Libra Article – BlockTrain – Medium
In June, Facebook announced its plan to march into the field of cryptocurrency — Libra. Ever since then, heated debates have aroused from both inside and outside the crypto circle and even captured much attention from the general public. What advantages Libra has compared to traditional currency and other cryptos and why some people support it in such an enthusiastic way? On the other hand, what are the major concerns different groups have on this ambitious project and why they fear it so much? Lastly, why some other people stay so suspicious about this project and what are their doubts? This article hopes to cast some light on these three questions.
According to Facebook’s own narrative, Libra is aimed to integrate the 1.7 billion unbanked population on the globe into the modern, digital financial world. The company points out the fact that although these people generally do not have access to the modern bank system, a billion of them do have a mobile device and the majority of them are Facebook users (Marcus, 2019). Hence, Facebook wants to include them into the modern financial system by providing an easy-to-use cryptocurrency on its and its partners’ platforms.
Besides, the company and many people believe that a cryptocurrency like Libra can significantly reduce the fees that occur during cross-border transactions. Every year, around $50 billion are taken away by the intermediaries during cross-border transactions. It is estimated to be around 7% of the total money in all transactions (Constine, 2019). Many believe that cryptocurrencies like Libra can significantly reduce these fees. This will not only benefit people who conduct cross-border transactions but also reduce frictions during international trades and benefit the global economy in general.
Why Libra supporters believe that Libra can bring about these and other many benefits while traditional currencies and other cryptos like Bitcoin and ethers cannot?
Firstly, compared to traditional currencies, cryptos have many advantages. Cryptos are traceable. This means that every transaction that has occurred will be recorded on the blockchain and every coin of cryptos can be traced. Moreover, all records on the blockchain cannot be tampered since cryptos are immutable. This means that once a transaction has been completely settled and recorded onto the blockchain, no one can change this record without changing the whole blockchain all together. Furthermore, a crypto’s blockchain, i.e. its database/ledger, is not stored in only one place/node. That is, cryptos are decentralized. Every node of the crypto serves equally as a manager of the currency. This decentralized character of cryptos not only reduces the danger of cyberattacks but also protects the currency from its managers’ corruption.
Now that cryptos have many advantages over traditional currencies, then, why Libra? For example, why not Bitcoin or Ether? Compared to Bitcoin and Ether, Libra has the following advantages:
(i) The price of Libra will be stable. One major issue that has made Bitcoin (BTC)s and Ethers so hard to use is the frustrating volatility of their prices. For example, it is likely that a Bitcoin is worth $9,000 now and drops to only $7000 tomorrow morning. However, Libra is different. Libra is a so-called “stable coin,” whose name reveals its key property that its price is stable. According to Facebook’s plan, the value of the Libra coin will be “pegged to a basket of historically stable international currencies” like US dollars (Constine, 2019). Therefore, the price of Libra coins will be much more stable (in fact, probably as stable as fiat currencies as Tether has proved so far).
(ii) Libra is scalable. Bitcoin and Ether has very small TPS, i.e. transaction per second. At maximum, Bitcoin takes 7 transactions per second and Ethereum takes 27 while traditional financial middleman like VISA takes 24,000+ (Loon, 2019). As a result, users have to wait for at least minutes before their transactions are completely settled down. What’s worse, when too many people are carrying out transactions on these blockchains, the traffic becomes really bad and results in high fees. Libra, however, will have large capacity and be scalable, so it will avoid all these trouble faced by Bitcoin and Ether.
(iii) Libra is beginner-friendly. Libra is aimed to be as easy to use as cash. Users are not supposed to know any technical details about Libra or crypto in general. They just spend it as they spend their cash. No buzzwords. Period.
(iv) Finally and most importantly, Libra has a huge pool of potential users it can easily reach out. Facebook alone has 2.45 billion monthly active users (MAU) (Noyes, 2019). That is, even if only one out of five of them end up using Libra, the total number of active users is still six times more than the total population of the United States. This is dramatically different from either Bitcoin or Ether, which both circulate only within small circles and always face the problem of mass adoption.
In contrast to Libra supporters above, some people strongly oppose this ambitious project. They come from government regulators, financial institutions and also the general public.
First, they are concerned what will come about when currencies are managed not by governments but by for-profits corporations. As Prof. Pistor (2019) of the Columbia Law School has pointed out, the problem is not cryptos but who runs cryptos. Most of the current members in the Libra Association are large corporations and these private companies exist not for public services but for profits. When these for-profits institutions find opportunities to leverage their profits, how much will they care about the common good of the general public? Will they harm people’s interests for their own? For example, will they refuse to make huge profits from secretly supporting criminal activities or terrorism? This kind of images have deeply troubled some people.
