Algocracy Newsletter: Facebook Libra

All you need to know in about 5 minutes

On June 18th, Facebook has published its own currency called Libra. Below is a quick summary of what seems to be obvious at this point. 

Let’s start with few facts and then with a few thoughts on what Libra means from the short, mid and long-term perspectives.

Libra: Crypto, Stable and Not Anonymous

  • Libra is a cryptocurrency. Think money as a software code, similar to Bitcoin.

  • It is an open standard controlled by the Libra Association incorporated in Geneva .

  • The Libra Association currently includes around 30 mostly global brands

  • Facebook is not controlling the association. They have “just” founded it, “just” contributed the initial technology and are “just” one of many association members ;-)

  • It is pseudonymous cryptocurrency similar to Bitcoin. That basically means, that it is not anonymous at all.
    With Facebook already owning large portions of social data of billions of people worldwide, the idea of them having access to those peoples realtime transactional data sounds actually quite scary…

  • Libra is a so-called stablecoin. This means, that it should stay pretty stable, not like f.e. Bitcoin. As people will be cashing in/out of Libra from/to their local currencies, the appropriate number of Libra(s) will be created/destroyed. That’s how it will be financially tied to the rest of the world. That’s also why Mastercard, VISA and PayPal are founding members of the Libra Association.

  • Libra will be launched in 2020. Its test network for software developers to play with should be launching anyday now.

Short term: A money transfer network

The primary value proposition of Libra for the common people is that it makes transactions cheaper and faster which is clearly targeted to third-world citizens who work in foreign countries and need to send money to their families back home.

Traditional money transfer companies currently charge them 7% transaction fees on average, which is unsustainable and Libra is going to disrupt them with near-zero transaction fees and instant money transfers.

This seem to be the first adoption use case for Libra which can be also judged from the style of their marketing video:

Short term: A Payment system

After the first adoption wave as a money transfer vehicle, people will start to use Libra to pay for good and services.

Imagine that for example Uber will offer you two options how to pay for a ride - one with your registered card, the other one with Libra, which will be cheaper (because of inherently lower transaction costs). Which one will you choose?

All the Big Tech companies have implemented their own payment systems in order to decrease transaction costs related to their content and services which have to be paid to traditional payment processors (Apple, Amazon, Google). 

With Libra, Facebook is now doing the same. The main difference is that they aim to do it on a planetary scale (because their social network is planetary) and through an decentralized cryptocurrency, which is more suitable for the networked world than traditional centrally-governed solutions.
Plus nobody would trust Facebook if they’d it on their own (because of the planetary problems they’ve been causing).

Mid-term: A Foundation for private messaging

For Facebook, payments will be a fundamental layer in their recently announced pivot to WeChat-like private messaging

In that future, the main source of revenue for Facebook may not be advertising (as it is now) but transactions done by its users - Libra will effectively become a payment processor for Facebooks decentralized private messaging network, through which users will transact with each other as well as with a wide variety of service providers and other merchants. 

And Facebook will be one of the (many) parties which will keep the Libra blockchain running, collecting the transaction fees and last but not least offering their own set of services on top of that.

Mid-term: A Fintech crypto-platform

Facebook has built Libra from open cryptocurrency standards and technologies. Cryptocurrencies allow transactions among untrusted parties.
This in effect allows individual members of the Libra consortium to safely participate and invest into the currency, although they may not trust each other, f.e. because they are competitors (think Visa vs Mastercard as an example).

Another important technological feature taken from the world of cryptocurrencies is that Libra has its own programming language  which makes it similar to other cryptocurrencies like Ethereum
This has a potential to spark a new ecosystem of financial applications and services and Libra may in turn become the largest fintech platform on the planet.

To achieve that vision, Facebook has designed Libra with the ability to process 1000 transactions per second, which is 3-fold more than Bitcoin or Ethereum. This is a prime example of a large corporation industrializing open source standards and technologies while not giving a damn about their original (cryptoanarchist) ethos.

This also clearly demonstrates the main problem of current open cryptocurrencies like Bitcoin and Ethereum - the size of their core development teams is simply too small.

Long-term: A new global currency?

This has been one of the first themes which a lot of people started to immediately talk about.
Yes, Libra has a potential to be global, because Facebook is a global social network and other consortium members backing it are some of the most influential global brands.

However, all traditional (FIAT) currencies have always fulfilled the following 3 use cases:

  1. Medium of exchange - ability to pay. The more universally, the better.

  2. Store of value - ability to save value for later spend. The more stable the better.

  3. Unit of accounting - ability to use the currency in the books, for tax purposes, etc.

For example Bitcoin is a really bad medium of exchange, because it doesn’t scale well in terms of number of transactions due to its technical limitations. It however may be a good long-term store of value (“cryptogold”), given the whole game theory behind its deflational nature.

On the other hand Libra is obviously optimized to be a medium of exchange for people around the world. At least for now.

In order to become a store of value, the big financial institutions would have to probably jump on board and back it up. Will they do it? We will see.  Trust is a big factor here and Facebook has lost a lot of it in the last few years.

And as for the unit of accounting, this would require governments around the world to accept Libra as a legitimate currency. That is not likely to happen any time soon.

The reasons above are IMO why Libra will serve as the medium of exchange - a payment platform - in the first few years. It will accumulate the value, build the momentum and then we will see.

However we can safely say now, that thanks to Facebook, cryptocurrencies are finally going mainstream. After 11 years since the publication of the original Bitcoin whitepaper .