Facebook’s announcement that they’re starting to develop their cryptocurrency has drawn plenty of media attention. Unlike Bitcoin, Libra will be operated on a private and permissioned network. Furthermore, it will be designed to be a so-called ‘stablecoin’, and will not be speculative in nature. Libra will be backed by ‘real’ assets, including a collection of multiple major fiat currencies, perhaps including USD, GBP, and EUR. The value of Libra will be pegged to this underlying basket of assets. Presumably, the Libra Association will occasionally rebalance and possibly adjust the underlying basket of assets accordingly.
Facebook is attempting to give more people access to basic banking, and improve how easy stable money can be transmitted while doing it cheaply, particularly for those in developing countries who often lack access to basic banking. Will many people no longer see the need for Bitcoin since Libra will be able to function as a global digital currency that is more stable than Bitcoin? Or will Libra be a Trojan horse that leads to greater adoption? Many experts seem to agree that the latter is the case.
How Will Libra Work Exactly?
Libra will be built on top of a permissioned blockchain. But what does this mean exactly? Facebook is hoping the Libra blockchain will have 100 or more ‘validator nodes’, also known as masternodes. These validator nodes are essentially responsible for processing all transactions. These 100 validator nodes collectively control all the transactions on the Libra blockchain. Libra has already announced who some of the validator nodes will be; major multinational companies who will be paying $10 Million USD each to become a validator node on the Libra blockchain. Confirmed companies thus far include Mastercard, Paypal, Visa, Uber, Spotify, eBay, Coinbase, and some others.
Libra vs Bitcoin
While Facebook is still in the midst of determining how Libra will work, its clear Libra will differ from Bitcoin substantially in a multitude of ways.
Bitcoin is borderless. It can be used by anyone, regardless of where they happen to live. Furthermore, being a person isn’t a requirement for owning Bitcoin. It can be owned by a machine or computer program as well. While Facebook’s goal is for Libra to be borderless, many experts highly doubt this will be the case. This is because governments can ban the use of Libra. As centralized organizations, Facebook and the Libra Association are bound to abide by local laws. Because they are centralized, they can be attacked and coerced, unlike Bitcoin which cannot be attacked in such a vector.
There’s no such thing as perfect decentralization. Decentralization is a scale, and Bitcoin is quite decentralized by almost every metric imaginable; full nodes, validators, miners, politically, and architecturally. Libra is only going to have 100 validator nodes and is centralized in many other aspects as well, making manipulation or collusion far easier to achieve.
The first question we should ask is stability compared to what? What’s the benchmark? Some might argue the US Dollar is the benchmark, but even the US dollar becomes stronger or weaker to other assets all the time. Plus over longer periods of time, the US dollar isn’t stable due to inflation of the money supply. A better benchmark for stability would be purchasing power over time.
Because Libra is likely to include a few different currencies and potentially even some other assets as part of the ‘basket’, Libra is likely to be more stable in terms of purchasing power over short periods of time, since even if one of the currencies in its basket strengthens or weakens, the other currencies will balance it out. Whether it remains stable over longer periods of time will likely depend on what assets the Libra Association includes in the basket. If they only include fiat currencies, Libra won’t be any more stable than fiat currency it holds over periods of time. If they include other assets such as gold or government debt which historically retain purchasing power better, Libra is likely to be more stable.
Bitcoin, on the other hand, is not very stable at least when compared to purchasing power, and if that’s the benchmark, it seems unlikely to change in the near future.
Bitcoin is the most secure network in the world. The Bitcoin network has never been successfully hacked, but not from a lack of trying. In fact, the network has been attacked more frequently than any other. And those attacks have only made Bitcoin stronger. Bitcoin’s strength is derived from its decentralization and meticulously designed codebase that has been tweaked over the last 10 years by the best developers in the world. As Andreas Antonopoulos says, Bitcoin is like a New York City sewer rat, exposed to a plethora of diseases, which is exactly why it’s so strong and hard to kill. Libra is unlikely to be as secure because it will have not have been exposed to all the attacks Bitcoin has.
Bitcoin’s governance structure is somewhat convoluted to explain, but efforts have been undertaken to make governance as decentralized as possible, with no one person holding too much sway. The Libra Association will be the single governing body of Libra with each validator node getting to elect 1 person to the Libra Association, making the organization rather centralized.
Bitcoin uses Proof-of-work as a consensus algorithm. Anyone is welcome to mine blocks on the bitcoin network and can be rewarded for doing so. With Libra, there will be no mining. Instead ability to validate transactions will be granted.
Open & Public
With Bitcoin, there are no restrictions on who can participate, regardless of whether it’s for running a node or mining. Libra, as a permissioned network, is the opposite.
Bitcoin is censorship-resistant it’s designed to not allow anyone to block transactions. Furthermore, transactions cannot be regulated or subject to government ‘approval’. This will almost certainly not be the case with Libra. Some people will likely not be allowed to receive funds if they’re from a certain country or are blacklisted for whatever reason.
Bitcoin doesn’t care about who the sender or recipient of a transaction is; it is agnostic to location, religion, or race. That’s almost certainly not going to be the case with Libra.
