What Facebook’s Actions Tell Us About The Future Of Blockchain

Opinion | June 26, 2019 By:

Libra’s much-anticipated unveiling has generated significant enthusiasm amongst followers of both the digital-asset economy and traditional markets. For an industry grappling with a lack of mainstream acceptance during its formative years, watching Facebook and its consortium of corporate partners enter the fold is sure to be viewed as a vindication of blockchain and cryptocurrency. As the project transitions through the development lifecycle, the increasing attention it brings will be a net gain for the entire industry. For every sophisticated investor or developer dissecting the difference between Libra and its alternatives such as Bitcoin, there are dozens of unbanked individuals who will soon discover digital assets for the very first time. With over 2 billion monthly active users, Facebook has the reach and resources to extend blockchain technology, together with its partners, beyond early adopters and into the mainstream for the very first time.

Banks Should Be Wary of Facebook’s Moves

In an effort to avoid Bitcoin-style volatility, the Libra token will be backed by a basket of assets set by the Libra Association, an independent foundation founded by 27 initial members including Visa, Uber and Andreessen Horowitz, each of which have invested at least $10 million into the project’s operations. This basket will include a variety of fiat currencies as well as low-risk, highly liquid government securities. Determining the weights of each asset and putting measures in place to make sure the peg doesn’t break gives the Libra Association a powerful, central bank-like role in global capital markets. Just as the committees that decide the makeup of indices, such as the Dow Jones Industrial Average Index (DJIA) or the S&P 500 exert significant influence over capital markets, so too, will the Libra Association with its potential to move markets with its decisions as the newest “basket-setter.” In addition, the interest earned on the Libra reserves will create a substantial revenue stream for the Association’s members, which they could choose to share with ordinary users.

In developing countries, the Libra Association could go one step further and operate as a de-facto central bank providing a flotation device for many drowning under hyperinflation in failing economies around the world. Citizens in countries such as Venezuela, Argentina and Zimbabwe will have access to a non-sovereign store of value and medium of exchange, which they can use to purchase products and services on any Facebook-connected platform. Remittance fees and various other charges will be drastically reduced by virtue of the fact that Libra can be sent peer-to-peer with an internet connection and a wallet.

Institutions Are Getting Off The Sidelines

It is no secret that one of the more significant narratives in the blockchain industry has been the entrance of traditional institutions into a domain that was previously the sole province of a small group of privacy-driven enthusiasts. While market watchers have been focusing on traditional wealth managers allocating capital to the digital asset class, Libra demonstrates the utilization of blockchain technology to enable an international tool for money transfer. Instead of simply investing capital in the space, the Libra Association’s members have opted to take an active role in validating and governing the network. By taking a consortium approach and establishing an Association to launch and govern its token project, Facebook reduces the potential for regulatory scrutiny and opposition on antitrust grounds given the varied nature of its partners. The Libra Association, based in Switzerland, is an entirely independent entity that will evolve into a more decentralized consortium as time goes on. Cameron Winkelvoss, who founded one of the earliest Bitcoin exchanges together with his brother Tyler, recently predicted that by 2024 every FAANG company (Facebook, Amazon, Apple, Netflix, Google) will have its own native token.

The Other Side of The Divide

Decentralization exists on spectrum. On the one end you can find public blockchains such as Bitcoin and Ethereum, while private chains occupy the opposite extreme. While Facebook and JPMorgan have decided to go the more permissioned route, other industry titans are instead basing their solutions on the Bitcoin blockchain. Microsoft, for example, is building ION, a decentralized identity (DID) solution, directly on the Bitcoin blockchain.  Another industry leader who has been vocal in his support of Bitcoin is Jack Dorsey. As the CEO of both Twitter and Square, Dorsey and his team are exploring ways to utilize Bitcoin and auxiliary technologies such as the Lightning Network on both their payment and social-media platform.

A blockchain is the means by which components within a distributed network agree on the updated state of a shared ledger in a consensus process. However, there are diverging opinions as to who gets to participate in consensus. While public networks, such as Bitcoin, allow anyone to become a validator, membership in the Libra Association is subject to restrictive criteria. Every company looking to enter the space will have to navigate the trade-offs between the two approaches before settling on a combination of features unique to their use case. Trusted partners are essential to bridging the divide between the technically minded blockchain industry and traditional institutions.

While the scale and scope of the Libra project could potentially expose a mainstream audience to blockchain technology in a way Bitcoin never did, it is equally likely that the privacy benefits of building on truly decentralized platforms draws innovative companies into the Bitcoin ecosystem.

Time will tell which side of the divide the community prefers.