What Is Libra?
Libra is best described as a Merkle tree accumulator with smart contract functionality under a dBFT-like consensus model. The blockchain is permissioned with stated intention to become permissionless within 5 years. In terms of design, Libra makes good choices for security and scalability, but heavily sacrifices decentralisation.
Libra uses a 2-token system:
- Libra: a non-pegged uncapped stable coin backed by a reserve.
- Investment token: represents an investment in the reserve.
The Libra reserve is invested in “low-risk assets that will yield interest over time.” Any dividends from the investment of the reserve will be paid first to the Libra Association – which includes Facebook, Visa and Mastercard – then, if any remaining, to investment token holders. The Libra Association is a Swiss not-for-profit organisation. Members of the association have exclusive access to run nodes at the time of writing. Governance is achieved through decisions of Association members with voting power proportional to the amount of investment token held. Protocol changes demand a supermajority: ⅔ of the votes. Long-term, Libra “plan to gradually transition to a proof-of-stake system.” The smart contract language, Move, remains to be fully implemented.
Why Is Facebook Doing This?
A large part of Facebook’s strategy stems from the fact that their largest markets are also ones that produce the lowest in advertising income. The average revenue per user in the United States is $34. In India, that figure is as low as $3. Combined with difficulties in moderating the viral spread of fake news and hate speech, Facebook had to look for alternative ways to generate revenue. Taking a cut of transactions instead of selling user data meant low operational overheads and higher revenue. It would also mean Facebook could hedge itself from a complete collapse of the advertisement driven models of web 2.0 and be a crucial platform as we transition away from the attention economy. Our analyst Joel John covers more on the reasoning behind Facebook’s strategy here.
What Does This Mean For The Web?
Facebook has already begun seeing backlash from regulators. It has also seen the Bank of England suggesting it is open to holding reserves for digital payments startups. As Jamie Burke said in this recent interview with Sky Network, Facebook could realistically use financial data with the social context of what people want to purchase. Thereby improving ad targeting and selling with improved context on what the individual wants. For a generation of web 2.5 applications, the gap between them and traditional ones like Facebook them is closing and the latter has huge cash reserves to pay regulators and move quickly. The social network could also upend how digital identities function currently given their vast network of over 2.3 billion users across three prominent platforms. However, existing open identity standards already offer key solutions for banking the unbanked. Phil Windley suggests in this post that although Libra may be good for the crypto space, financial inclusion should not necessarily come at the cost of privacy. It is too early to suggest whether Libra will become a raging success like WeChat or will become yet another banking consortium that struggles to see traction. However, what is evident is that the world’s largest corporations are now building on and deploying a blockchain solution. That’s one small step for a social media network, a giant leap for the ecosystem.
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