Second, people find it hard to trust the big tech giant behind Libra, namely, Facebook. Surrounded by scandals like user data misuses, Facebook is a name many people prefer to take a more cautious stand. Although Facebook claims that it is just one of the current 21 members in the Libra Association and has only one vote out of the total 21 in the committee (Constine, 2019), people still tend to believe that Facebook is de facto the sole leader of the whole project. Afterall, without Facebook’s technology supports and its huge user base, it seems that Libra has no way to come about (Pistor, 2019).
Third, since Facebook announces that Libra will not limit users on what digital wallets they choose to use (Constine, 2019), some people are concerned with prevalence of low-quality or even fraud digital wallets. Because most people will not dive into the technical details of Libra or blockchain, there is a real risk they need to take before getting into the Libra world.
Fourth, people, mostly U.S. regulators, are deeply troubled by the location Libra chooses to place its headquarter — Switzerland. That is, not the United States. People are concerned that which country will regulate the Libra project and that in the upcoming revolution of cryptocurrency and blockchain who will be the leader that Libra chooses (Crapo, 2019).
Lastly but significantly, some points out that even if Libra has nothing to do with either cryptocurrency or Facebook, the amount of capital itself that Libra will hoard is something worth special attentions. As I have explained in the previous section, Libra is a “stable coin.” That is, each libra coin released by the Libra association is backed by fiat money of equivalent value. In fact, the mechanism of Libra is like this. Every time someone buys a libra with her local currency, say $1, a new unit of libra is coined and sent to this person while the $1 goes into a reserve managed by the Libra association called “the Libra Reserve”. Similarly, every time someone sells back a libra for her local currency, say $1, she gets $1 from the Libra Reserve and the libra coin she gives back is destroyed (Constine, 2019). This mechanism means that if one libra coin right now is worth $1 and there are 2 trillion libras circulating around the world, then in principle the Libra Reserve has 2 trillion US dollar cash at its disposal. This is a scaringly huge amount of capital because a simple transfer of it from one place to another will definitely have vast consequences on the global financial market.
While Libra supporters and opposers are arguing against each other, some people are just skeptical about the Libra project itself. They ask, is Libra really something as Facebook has described? FT Alphaville, the financial team blog of Financial Times, sums up these suspicions (FT Alphaville, 2019):
(1) Is Libra really a blockchain project?
Alphaville doubts the claim that Libra is based on blockchain. The team points out that although Libra adopts key elements of blockchain like Merkle Trees and Byzantine Fault Tolerance Consensus Protocol, its data structure is not the one of a blockchain. In a typical blockchain, data are arranged into blocks and each data block is hashed down and added to the next block and this results in a chain-like data structure. However, Libra’s data structure is just a single database without any chain whatsoever.
(2) Is Libra really a decentralized project?
Alphaville also doubts that Libra is too centralized to be a decentralized project. Only members in the Libra Association can serve as nodes of Libra blockchain since Libra blockchain is permissioned. Currently, there are only 21 and thus only 21 nodes (Libra Association, 2019). For comparison, Ethereum is a permissionless blockchain (i.e. anyone can serve as a node of Ethereum) and has around 6,000 to 7,000 active nodes (Etherscan, 2019 November). Hence, Libra is too oligarchic to be a decentralized project.
(3) Can Libra really help the 1.7 billion unbanked?
Alphaville is also concerned with Facebook’s claim that Libra will include the 1.7 billion unbanked population into the modern digital financial world. The team points out that the biggest challenge for the unbanked to digitalize their assets is the lack of basic digital infrastructure in their local regions. Both Libra and the traditional bank system face this exact same problem. Thus, how and why can Libra do better than the old game players?
(4) Can Libra really reduce cross-border fees?
Lastly, Alphaville also doubts Facebook’s claim that Libra can significantly reduce fees for cross-border international transactions. The team stresses that the most important factor behind the current high fees is not a technological one but a regulatory one. That is, high fees result from the long administrative and regulatory processes rather than low-quality technology. Moreover, in order to ensure some satisfactory level of security, this costly regulatory process seems inevitable. In other words, even if Libra creates its own international monetary system, which itself seems an almost impossible task, in order to fulfill the requirements of each nation’s monetary policies, the transaction fees will likely remain high.
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Published at Mon, 16 Dec 2019 03:17:51 +0000
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