User Experience & Usability
Libra will likely be easier to use for those less technically savvy than Bitcoin or other cryptocurrencies. Simplicity is simply not a prime focus for Bitcoin developers right now, while Facebook is likely to make it a priority. Furthermore, Libra holders will likely be able to spend their Libra through existing applications already on their phones such as on Whatsapp or the Facebook app itself.
Bitcoin does not pay holders any interest or dividends. However, there are a variety of third party services Bitcoin holders can elect to lend funds through to earn some interest, albeit with significant risk since they would no longer control the Bitcoin. Keep in mind that scams and Ponzi schemes are rampant in the industry; any service offering annual interest in excess of 10% is almost certainly a Ponzi scheme.
Libra will not offer users any interest, at least to start. The Libra Association will likely invest reserves elsewhere so that they, and by extension validator nodes, including Facebook itself will earn significant interest income of deposited reserves. This monetization strategy has already generated significant criticism since Facebook will not be paying back people any interest to start. While Facebook might want to give a portion of the interest earned back to holders, they are currently prevented from doing so under securities laws, since anything interest-bearing or offering a dividend is considered a security under U.S. security laws. In order for the Libra Association to start paying interest, countries will need to modernize their antiquated securities laws to make clear that an interest-bearing Libra would not be considered a security.
Medium of Exchange
A decent number of merchants already accept Bitcoin, but the majority of merchant still don’t accept it. But the same could be said with pretty much any fiat currencies. Canadian dollars practically cannot be spent outside of Canada, and even some Canadian companies price their services and insist on payment in US Dollars rather than Canadian dollars. Bitcoin functions reasonably well as a medium of exchange among merchants who accept it. However, more adoption is still needed and transaction speed needs to be improved. That’s precisely what developers of Bitcoin’s lightning network have been working on, and incredible progress has been made already. Libra is likely to function well as a medium of exchange as well, but it’s not clear just how many merchants will be accepting Libra for payment of goods and services.
Unit of Account
Bitcoin currently does not function effectively as a unit of account. A merchant would rarely price a good or service at say, 0.1 BTC, and be willing to honour that same price a few months later. Libra hopes to function as a unit of account. But will only be successful in this regard if they see widespread adoption akin to the USD which currently serves as the best unit of account. Stability alone is not enough.
Store of Value
Libra aims to function as a store of value. But given that the assets backing Libra will be largely major fiat currencies, Libra should not serve as a better store of value than the currencies backing it. Major fiat currencies such as the Euro and GBP are effective as a store of value over a few months or even years. But over longer periods of time such as decades, even major fiat currencies have historically always been a poor store of value due to inflation of the money supply. Nonetheless, Libra is likely to serve as a far better store of value for people in developing countries who have local currencies that are often much more inflationary than major fiat currencies.
Even though Bitcoin is not as ‘stable’ as Libra will be, it is often considered to be a better store of value since there will only ever be 21 Million BTC; it’s not as inflationary in nature and better equipped to sustain purchasing power. Furthermore, since people sometimes lose access to their private keys, some would consider Bitcoin to be de-facto modestly deflationary.
The Bitcoin network itself cannot be controlled, altered or manipulated by any government entity through law or regulation. On the other hand, Facebook is currently in discussion with governments around the world. Some government officials want Facebook to put a ‘pause’ on development, while others are insisting on a level of control or having a ‘backdoor’.
While it is technically possible for transactions that occur on the Bitcoin network effectively to be changed, it’s in no way practically possible to do so. For practical purposes, we can say Bitcoin transactions are immutable and unchangeable. Whether or not Libra transactions will be immutable remains to be determined. In all likelihood, I suspect they will not be. Governments are likely to negotiate ways with Facebook to have the ability to cancel or alter transactions when need be. If that happens, Libra would not be immutable.
A Safe Store of Value for Wealth
Will the existence of Libra lead people to store their wealth in it? It will clearly offer some advantages to Bitcoin. Libra will be more stable in value, it will be “fully backed”, and it could potentially be easier to use and spend. It could be a better option than existing stablecoins as well since their reserves will likely be audited (unlike most stablecoins like USDT) and retain purchasing power slightly better than a USD-backed stablecoin. Libra is likely to be highly successful in developing countries. This is exactly why developing countries may ban it as it’s effectively a threat to their local currencies.
There’s a high likelihood of success for Facebook’s Libra. Many people will want to store their wealth in Libra because they will believe it’ll hold better value than their local currency. Others will use it because they want to hold or even hide money outside of the traditional financial system where a government cannot repossess it such in the case of a lawsuit, lien, divorce, fraud, or corruption.
I do not believe Libra competes with Bitcoin in any way. I suspect once people start using and adopting Libra, and start being censored, having transactions reversed, being restricted, or banned, many of these people will switch to Bitcoin. Libra will simply be an easier barrier to entry into cryptocurrency allowing people to get more comfortable with it while at the same time enabling them to realize that access to money should not be restricted and censored.
Many people are likely to adopt Facebook’s Libra, but it’s likely to be a trojan horse leading to greater bitcoin adoption. Governments and lawyers are used to being able to order the repossession of currency and assets through a court, and if Facebook’s Libra sees significant adoption, which it likely will, then governments and lawyers will have to adapt.