On June 18th, Facebook announced the Libra blockchain and cryptocurrency, which raised many questions: What is Libra and how will it work? Is it a cryptocurrency? Is it a blockchain? Will it overtake Bitcoin and Ethereum? Will consumers trust it? What is its potential? What’s in it for Facebook? And will Libra become the unifying and transformational blockchain that everyone was hoping for?
Enter Facebook’s Libra cryptocurrency and blockchain
The Libra whitepaper holds some answers to the above questions, including how it will be governed. Libra will be launched by the Libra Association, which is an independent, nonprofit membership organization, headquartered in Geneva, Switzerland. Libra will be governed and controlled by this association and will be independent of Facebook.
The key difference between Libra and Bitcoin is the permissionless versus permissioned blockchain. Simply, a permissionless blockchain implies that anyone with the right hardware infrastructure can apply the mining protocols and participate in validating transactions and in becoming a validating node on the Bitcoin network. Currently, Bitcoin has over 9,500 nodes, which enabled it to withstand the test of time and produce an immutable, distributed and secure ledger.
In contrast, Libra is going to be a permissioned blockchain that is centralized where its consensus mechanism, software and governance are controlled by Libra Association members who are the only ones permitted to validate transactions. At launch, the Libra blockchain will have 100 permissioned organizations. Visa, Mastercard, Uber, Vodafone and Spotify are among the founding companies of the Libra Association.
Is Libra a cryptocurrency with a blockchain like bitcoin?
Libra applies many of the same building blocks and concepts as Bitcoin. It uses a blockchain, cryptography, digital wallets, anonymous accounts, smart contracts and the gas concept with a new programming language called “Move”. This makes Libra more like Ethereum than Bitcoin.
Libra will be implemented as a stable cryptocurrency by pegging it to a basket of “low volatility” assets such as the dollar, euro, yen and bonds, and through creating the Libra Reserve. This reserve allows the 100-node consortium to “mint” and destroy Libras as needed and based on demand.
So, when customers buy Libra coins using dollars, those dollars are put into the reserve that is then invested in low volatility assets. This fund concept is missing from Bitcoin and Ethereum, which leads to their price swings and speculations and makes Libra a powerful contender to Bitcoin, Ethereum and other cryptos.
Libra is also being architected with some advantages over traditional cryptocurrencies. It will consume far less electricity than Bitcoin and is touted to have a higher throughput of 1,000 transactions per second (TPS) compared to bitcoin’s seven TPS and Ethereum’s 15 TPS.
It also promises to make sending money across the globe as easy as texting and will have very low fees compared to close to 5% of the transaction value of international wire transfers.
Furthermore, Libra has the potential of helping many of the 1.7 billion unbanked to enter the global financial system. It could trigger a wave of innovation in financial services as much as the internet did for online services.
These are some remarkably important advantages for Libra that could possibly offer the transformation that has been expected from blockchain and cryptocurrencies.
With Facebook’s 2.4 billion users across the globe, Libra has the potential of transcending governments and central banks and possibly becoming an international digital currency. If Facebook’s users adopt Libra to shop, transfer money and transact, it could make Facebook one of the most powerful financial institutions in the world.
“That would herald a consumer revolution — but could also make financial systems less stable and reduce governments’ economic sovereignty, ” writes The Economist.
But, more importantly, Facebook needs the blessing of governments across the globe and the trust of its customers. These are two enormous obstacles that Facebook would need to overcome. It is by this fundamental trust from governments and from consumers that would define the future of Libra and possibly of Facebook. So, can Facebook address these two trust problems and use Libra to solve its own low level of trust from consumers and governments?
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