Thoughts on Facebook Coin – The Control
Facebook recently announced its cryptocurrency initiative called Libra, though Facebook Coin is a more appropriate name for it. The establishment of the Libra Association implies that the initiative lies outside the control of Facebook but make no mistake about it, Libra is a Facebook-controlled operation for the foreseeable future.
Given that Facebook has reached massive scale with over 2.2B users across its suite of products, there’s been a lot of excitement about the announcement from a mainstream audience. There’s also been a lot of skepticism from crypto purists.
Is this the catalyst the industry needs to reach mainstream adoption for use cases beyond speculation? Or is this a doomed attempt by a large incumbent to enter a fast growing category that it already missed the boat on?
Some have compared Libra to Google Plus (a 2011 effort by Google to get into the social networking category which ultimately failed), but it will likely look much more like Bing, Microsoft’s 2009 search initiative; not a massive failure or a massive success but a viable product that serves a purpose for some users. Microsoft Bing has not made anywhere near the impact that Google has on the world, but 10 years after its launch it still exists as an alternative to the Google search engine and is useful for a niche user base.
The stablecoin opportunity
The growing demand for cryptocurrencies designed to be price stable is clear. Tether is the second most widely used cryptocurrency today, trading over $1B per day despite it being centralized, led by an untrusted team who recently got a court order from the New York Attorney General and lacking transparency. MakerDAO broke out as the most successful decentralized application in 2018 and there’s now over $432M worth of collateral backing $90M worth of the dai stablecoin. USDC is a new stablecoin entrant launched last year by Coinbase that now trades hundreds of millions of dollars in volume a day.
It’s a logical step for Facebook, the largest and most important social network in the world, to launch their own stablecoin given the clear and growing demand for stablecoin. Big banks like JP Morgan and Goldman Sachs are going after the same opportunity (see JPM Coin and the Goldman Sachs initiative), but Facebook has broader distribution, more technology acumen and a higher level of trust from consumers globally (though that trust may be on the decline). If Facebook can create a compelling product and leverage their users and brand in the process, there’s a massive opportunity there in theory.
Limited upside in practice
While the stablecoin opportunity is massive in theory, there’s two primary challenges likely to limit the success of Facebook Coin in practice. I’m not picking on just Facebook here; these two hurdles exist for every corporate cryptocurrency. But I don’t think any corporation can overcome them, Facebook included:
- Given that Facebook is a huge company and heavily scrutinized by regulators, it’s impossible for it to implement most of the features that have made cryptocurrencies successful. There are many different regulatory restriction that are likely to arise, but I think the most limiting is the fact that a broad group of global individuals can’t be early owners and champions of Libra. Ownership of Libra is being restricted to large, brand name companies and investment funds with over $1B in AUM, which means that unlike Bitcoin (BTC) and Ethereum, individuals from around the world can’t have early skin in the game. Any cryptocurrency that lacks broad, distributed ownership from people from around the world early is at a major disadvantage.
- A brand name like Facebook creating a cryptocurrency and getting other brand names like Uber, Lyft, Visa, Paypal onboard sounds great on the surface but faces the innovator’s dilemma. None of the companies involved have strong enough incentives to focus on it as their primary initiative. Cryptocurrency is a small part of their overall corporate strategy and they have existing profit centers to uphold. Focus and dedication is essential to making any new venture great and I just don’t think that something like Libra has enough incentive alignment from great people who are solely focused on making it work to succeed at a large scale.
Positive for the industry regardless
The good new is that this initiative has already catalyzed more developer interest and investor interest in cryptocurrencies broadly. And when it launches it also has the potential to introduce millions of new people to public key cryptography via the Calibra wallet that Facebook plans to launch in tandem.
A more socially scalable stablecoin project with purely aligned incentives and buy-in from a broad global user base like MakerDAO has much higher upside potential, but Libra still has the opportunity carve a nice niche for itself. To do so, the team working on it would be wise to do the following:
- Keep things simple and launch a basic stablecoin quickly. Launching a centralized stablecoin is not difficult and there’s a pretty well understood playbook for it. Facebook should avoid trying to do too much and launch a nice wallet and stablecoin for users ASAP.
- Leverage the global userbase to airdrop coins to the unbanked. There’s no other company on the planet batter equipped to reach the unbanked, and investing in a large airdrop of coins to verified users globally could be a powerful way to bootstrap the network and connect more people in the world to the global economy.
Published at Mon, 01 Jul 2019 16:30:04 +0000
