ELI5 Facebook Libra Cryptocurrency

ELI5 Facebook Libra Cryptocurrency

Facebook is getting ready to unveil their new cryptocurrency project called Project Libra Network on June 18 (9 days from now).

In this post I’ll summarize everything I’ve been able to learn about Libra so far. These are some notes I took while researching what the buzz was all about. Facebook has kept most details under wraps, but their public speeches and (obviously selected) leaks give us an idea of what’s coming.

Nobody knows yet what the cryptocurrency used in this network will be called (more on the name below), but for the time being the community is calling it LIBRA. So for the purposes of this post I’ll call it Libra. Keep in mind though this name may change soon and we may be forced to call it something else, like Facecoin or Instacoin or WhatsaCoin or…..

Stablecoin

Libra will be a stable coin which will derive its value from a basket of currencies. Some speculation about it being tied 1:1 to the US Dollar but being a global scale company would make it more attractive to hedge possible volatility by including additional currencies which usually vary with and against the U$ Dollar.

The initial basket will be worth U$ 1 billion. Facebook is looking for 100 partners to invest each U$ 10 million into this basket. These partners will then have the right to verify (mine) transactions and participate in the network profit.

The goal in creating a large basket and tying it to major world currencies is to keep the coin value as stable as possible so that it can be used for payments within the worldwide Facebook ecosystem. FB needs the value to be as predictable as possible to keep the accounting simple, to predict cash flow and to report taxable income in various countries. It’ll be interesting to watch how, exactly, they’ll operationalize their financials in diverse legislations using one single currency.

Keep in mind here that this is a blockchain-based digital currency. Not really a decentralized cryptocurrency, but a centralized project based on the blockchain. This is important, so keep it in mind. I’ll mention this again and again throughout the text because it really is what sets this project apart from a real cryptocurrency.

The decision to make it a stablecoin rather than letting it fluctuate in the wild cryptocurrency exchange system seems to make sense from a business point of view.

Facebook payments will be settled in Europe, USA, Asia and elsewhere all using this currency and the centralized blockchain-based ledger. As long as it’s tied to major world currencies, it’s going to be more predictable and easy to account for.

Project Libra Network

We don’t know what the Facebook cryptocurrency will be called. And since we don’t, everyone’s calling it something different.

Libra is the most widely used codename for the cryptocurrency. They say it’s a play in LIBER. They say it’s the translated Pound (in Latin countries Pound = Libra, Sterling Pound = Libra Esterlina). Could be anything, really, all we have right now is speculation (AKA a competent viral marketing team well alive planting rumours via select channels on social media but don’t mention that).

Two other names being speculated are WorldCoin and GlobalCoin. These are self-explaining. FB wants a global currency they can use to settle payments anywhere in the world, inside any of their products. Both make sense. (There’s just a small problem – WorldCoin and GlobalCoin both already exist…..)

Mass media is calling the FB crypto GlobalCoin. If you search for this term you get tons of recent news about it. Maybe they know something we don’t.

Worldwide Currency

An immediate consequence of it being blockchain-based is it can be accessed from anywhere in the world at any time 24×7.

Someone in China can make a payment to someone in the UK using this system. If the Facebook system is implemented in true P2P fashion, then there’s no way to block a transaction originating from a sanctioned country. I’m sure they’ve considered this scenario during their planning phase so there’s likely going to be some centralized control of transaction geolocation. One possible implementation could take the Facebook user ID into consideration. By storing the FB ID in the blockchain, the centralized system can check that ID against their existing business rules for FB users. Those disallowed from the social network itself will be disallowed from Libra Network as well. This is a centralized system, though, and not at all related, not even resembling of a real cryptocurrency.

Project Motivation?

Why is Facebook investing in a blockchain project?

Why not just negotiate excellent rates with Visa, MC or AMEX and roll with it, using their existing worldwide infrastructure?

One obvious answer is: Facebook wants to sidestep credit card processors and go direct.

How much does FB spend on CC fees yearly? Surely a lot? Billions of U$?

