-all game is highly important to maximize profit (more transaction fees and seigniorage). Hence, by moving fast on the year many Blockchain projects are set to release their Mainnet, Facebook relieved users from feeling that they must choose one of the Stablecoins released this year (no FOMO).

Moreover, they get to benefit from working on a project that requires a high level of trust in times when they are fighting trust issues. By showing that they care about privacy, they can start regaining the lost trust.

Evolution of money was supposed to happen through the development of Stablecoin and Facebook’s entry has just accelerated this rate. If other Stablecoin projects don’t deliver a compelling experience before next year, Facebook’s decision to share their white paper mid-2019 without a finished product may prove to be one of the best decisions they make.

For more about Facebook’s Project Libra, check out my other hackernoon stories!

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