Facebook Libra: 5 Ways the Cryptocurrency Aims to Fix Bitcoin’s Big Flaws
The world's largest social network is launching a global cryptocurrency.
Facebook is going all-in on crypto. The world’s largest social network, with over a fourth of the global population, detailed plans Tuesday to launch a cryptocurrency similar to bitcoin that could enable seamless cross-border transactions.
Libra, launching in developer form now with a full launch set for the first half of 2020, aims to improve access to global financial services. Its website highlights how 1.7 billion people are without a bank account, and they pay around $4 more per month for access to cash. Those that do have accounts can wait up to five days to complete a transaction. Increasing access to financial services, it explains, could reduce extreme poverty by 22 percent.
“Libra holds the potential to provide billions of people around the world with access to a more inclusive, more open financial ecosystem,” David Marcus, head of Facebook subsidiary Calibra aimed at organizing the company’s involvement in the project, said in a statement.
The initial response from cryptocurrency insiders has been fairly positive. Analyst Joseph Young wrote on Twitter that he was “impressed” by the partners involved in the project, and the white paper’s description of Libra as a cryptocurrency was a “good first step.” Pavol Rusnak, chief technology officer of Trezor wallet developer Satoshi Labs, declared that he was “a big fan” of Libra and that it has the potential to replace other projects like Ethereum, Ripple and Stellar. Rusnak did note, however, that “for every other usecase when truly decentralized and uncensorable network is required, there will still be [bitcoin.]”
Not everyone is completely on board. Technology writer Owen Williams struck skepticism over how the project could influence global economics, later adding that “all of this sounds dandy if you ignore the company with the largest reach in history trying to make an end-run around currency/governments”:
In many ways, Libra’s benefits echo those touted by bitcoin enthusiasts. The world’s largest existing cryptocurrency launched in 2008, after anonymous engineer Satoshi Nakamoto released a white paper detailing its design. In the wake of the financial crisis, bitcoin offered decentralization away from banks and a trustless transaction system that ran on a new creation called the blockchain.
While Libra retains a number of the benefits that brought bitcoin to prominence, it differs in several key ways.
5. It Doesn’t Use Proof-of-Work
Bitcoin uses a controversial method for processing transactions. “Miners,” people that run computers that contribute to the network, set their machines to solve complex puzzles before processing a transaction. The “blockchain” public ledger that logs all transactions requires approval from the network that the puzzle has been solved and the transaction is valid before it’s added onto the chain. Miners receive some bitcoin as a reward.
While the method protects against centralization, as it’s very hard for one group to own the majority of computing power and start fraudulently double-spending coins, it’s come under attack for using a lot of energy. Researcher Alex de Vries claimed in March that one transaction uses over 700 kilowatts per payment. Elon Musk named energy use as one of bitcoin’s key flaws.
Libra aims to use an alternative, known as “proof of stake.” This will reward stakeholders for their share of the network, meaning people have an incentive to ensure the smooth operation of the network. It’s an alternative supported by de Vries, who believes it would reduce energy consumption.
Initially, the blockchain will be managed by the Libra Association, where Facebook will play an equal role to that of its peers. It will run as a “permissioned” blockchain, meaning transaction-validating nodes that run the network will be approved on a case-by-case basis. The goal is to move to a “permissionless” system, similar to bitcoin where anyone that meets the technical requirements can run a node, within five years.
“Over time, it’s designed to transition the node membership from these founding members who have a stake in the creation of the ecosystem to people who hold Libra and have a stake in the ecosystem as a whole,” Facebook’s blockchain technical lead Ben Maurer told Coindesk.
4. It is Governed by a Team
The Libra Association, a not-for-profit organization headquartered in Geneva, Switzerland, aims to have 100 members before the launch in the first half of 2020. This association is expected to take over from Facebook’s leadership role sometime after this year. Unlike bitcoin, this team will have the authority to create and destroy tokens on the network. This leadership model could make development simpler, as bitcoin has struggled to achieve consensus on small upgrades like segregated witness.
This group will have some impressive credentials to their name, touting its friendly approach to the existing financial systems by including giants like Visa, MasterCard, PayPal and more:
3. It Doesn’t Float Freely on the Market
Bitcoin’s value, dictated by the markets, has made headlines for its wild fluctuations over the last years. It reached the $20,000 mark in December 2017, only to drop to around $3,700 in November 2018. Its free-floating value means its price is dictated by its users, but it makes purchases difficult as it can move fast versus a user’s daily currency.
Libra aims to avoid this. Unlike bitcoin, each coin is backed by a series of low-risk assets including government securities. The association will invest in low-risk debt from multiple stable governments, effectively linking the coin’s value to a basket of global currencies. The assets will be held in a globally distributed network of custodians, each with an investment-grade credit rating.
This should produce greater price stability for its users, but for bitcoin fans skeptical of financial authorities, it could be a step too far.
2. It Wants to Collaborate With the Existing Financial Systems
Libra is very much in favor of working with existing systems, instead of replacing them with something new. From the white paper:
Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts to improve the effectiveness of anti-money laundering. We believe that collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, is the only way to ensure that a sustainable, secure and trusted framework underpins this new system. And this approach can deliver a giant leap forward toward a lower-cost, more accessible, more connected global financial system.
After one analyst called in February for Visa, MasterCard and PayPay to fully embrace cryptocurrency, this could be their big step in the water.
1. It Supports Smart Contracts
Smart contracts are effectively computer scripts that run on top of the network. Bitcoin supports some basic smart contracts, enabling simple payment triggers when certain conditions are met, but Libra takes this one step further with an Ethereum-like focus on its applications.
The Move programming language is designed to facilitate these actions. It ensures that digital assets can only move around once, similar to the Ethereum-powered ERC-721 tokens that powers the CryptoKitties cat-collecting game. The language also powers other aspects of the network, like the validator nodes.
Bitcoin looks set to retain its position as a giant, decentralized cryptocurrency that avoids design by committee. For those seeking an asset-backed token with the support of big names in finance, Libra could be the answer.
The author of this story has a stake in bitcoin and Ethereum.