By deploying a blockchain-based system they can bypass the middlemen and go direct. Customers will now pay FB directly. Since it’s a centralized blockchain the “mining” fees become internal FB costs, same costs they already sustain by maintaining a credit card payments infrastructure.

Going direct also has an additional advantage for Facebook, which we’ll discuss next.

Financial Tracking

Facebook thrives on user data. Geo tracking, IP tracking, cookie tracking. All these are available to Facebook using existing technologies.

For instance, your mobile phone’s Facebook app already has access to GPS data. It knows where you are 24×7 – and it phones that info back to FB periodically.

What’s missing in Facebook’s user tracking arsenal?

You guessed it. Financial tracking.

As we mentioned earlier, Facebook wants their cryptocurrency to be tied to the U$ and a basket of other worldwide currencies. This is so users can pay for real world stuff using the new Facebook currency!

Now imagine this: every transaction you perform using the Facebook crypto will be stored in their centralized blockchain. You buy a smoothie at 7Eleven? It’s on FB’s blockchain. Buy tickets to NFL game? It’s on FB’s blockchain.

Imagine having all this payment data for immediate query, user profiling and ad sales? Knowing exactly who spent how much on on what. This is a dream come true for Facebook. The user habit information contained in such a database is all that’s missing on Facebook’s user tracking. Right now credit card operators keep this data to themselves (or sell it for billions of U$ to select partners?). By going direct, Facebook gains access to users’ financial habits.

It’s a goldmine. And also a privacy hazard which has already been raising eyebrows on crypto twitter and other discussion boards. At least with credit cards you have an accountable entity between you and the merchant. By going direct (such as in a direct Bitcoin transfer) you are giving the merchant access to your blockchain history. In this case, Facebook would see every detail of every transaction in all cases, regardless of who you’re paying.

And the blockchain makes it possible with a relatively small initial investment compared to what it’d take to build something like it using pre-blockchain tech.

Initial Investment

Facebook will invest in 100 verifying (mining) nodes for the initial infrastructure. The way this was designed is truly clever.

The investment will be in the form of a subsidy for “miners” (verifiers). Mining “Libra” will not be available to average users, unlike a truly decentralized cryptocurrency is.

Instead, Libra mining will be available only to certain carefully chosen institutions who each will receive U$ 10 million to become “payment verifiers”. I assume each verified (mined) block will pay a reward to this trusted party. The end goal is to generate the initial U$ 1 billion in fees within a certain timeframe (which I assume to be between 18 and 24 months from what I’ve read).

Note that this is 100% centralized within one corporate framework.

The verifiers are simply contractual partners within the centralized system. While they may be geographically distributed around the world, this is no more decentralized than a distributed Oracle or DB2 database owned by a bank that has branches around the world.

The main difference being that this infrastructure is self-sustaining. The miners will earn a fee for each transaction processed and since they’re trusted parties, FB will simply assume the system is working fine. Decentralized maintenance + centralized finance. Pretty clever setup.

Each miner then takes care of their own electrical, infrastructural and transactional duties. The result ends up on the centralized blockchain for Facebook’s enjoyment.

Network

So what’s with the “Network” part of Project Libra?

This is, IMO, one of the more interesting technical aspects of this project.

We know it’s not really decentralized. Fine. But it’s still a network.

The network could refer to the users or the back-end network.

I’ve mentioned the verifier partner network, I’ll mention other potential participants next, for now let’s focus on the user side of the network.

Facebook: Over 2.5 billion users. That’s 2.5 billion people being exposed to Libra immediately upon launch. It’s massive. It’s larger than any blockchain project ever. Bitcoin had a handful of people exposed to it in 2009. Libra enters the game with 1/3 of the world as potential users. I can’t begin to estimate how big this is for blockchain adoption.

Instagram: The fancy social network du jour. All those celebrities and influencers having Libra shoved right at their face, buying Libra to pay for their ads and stuff, all instantly upon launch. This is big. Very very big.

WhatsApp: Billions of mobile users online 24×7 around the world instantly become Libra users. Imagine being able to buy a shoe from a friend and pay instantly within WhatsApp? Imagine being in a trade group and buying whatever, anywhere in the world, instantly using a trusted token, without pulling plastic from your wallet. This is massive.

