It’s been an interesting few weeks in Cryptoland. Facebook finally unveiled it’s rumoured cryptocurrency called Libra, a joint effort with companies such as PayPal, Uber, Visa, Mastercard, and many others. Libra’s stated purpose is to provide a payment system that will be easy to use and cheap, bringing financial services to the masses using mobile technology in the same way that sending a text message has become free. The Libra white paper explains:
“Securing your financial assets on your mobile device should be simple and intuitive. Moving money around globally should be as easy and cost-effective as — and even more safe and secure than — sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn. New product innovation and additional entrants to the ecosystem will enable the lowering of barriers to access and cost of capital for everyone and facilitate frictionless payments for more people.”
In order to achieve this, Libra will be a new cryptocurrency that can reach the main goals of being easy-to-use, have wide acceptance,and also have the advantage of being backed by the largest social media giant in the world, while at the same time having also the support of various other companies. Libra will have three main characteristics:
- It is built on a secure, scalable, and reliable blockchain;
- It is backed by a reserve of assets designed to give it intrinsic value;
- It is governed by the independent Libra Association tasked with evolving the ecosystem.
This move by Facebook could be seen as a complete vindication of cryptocurrencies in general, and blockchain specifically. Finally all those sceptics such as Yours Truly can be shown to be wrong in their repeated criticism of all things crypto. Libra has been cited by some as the reason for the latest Bitcoin price increase, and then blamed for the inevitable crash after this effect wore off. In fact, the latest Bitcoin price shenanigans have nothing to do with Libra, and everything to do with price manipulation and Tether, but I digress…
In fact, Bitcoin enthusiasts have been generally quite critical of Libra, as they see it as anathema to many of the decentralised principles that are at the centre of their cryptocurrency. Moreover, despite the use of blockchain and other buzzwords in their white paper, there is growing concern about various elements of the proposal. There are of course concerns about privacy, as this is seen as an attempt for Facebook to syphon more data about our daily purchases. There’s also worry that Facebook will be using its reach to become a de-facto monopoly, with critics such as Nouriel Roubini calling it a “monopoly scam“. But there are other issues with the currency from the perspective of centralisation of services. I’m particularly worried that Facebook is co-opting the language of decentralisation while offering a highly centralised service.
So let’s get to some details. The proposed cryptocurrency is indeed nothing like other schemes such as Bitcoin in the sense that it is what is known as a stablecoin, it doesn’t rely on mining to derive value, that is provided by deposits by the participating institutions, investors and consumers. Every Libra coin will be backed by “real” money deposited and held in a reserve, which ensures price stability and it also evades some negative aspects of other cryptocurrencies, such as energy expenditure. It is also not like other cryptocurrencies because it is mostly centralised, the Libra Association, which is made up of the corporate investors, will tightly control all aspects of the currency.
This means that for the most part, Libra will act not as a crytpocurrency, but more like an electronic wallet. The distinction may seem subtle, but it changes entirely the reason for its existence. The idea behind a cryptocurrency is that value is derived through using computational power to crack mathematical problems and validate transactions. But a stablecoin only derives its value from deposited funds, so it will act as a wallet. There is nothing wrong with that, and having a mobile phone wallet could be quite appealing in some places, but it will be no different from other existing mobile services such as those already offered by Google and Apple.
The difference then would be with the use of blockchain, Libra will usher a new currency that will rely on its own smart contract language. The white paper states:
“The goal of the Libra Blockchain is to serve as a solid foundation for financial services, including a new global currency, which could meet the daily financial needs of billions of people. Through the process of evaluating existing options, we decided to build a new blockchain based on these three requirements:
Able to scale to billions of accounts, which requires high transaction throughput, low latency, and an efficient, high-capacity storage system.
Highly secure, to ensure safety of funds and financial data.
Flexible, so it can power the Libra ecosystem’s governance as well as future innovation in financial services.”
But critics have already looked at this, and it looks like this is not really a blockchain at all. FT Alphaville has done a great job of uncovering the details. The main problem is that Libra defines a blockchain in a way that is incompatible with previous definitions of blockchains, it is not decentralised, it has a proprietary and hierarchical consensus mechanism, and most importantly, it doesn’t even have blocks that are chained together. According to the article:
“Talk of decentralised structures is everywhere in the frustratingly wordy but detail-light introductory material. But one thing which can be unpicked immediately is that the system only aspires to achieve decentralisation at some point in the future.
For now the unique benefits of blockchain’s “distributed governance” are only theoretical because in the first instance the Libra Blockchain will be coming to market in fully “permissioned” form, effectively centrally controlled by the founder Libra coin holders.
To save costs and to introduce efficiencies even further, the Libra administrators even float the idea of archiving off data (possibly for a fee) in order to save space — something that would be considered anathema to most self-respecting fans of immutable blockchain technology.
In short, most of the features that make a blockchain a blockchain don’t seem to be there.”
I tend to agree. Libra is impressive in many ways, it could indeed become a popular payment system powered by social media, something akin to Wechat in China, but after that most of the talk about open source code and decentralisation falls flat, when we look closely this is just a centralised data structure, but a blockchain it ain’t.