Facebook’s Libra is being referred to as a cryptocurrency, so you’d think it’s only fair to compare it to the top cryptocurrencies like Bitcoin or Ethereum.
This doesn’t entirely equate, though. It’s perhaps better to consider comparing Libra to traditional payment networks like PayPal or Venmo. Calibra, via Facebook, has an advantage over these networks due to its massive reach, as compared to the most popular peer-to-peer payment networks.
The biggest problem with these networks (and payments cryptocurrencies) is inter-operability, adoption and reach. Libra will operate on top of the existing financial system, which is the biggest difference between Libra and Bitcoin or Ethereum. Inter-operability and adoption will still be an issue for Libra: it will require adoption by thousands of providers and millions of vendors to become successful.
The opportunity for Libra is in leveraging Facebook's reach, which could theoretically accelerate the adoption of the currency at a far lower cost than other businesses wanting to enter the space.
Is Libra bigger than Bitcoin?
Libra is no rival to Bitcoin, and most cryptocurrency experts would agree that Libra isn’t a real cryptocurrency. Relative to PayPal or the rand, Libra is a cryptocurrency, but when compared to Bitcoin, Libra is far from it.
Libra will probably serve the mass market and is setting itself up to be the largest bridge to decentralisation that has ever been created.
But how decentralised will it really be? The answer is: “kind of decentralised”.
The reason for this is that like regular cryptocurrencies, the database or ledger will be distributed to nodes. However, these nodes will be run by the 100 companies and organisations (initially, only 27) that can afford to pay to become a partner, and it is unclear how they might expand this network even though the white paper alludes to it. This is cause for concern because it significantly reduces the level of decentralisation possible.
Having only 100 validator nodes could create a scenario where it would only take a handful of organisations to completely restrict users from transacting. If you compare it to Bitcoin, with 10 346 nodes, it would take considerably more influence to convince the majority of these nodes to restrict anything.
This is important for a number of reasons: the first is that decentralisation is a fundamental property of cryptocurrencies that creates the trustless environment that most blockchains are striving for; basically, you want to make it as difficult as possible for any single entity to influence the majority of the nodes, to prevent any bad actions being taken.
The second-largest concern is that Facebook has a long history of not respecting privacy. This is apparent with many, if not all, of its products, from Facebook to Messenger to Whatsapp, and there should be no expectation for Calibra/Facebook to roam within the bounds of acceptability here. In a previous post about privacy, we discussed the importance of being able to transact anonymously, and this should be considered when deciding whether or not to use Libra.
Is Libra investable?
Yes and no. There are actually two cryptocurrency-like tokens to Libra: the Libra coin, which will attempt to be as stable as possible and is backed by the Libra Investment Token, which is backed by low-risk underlying traditional assets.
If you are able to spend the money on becoming a validator node, you could purchase a minimum of $10 million worth of Libra Investment Tokens that are backed by “bank deposits, government securities and debt from stable governments”. Running a validator node will cost approximately $280 000.
This makes the Libra coin, which will be publicly available, less investable because it would act similarly to Tether and other stable coins, meaning that there is very little room for growth unless it was used to hedge against other fiat currencies.
Conclusion
In summary, Libra is likely to be neither amazing nor terrible, and will probably be widely used after its launch due to the easy onboarding that most of Facebook’s 2.38 billion monthly active users will experience because the currency will run natively within Facebook products. It does, however, raise serious privacy and data concerns as well as concerns about trust, the immutability of a far-less-than-decentralised blockchain and the underlying assets that create stability for the currency.
The company has not been overly verbal about its investment strategy or how it will roll out the addition of new validator nodes, which will be two important things to look out for as the launch nears while assessing the currency for investment.
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