Messenger, etc: All the other FB user engagement products using Libra for payments. Imagine having Libra exposed to billions of people right on the first day.

User to Facebook, user to user, user to other businesses. “Hey man do you take Libra? Just log on to whatsapp and I’ll pay you”.

This is big. I can’t stress this enough, it’s the largest commercial blockchain project ever.

Winklevoss Connection

Zuckerberg has reportedly been in touch with the Winklevoss twins about having the crypto listed in their Gemini exchange. This initiative is part of Project Libra’s financial front. Zuck has to raise R$ 1 billion for the initial backing of the stablecoin and he doesn’t want to disimburse this from Facebook’s treasury.

The Winklevoss contact fits in perfectly with the funding strategy. If Gemini were to become one of the trusted transaction verifiers, all transactions going through their infrastructure would be almost instantly mined without leaving the Gemini system.

Store of Value

One of the goals in making Libra a stablecoin is to make it instantly valuable.

By tying it to the US Dollar, Euro, Pounds, Yen and others, it’ll immediately become a store of value. Or will it?

The thing is you don’t really need a cryptocurrency for this. There are projects where you simply don’t need a blockchain and this seems to be one of them.

Facebook could simply emit U$ 1 billion in “bonds” and subdivide it into small tokens. Payment verifiers could just install some piece of FB software and verify transactions based on some token ID. But, back to store of value.

Being backed by a major corporation and having 100% audited funds makes Libra immediately attractive to investors looking for a safe harbor.

From my vantage point Ripple is the immediate target here. I think Libra is everything Ripple ever wanted to be, except XRP never had a massive popular platform like Facebook behind it.

I think Libra may be the Ripple killer. We’ll find out soon.

Good for Bitcoin?

Some crypto enthusiasts see this as good for Bitcoin. (But isn’t everything?)

I disagree. Project Libra is a complete distortion of what Bitcoin was intended to be. Libra is centralized, controlled by one guy, tied to conventional currencies and not available to individual miners. It’s not a real cryptocurrency.

How could this benefit Bitcoin?

Only way I see is if the initial U$ 1 billion currency basket includes Bitcoin in it. That is unlikely, though, as Facebook is seeking partnerships with Visa, MasterCard and other traditional payment processors. These will have a vote, even if informal one, in the initial stages of Libra Network and they wouldn’t arm their enemy.

The traditional payment processors involved in Libra Network will want their tech to be used and that’ll likely involve prepaid or virtual cards and other existing products.

I hope Bitcoin is listed in the initial basket but gotta admit it’s unlikely. That’s the only scenario I can see where this would benefit Bitcoin directly.

Another possibility is if Libra becomes a major failure, if the difference from Bitcoin is made very clear to the public then it’s possible that it’d become a counter-example to why centralized cryptos won’t work where Bitcoin will.

Which brings us to the next point….

Facebook Flops

If Facebook messes up Project Libra it wouldn’t be their first flop.

From the top of my mind I can remember a few failed products, especially those meant to further track users using their smartphones like Facebook Home. This was a dumb attempt at inserting Facebook between you and your Android OS. Isn’t that clever!! Intercept everything you do on a phone to track you. No thanks.

Then there was Facebook Offers, Facebook Credits, Facebook Autofill.

Let’s take a look at Autofill for instance. This was a system designed to store all your payment data (wink wink) and then “help” you fill out credit card forms. Ain’t that handy! Facebook gets to see where you’re using your credit card. Wouldn’t it be nice to have a payments system and bypass all this nonsense already!?

As you can see, Facebook has been trying to insert themselves between you and your financial life for a very long time.

But all these previous attempts failed. Will Project Libra go where no other FB user tracker has gone before?

Only time will tell. We’ll find out soon too. The experiment begins on June 18.

I don’t use any Facebook product so I guess I’ll have to wait for the reactions to see how it goes. I’m probably one of the strict minority that will not get Libra shoved on my nose at launch.

I hope you like this short overview. I compiled these notes while I studied Project Libra over the past 15 days or so so see what the hype was about. Cheers!

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