Is Facebook’s Libra Really A Cryptocurrency?

News, Opinion | June 19, 2019 By:

Facebook’s impending foray into the world of cryptocurrencies centers on its recently unveiled Libra project, with the Libra stablecoin at its core. Reporting by The Block revealed that the inaugural backers of the Libra network, which function as node operators, will consist of a mix of investment firms, payment companies, e-commerce giants, and more in a consortium-based model.

With some members charged $10 million to run nodes, which grants them access to view the network, Libra could prove a lucrative revenue source for Facebook — to the tune of $1 billion.

This begs the question: is Libra really a cryptocurrency or simply a fintech play by a social media giant?

Consortiums, Decentralization, and Stablecoins

Immediate concerns about Facebook’s plunge into the fintech world are manifest. The firm’s reputation as a reliable manager of user data is more than suspect, and an advertised-based revenue model does not breed confidence in sustained privacy practices.

Combine sensitive user social media data with their financial data, and you have a volatile mix of information on critical aspects of peoples’ everyday lives.

It is unclear precisely what the role of the node operators will be in the system, but the high entry fee and access to the blockchain seem a thinly-veiled paywall for the companies to access comprehensive user data. There will be 100 companies at launch, including the likes of PayPal, Visa, and eBay, so it will be interesting to discover their role besides partaking in the governance procedures of Libra.

The control of these Silicon Valley data monopolies is a legitimate concern. PayPal is a financial power player, Uber a logistical power player, and eBay an e-commerce power. The fact that the Libra blockchain will not be directly auditable (only proofs will be available) creates a downstream problem of just how far the extent of data collection, or surveillance, will be possible on users regularly transferring value on Libra.

According to TechCrunch, Libra will be natively integrated into Messenger and WhatsApp, with zero fees, as well as integrated with merchants and a pending rollout of physical ATMs for the stablecoin. Interestingly, TechCrunch also notes how the level of “decentralization” of Libra may help Facebook to avoid direct regulation for its control over the cryptocurrency.

However, decentralization is a stretch for a Facebook-issued stablecoin.

With 100 node operators, Libra is ostensibly more decentralized than many “cryptocurrencies,” and blockchain projects in general, but does not meet the type of censorship-resistance or decentralization that are two of the underpinning value propositions of cryptocurrencies like Bitcoin. Launching a decentralized cryptocurrency network can be difficult though.

Designs for bootstrapping decentralization are commonplace in the crypto sector now, with everything from Grin’s mining and token distribution model to proof-of-stake networks tweaking various incentive models. Emerging networks like Algorand implement Pure Proof-of-Stake to drastically lower the barriers for entry to users, and other networks, like Cardano, seek to launch with decentralization after years of development in the run-up to its Shelley testnet.

While these networks demonstrate better decentralization than the Libra consortium, Libra may ultimately prove a more valuable tool in onboarding more users to cryptocurrencies in general since many users simply want the convenience of using the stablecoin in their favorite messaging apps.

However, Libra’s departure from what defines cryptocurrencies may concurrently mislead new users about the critical components of genuine cryptocurrencies. And that does not start and end with decentralization either.

Libra is akin to a permissioned blockchain stablecoin network. Several cryptocurrency projects, like Ripple, are similarly centralized and have developed into more of conventional fintech innovations rather than pure cryptocurrencies. Different than other stablecoins though, Libra will be backed by a basket of currencies rather than pegged to a single fiat currency — such as Tether.

Stablecoins have an increasingly prominent yet polarizing position in crypto markets. While they offer stable pegs of value for trading in and out of altcoins on exchanges without fiat pairs (i.e., Binance), they add layers of complexity and risk to payments when compared to something like Bitcoin.

That may not be a prohibitively sizeable barrier for most of the mainstream that will use Libra though, and while a blockchain-based settlement layer can reduce transaction friction for users (i.e., no fees), it is not a promise of a protocol to build technology on top of.

Fintech vs Cryptocurrency

Libra appears to be more of a Facebook product than a modular technology from which to build upon. As a stablecoin, its primary value proposition is convenience and stability, but many crypto users are hodlers that are merely speculating on the price of digital assets.

Will Libra become a more convenient form of Venmo? It has that potential, but in the end, that’s not adding much value to an ecosystem built on removing trusted intermediaries and providing modular, censorship-resistant technologies.

Facebook’s Libra may tenuously qualify as a cryptocurrency, but it is more a fintech in