Facebook is going to launch its own cryptocurrency with the potential of turning the social network into the largest payment service in the world.
Zuckerberg promises strong privacy protections and claims the new digital currency will be independent of the Facebook company.
The new coin called Libra is planned to launch in early 2020, and to market it, Facebook is capitalizing on the growing popularity of blockchain cryptocurrencies. But when we compare how traditional cryptocurrencies actually function with what Facebook proposes with Libra, the difference cast light on Facebook’s intention to become a global hegemon of the financial world.
There is no universally accepted definition of cryptocurrency. But the majority of them share several key attributes that attracted many people to start using them. Traditionally, cryptocurrencies operate on blockchains. Blockchain is a public ledger of transactions that are chronologically organized in time-specific blocks.
For example, in the Bitcoin network, a new block of transactions is created every 10 minutes.
Usually, these blocks are created by a process called mining — solving computationally difficult problems and validating transactions broadcasted by its users. Miners get rewarded with cryptocurrency for contributing their computing power to the network.
Most cryptocurrencies are traditionally completely decentralized and free from any authority. Every user can create their walled or as many wallets as they like and store cryptocurrency that they can transact without any restrictions.
There are no banks or governments that can dictate how someone can and can’t use their digital money. This makes cryptocurrencies very attractive to free speech advocated as they are extremely censorship-resistant.
Currently, there are 28 members and the Association hopes to have 100 of them by the initial launch date. The criteria to become a member are rather exclusive. Your business needs to have a market value greater than $1 billion, reach at least 20 million people a year, and be ranked among the top 100 industry by lists like the Fortune 500.
Charities and academic institutions are also welcome to join the Association, but they also have to form the worlds top 100. Among the members currently are payment gatekeepers like Paypal, Visa or Mastercard, tech billionaires from Facebook, Spotify and Uber, cryptocurrency services like Coinbase and Xapo or ventures.
All members have an equal vote, but for now, Facebook claims leadership in the development of the platform. Most blockchains are permissionless. That meant anybody can use them and run its owns a full copy of the network without needing to ask for permission from anybody.
Everybody can observe the whole blockchain from the beginning to the present time. It is maintained by people constantly connecting and updating their copies of the blockchain to the network.
There are no central servers as the whole blockchain runs as an interconnection of its copies, also called nodes, directly beaming transaction records into the internet.
This decentralized structure makes blockchains extremely resistant to attacks. Not all blockchains are permissionless though.
Libra will start as a permissioned blockchain. Only the members of the Libra Association will be privileged to run nodes and validate Libra transactions. No one will be allowed to mint or burn Libra without the permission of the Association.
Although Facebook promises Libra will eventually become a permissionless blockchain, there are no indications as to when this is going to happen specifically and how they are planning to go about it. It is worth noting that no permissioned blockchain has ever succeeded in transitioning into a permissionless blockchain.
The vast majority of blockchains are transparent.
That means with the exception of a few obfuscated blockchains, using a cryptocurrency requires broadcasting your entire transaction history to the ledger.
In fact, they are so transparent that some people maintain so-called “rich lists”, rankings of addresses holding the most amount of coins. This is huge privacy and fungibility issue. Every coin on the network can be traced back to its very origin of creation and all future spending can also be recorded.
This not only gives observers the power to collect transaction records of everyone on the blockchain, it also enables them to freeze certain addresses or block use of particular coins to prevent them from being moved across exchanges.
Libra blockchain is also going to be transparent.
But the pool of validator nodes is only open for the members of the Libra Association. This will allow a group of 100 unaccountable organizations to observe and track all transactions on the network, with full decision authority to freeze or blacklist certain addresses or transaction.
Whatever on the network will not open for public scrutiny but will develop strictly behind the closed door of billionaire-class members of the Libra Association.
However, making blockchains transparent is not a requirement.
Privacy-focused cryptocurrency Monero already obfuscates its blockchain by default and automatically conceals transaction amounts and address balances. The level of privacy by design of a blockchain is thus purely a choice of its developers.
So if Facebook wanted to, they would make Libra Blockchain more private. But for most people, using Libra will be synchronous with using a range of Facebook apps, like the Messenger, WhatsApp or Instagram.
This deep integration will make it easy for Facebook to identify and continuously track financial behaviour of the vast majority if not all Libra users.
What gives cryptocurrencies their value is the hard-coded cap on how many coins there can be in circulation. Demand for a scarce currency drives its value up and down, which reflects on the volatility, of most digital currencies.
Some cryptocurrencies claim to be so-called stablecoins because they are backed by a fiat currency, like the US dollar, or other tangible materials like gold. Most coins are not stablecoins because holding up a reserve requires putting aside billions in cash that cannot be moved and maintaining such a reserve usually predicates a central authority.
Currently, no decentralized concept for holding a distributed reserve exists and thus stablecoins are usually in direct contradiction to the traditional concept of decentralized blockchains.
Most among the cryptocurrency crowd believe that volatility of digital money is only a temporary effect of early adoption and that it would disappear once full adoption takes place.
Libra claims to be one of those stablecoins. But it is not pegged to any particular fiat currency.
Rather, what’s propping Libra is a reserve of low-volatility assets comprised of government securities, treasury bonds, bank deposits, and a basket of foreign currencies, including US dollar, euro and Japanese yen.
The purpose of the Libra Reserve is to hold its value.
For every Libra created, there must be an equivalent amount of assets held in the reserve. And for each coin burnt, assets must be taken away. Libra Association aims to form this reserve by deposits from private investors and founding members. Just like with other banks, this reserve will be used for further investments to earn interest.
What’s more troubling is that it will remain up to the Association to decide on the composition of the Reserve basked, where to invest the reserve money and what risks they are willing to accept.
This essentially makes Libra function like any high street bank.
Even users can deposit into the reserve by buying Libra. But while in a traditional bank, customers can earn interest from their deposits, the interest earned from deposits in the Libra Reserve will only go to reward the Founding Members and for development of the platform.
Where Libra Association decides to make investments with its Reserve is going to play a major political role. Purchasing strategic government bonds or debts can buy a lot of two way influence from the Association into the said government and vice versa.
Libra will thus become the ultimate example of revolving door into the financial assets of hundreds of millions of people.
Developments of the majority of cryptocurrencies is open source and relies on a consensus.
Preferably, the computing power of the network is distributed among so many users that no single party or a group can have too much leverage. Preferably, all software from wallets up to the blockchain core is open source, which gives users trust that no malicious intent is embedded in the source code.
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