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Libra – an analysis of Facebook’s new cryptocurrency

Use Cases, Technology and User Experience

What is the use case of the token?

According to the Libra Whitepaper Facebook has two major objectives for the Libra cryptocurrency. The first goal is to provide financial services for those people who do not yet have a bank account. These people mostly live in developing countries and are part of low income sociodemographic classes. The second objective of Facebook is to provide an easy and digital solution for remittances. Remittances can be described as money that is sent from one country to another; mostly this money is sent by people working abroad who are supporting their family in the home country.

It is interesting to note that for the purpose of remittances Facebook in the first place will be competing with services like Transferwise and Western Union. Despite the fact that Facebook is conceptualizing Libra as a cryptocurrency it is first and foremost competing with Fintech startups and established financial service companies.

Eventually many people would assume that Libra will be used for all kinds of purposes that regular money is used in both the developing and the developed world. This would include friends that share expenses and want to settle their balances in a quick and easy manner or people working in the gig economy and getting paid for it. In this regard Libra is a competitor to platforms such as PayPal and Payoneer. Furthermore it is also competing with fintech startups such as Revolut that offer instant transfers among their customers.

While Libra has potential benefits in countries with inflationary currencies such as Venezuela, it’s value to the Western world where efficient payment systems already exist is limited. The past decade has brought a number of online payment mechanisms to the internet and many of them are working seamlessly. Besides that there also exists a high number of convenient physical payment methods, such as Apple and Google pay or credit and debit cards with touch functionality.

With regard to the western world it is worth pointing out the significant price fluctuations between major currencies such as USD and EUR. There have been periods in the past five years where the exchange rate of USD to EUR fluctuated by more than 10% within one quarter. In such an event people in the US or Europe may lose purchasing power if Libra loses 5% towards the USD or Euro within a period of three months. 5% is a significant amount of money for someone who holds a balance of 1k USD. At the same time users will not get any interest paid while they are subject to the exchange risk.

For the reasons mentioned above it is questionable to which extent Libra will get adopted in the Western world. In developing countries and countries affected by economic misery the situation looks very different. People would have all the reasons to adopt a currency like Libra. However, Venezuela and other countries in similar conditions will most likely ban Libra since it would cause the country to lose its monetary sovereignty. If Libra would get adopted in Venezuela the country could no longer control its own monetary policy. Libra is a cryptocurrency that is not permissionless. Therefore we can expect a high number of countries to regulate and possibly even ban Libra forcing Facebook to implement the ban.

What does the technology behind look like?

The Libra blockchain will use a Byzantine fault tolerant consensus mechanism. The technical whitepaper assumes that Libra will initially be able to process 1,000 payment transactions per second and will have a 10-second finality time.

The Libra protocol will support the Move programming language which enables smart contract functionality. Based on this feature we can assume that Libra will not only compete with cryptocurrencies that are associated with payments such as Bitcoin, Bitcoin Cash and Nano, but also with cryptocurrencies that aim to be programmable money such as Ethereum and Eos.

The Libra blockchain will limit the validators initially to the founding members of the Libra Association and is therefore not permissionless.

How is the User Experience?

Facebook is planning to integrate wallets for Libra in its messaging services WhatsApp and Facebook Messenger. By integrating the wallets directly into these apps Facebook wants to maximize the number of early adopters and decrease the barriers for using Libra. It can be expected that the wallets will be easy to use for end users that are so far unfamiliar with cryptocurrencies.

However, several points remain unclear. It remains open how the process for account recovery will look like if a phone gets stolen or falls down and no longer can be used. At this point Facebook will face a difficult trade off between security and ease of use. In case it will be easy to migrate the wallet to a new phone once a user loses access to the old phone there will be severe security vulnerabilities such as the possibility to suffer from a sim swap attack. In case Facebook will require a sophisticated account recovery process it risks creating friction with the  non technical mainstream users it is targeting. It is one thing to lose access to the messages that people have sent, but it is much more frustrating to lose access to money you have owned. It will be interesting to see how Facebook will solve these issues and provide a smooth user experience for the mainstream who is unlike early adopters of cryptocurrencies not familiar with advanced security procedures.

