What is Facebook Libra?
Facebook has announced it will be launching its own cryptocurrency in early 2020 called Libra. The goal of this blockchain-driven currency is to reduce transaction fees and complexity, as well as give greater access to a stable currency and payment method to people around the world.
Basics of Cryptocurrencies and Blockchain
In order to understand Facebook’s Libra, it is necessary to learn the basics of blockchain and how a cryptocurrency works.
Essentially, a blockchain is a database of records that are independently verified by a decentralized network. This network then secures the data to prevent manipulation or alteration, ensuring that the information is safe and accurate.
When a transaction occurs, it is validated by hundreds or thousands of computers across the network, timestamped and encrypted. Each of these validated records forms a block, and all of the blocks are linked together to form the blockchain.
Since this verification is not controlled by any one entity, there is inherent data integrity and users can trust the information without having to blindly trust the source. There is also a complete audit trail, so a transaction can be independently audited and traced all the way to its origination.
A cryptocurrency is a digital asset that uses blockchain to create a public financial transaction database. Unlike the traditional central banking systems that are controlled by individual institutions, cryptocurrencies take advantage of a decentralized blockchain to promote anonymity, security, and transparency.
Bitcoin was released in 2009 and is considered to be the first decentralized currency, but since then over 4,000 other cryptocurrencies have been created.
Facebook has recently announced its plan to launch a new cryptocurrency, Libra, in early 2020. The Libra is meant to allow users to send money or make purchases with almost no fees involved, invoking a sense of financial freedom. In fact, the name Libra was chosen because it is the word for a Roman unit of weight and also has the stem “Lib” which means free in French.
The plan is for Libras to be spent through wallet apps on mobile devices and for the currency to be accepted anywhere from grocery stores to online merchants.
Maintaining a relatively stable value is one of Libra’s primary objectives, as this will make it a good medium of exchange and encourage more merchants to accept them as payment for goods and services.
The value of a Libra will be tied to the Libra Reserve, which is a set of bank deposits and short-term government securities from stable currencies like the dollar, euro, and yen. This will ensure the stability of the currency’s underlying value and give it intrinsic value as an asset. The fact that the Libra is backed by a reserve of financial assets sets it apart from other cryptocurrencies, as the main criticism surrounding those is that there is no real value linked to the tokens.
The Libra will be based on scalable, open-sourced blockchain technology that will allow billions of people around the globe to use it for their financial needs. This platform is also built for speed, with the capability to process 1,000 transactions per second – a huge improvement from Bitcoin’s 7 transactions per second.
When a transaction is submitted, each of the nodes will run a calculation based on the existing ledger of all transactions. Once two-thirds of the nodes validate and approve the execution of the transaction, it will be executed and permanently entered into the blockchain ledger – something that cannot be reversed.
Every time someone trades in their currency for a Libra, that money will be added to the Libra Reserve. If that person later wants to cash out their Libras for local currency, the value will be taken out of the Libra Reserve and the Libras given back are destroyed. This means that the entire value of the Libra currency will be in circulation and will never run fractional; it will also maintain its own value.
The Libra Association
While Facebook developed the concept and supporting technology to operate Libra, it will not have sole control over the cryptocurrency. Instead, it will be a member of the Libra Association – the not-for-profit entity that will govern and oversee the development of the token. It will also be responsible for the open-sourced Libra Blockchain and developer platform that will facilitate the use and adoption of the currency.
Each business must invest a minimum of $10 million into the project to become a founding member of the Libra Association. They are also required to have at least a half rack of server space operating at 100Mbps or above, a dedicated internet connection, enterprise-grade security capabilities, and a full-time reliability engineer on site. In addition, the business must have hit $1 billion in market value or be a top-100 industry leader on a scale like the S&P.
The Libra Association already has 28 members, including companies like Facebook, Visa, Uber, PayPal, Spotify, eBay, and many others. Facebook hopes to reach 100 founding members before the official launch of Libra and is open to any business that meets the requirements, regardless if they are a direct competitor.
Each member will be rewarded with one vote on the council as well as a proportionate share of the interest and dividends earned on the Libra Reserve. It will be based in Geneva, Switzerland as this is a neutral location that is known for its strong support of blockchain and financial innovation. The current plan is for the association to meet biannually to maintain end evolve the Libra platform.
As an additional measure to separate Facebook from the currency, they are launching another subsidiary company called Calibra. This entity will handle the cryptocurrency dealings to ensure that there are clear information barriers between your Libra payments and Facebook data.
This will prevent ad targeting and keep your identity private when you transact with the libra currency in other applications.
Implications of Facebook Libra
If the Libra currency is successful in becoming a simple, global currency, it has the opportunity to change the fundamental framework of the existing financial industry. Creating a global financial infrastructure will empower people around the world and give them access to a fair and stable way to conduct business.
The speed and security at which this can be accomplished will lead to a more efficient system and, as a result, fewer fees and greater access for those without banks or reliable financial systems.
Imagine if someone living abroad could easily send money from their phone to their family at home, without having to pay expensive bank remittance fees or risk mailing a check. It would also eliminate the manipulation of foreign exchange fees and ensure they are getting a fair value for their currency.
It will also facilitate the execution of small dollar-value transactions that may currently be unfeasible with high credit card fees. All in all, more people would have access to financial services, cheaper capital, and the ability to control their money without borders.