Facebook recently announced plans to launch its cryptocurrency ‘Libra’. The Libra whitepaper describes Libra as “a stable digital cryptocurrency that will be fully backed by a reserve of real assets.” But when you take a closer look at how the Libra network is built and operates, you start to wonder, is Libra really a cryptocurrency?
What is a Cryptocurrency?
A cryptocurrency is a digital asset that is non-sovereign, trust-less, decentralized, and uses cryptographic principles for generation, distribution, and transferring data. When you hear the word ‘cryptocurrency,’ your first thought is probably Bitcoin, the first cryptocurrency built on top of a blockchain network.
Bitcoin embodies all the principles required for a digital asset to be considered a cryptocurrency by definition. Nobody owns the Bitcoin network (it’s non-sovereign). You don’t have to trust anyone or an intermediary for your transactions to be sent or received (it’s trustless). Bitcoin has nearly 10,000 nodes located all around the world (it’s decentralized), and its economy is enforced by math (it has cryptographic principles). When digital assets don’t have these properties, blockchain and cryptocurrency advocates would argue that the digital asset at hand is not a cryptocurrency. But instead, a peer-to-peer digital asset.
What is Libra?
Libra is a stabilized (non-volatile) digital asset pegged to a basket of currencies, built on top of a permissioned blockchain. A permissioned blockchain is a blockchain that you can only participate in if a gatekeeper has granted you access.
When Facebook announced Libra, their announcement was met with significant pushback from world governments. Members of the Senate Banking Committee grilled Facebook executives about Libra in a July 16th hearing. The committee expressed doubt that the project could adhere to monetary regulations or generally protect the public good. The hearing showed that there was consensus between government regulators and cryptocurrency purists. Neither believes that one tech juggernaut, Facebook, is an adequate or respectable candidate to spearhead a worldwide financial ecosystem.
Libra’s goal is to provide banking to the unbanked people of the world, those who do not have access to a financial institution or sufficient means to send and receive money. It is estimated that there are 1.7 billion unbanked people globally, mainly in developing countries. The World Bank identifies the rise of global smartphone ownership as an opportunity to provide financial services to this under-served population. But, obstacles such as high transaction fees and high barriers to account ownership still render mobile banking inaccessible to many.
However, Facebook already has the infrastructure in place to provide financial services to this unbanked population. Facebook has a userbase of 2.7 billion people globally. This includes a significant number of individuals who are underbanked but have access to a smartphone, computer, and the internet. That being said, Facebook is looking to use Libra as peer-to-peer money, which will allow the unbanked to send, receive, and store their money for far cheaper than methods currently used.
But despite Libra’s noble and ambitious mission, does Libra have the features required to make it a cryptocurrency by definition? The three defining characteristics of crypto are generally decentralization, trustlessness, and cryptographic architecture. Let’s take a closer look at whether Libra meets the requirements of this three-point checklist:
Cryptocurrencies are Decentralized
Decentralization means that there is no single command-center/entity that supervises, facilitates, or acts as a gatekeeper to the network. For instance, Bitcoin is decentralized; anyone can join and support the Bitcoin network. All they need to do is run a node that contains the Bitcoin ledger to participate–there is no barrier to entry.
On the other hand, Libra is being scrutinized over lack of decentralization; Libra is a permissioned blockchain. This means there is a gatekeeper who permits entry to the network when a potential participant has met the requirements to run a Libra node. The requirement to join the Libra network is a $10 million pay-to-play fee.
In addition, only the members of the Libra Association have permission to run a Libra node and participate in securing the Libra blockchain. At the moment, there are 28 members of the Libra Association, including payment giants such as Visa and Mastercard and tech figureheads such as Spotify and Uber. Even though Libra is decentralized over these 28 members, the Libra association is a single governing body. Libra’s structure is more “decentralized” than a single control point. But, it lands short of the decentralization blockchain and crypto advocates have in mind when they hear “cryptocurrency.”
After all, it is not difficult to imagine these 28 members conspiring to influence outcomes; all they would need is 15 members of the network to agree upon a dishonest result. On the Bitcoin network, you would need to have over 4500 nodes on the network conspire to agree upon a false outcome. This is a rather difficult feat to accomplish when you don’t know who the node operators are or where they are located globally. When you compare Bitcoins decentralization to Libra’s, you start to get a sense of how decentralized Libra really is.
Cryptocurrencies are Trustless
Trustlessness means that a cryptocurrency network’s architecture self-enforces governance. Cryptocurrency networks have a consensus algorithm that can verify whether the transactions that appear on the ledger are legitimate or not. Mathematical proofs enforce the rules of these networks, they do not require parties to instill trust in an intermediary to facilitate the transaction and it’s truthfulness.
When it comes to Libra, you are required to instill your trust in the Libra Association. In a recent hearing in front of the financial services committee, Facebook’s head of blockchain, David Marcus, said that Libra would have fraud protections in place. In other words, transactions can be reversed. On true cryptocurrency networks like Bitcoin and Ethereum, there are no fraud protections in place, and transactions cannot be reversed.
Cryptocurrencies are Cryptographically Secure.
Cryptographic security means that network supporters, both miners, and nodes, solve and use mathematically secure algorithms to trigger crypto transactions.
Is Libra cryptographically secure? Jameson Lopp argues that Libra’s dependence on permission eliminates the need for a cryptographically secure consensus mechanism. Essentially, Libra doesn’t need to be cryptographically secure–its association members already control its blockchain without the intense security required in a trustless environment.
So Is Libra A cryptocurrency?
Libra, is without a doubt, a peer-to-peer digital asset. But calling it a “cryptocurrency” is misleading. Libra lacks the true decentralization, trustlessness, and cryptographic resilience to count itself among cryptocurrencies like Bitcoin or Ethereum.