Token Economics

The Libra cryptocurrency will be backed by reserves which will be held in a basket of global currencies such as the US Dollar, the Yen and the Euro in combination with a bunch of other smaller currencies. These reserves will allow Libra to maintain price stability in relation to the basket of underlying currencies. It essentially will become a stablecoin replicating the performance of the basket of underlying currencies. This means that Libra will become a substitute to the established stablecoins such as Tether or Dai. However, Libra will not replicate a single currency but a basket of currencies.

Since Libra is a stable coin the whitepaper highlights a different mechanism to generate revenue. Facebook has a massive user base across it’s services WhatsApp, Instagram and Facebook itself. Eventually Facebook wants a big part of this user base to use its stable coin. Let’s quickly make an example for understanding how Libra will generate profits. Imagine a scenario where 1 bn people hold a balance in Libra of on average 100$. That’s a 100 bn $ combined. The Libra association will then invest this money in low risk securities that pay an interest. Libra will then generate income from the interest; assume they generate 2%. That represents 2 bn $ per year. However they will not redistribute the profits to the user base. Instead they will keep it in the foundation to pay for operating costs and repay dividends to members of the foundation. This revenue model is very similar how banks generate profit based on cash deposits of their customers.

Progress History, Achievements and Road Map

Facebook so far has published and opensoucred the codebase for the Libra blockchain at its initial stage. Furthermore Facebook has presented the founding members of the Libra Association which reads itself as the who is who of the American tech industry. Among the participants of the Association are PayPal, Mastercard, Visa, Stripe, Uber, ebay, MercadoPago, Vodafone, Coinbase, Andreessen Horowitz and USV. The strategic alliances that Facebook was able to form are impressive and span across all verticals of the American tech sector. Facebook is expecting to release Libra to end users in the first half of 2020.

Community Strength

Facebook is the world’s largest social network and besides the Facebook platform itself it also controls Facebook Messenger, WhatsApp and Instagram. Facebook has more than two billion users which is basically more than any other platform. In comparison, there are around 800,000 active addresses on Bitcoin, the world’s largest cryptocurrency. This implies that Facebook has more than a thousand times more users than Bitcoin. The dimensions of the social network do not compare to any blockchain network. As many market observers believe blockchain technology is still in its infancy. However, there is no evidence suggesting yet how many of its users Facebook can convert to use Libra. If you would assume that 10% of Facebook’s user would also engage in the Libra network within one year after its launch then this would estimate the user base to 200 million people.

Conclusion

In the short run the announcement of Libra had a positive impact on the price of Bitcoin. Bitcoin is more than ever considered as digital gold and has its own distinctive feature that distinguishes the cryptocurrency from Libra and its fellow blockchain platforms. However, several altcoins that serve a similar purpose as Libra appear to have suffered recently from the announcement of Libra. In general the launch of Libra is still far ahead and the exact implications on the market are not yet clear at this stage.

Libra will not be censorship resistant and permissionless as Andreas Anonopoulos, a famous cryptocurrency commentator, pointed out. This means that governments will have the ability to block accounts, freeze funds and ban transactions. It also means that not anyone will be able to set up a node and participate in the consensus for Libra; at least not in the beginning. For these reasons several industry observers do not consider Libra as a blockchain platform.

The fact that a large company like Facebook puts its weight behind a cryptocurrency gives credibility and brings attention to the nascent technology. Furthermore, it forces developers of decentralized applications to improve on UI and UX since they will need to compete with giants like Facebook which is a master in this art. Therefore we can conclude that the launch of Libra represents a major milestone with regard to the acceptance and adoption of blockchain technology.

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