What is Facebook Libra? The Beginner’s Guide

What is Libra? It is a cryptocurrency launched by Facebook in early 2020. Libra has become the hottest topic in the crypto universe in the summer of 2019 after its white paper was released. Is Libra going to hurt Bitcoin or is it going to be shut down by governments? Keep reading – we’ll have Libra explained for you. This is the ultimate Libra beginner’s guide!

What is Facebook Libra? It’s a stablecoin

Let’s put Libra first to the correct category in the world of crypto. To simplify things, we can divide cryptocurrencies to a three main categories: currencies, platforms and tokens.

Currencies are cryptos such as Bitcoin, Litecoin and Bitcoin Cash. Their purpose is to function as P2P money. They offer an alternative to fiat currencies in the digital world.

Platform category can be also called an ecosystem or operating system for decentralized apps. The most famous members include EOS, Ethereum and TRON. They offer a framework for software developers to create dApps.

Tokens are typically built for a very specific purpose. The most common type is a utility token, which means that the token has utility inside a certain application. Typical examples are Basic Attention Token and Pundi X. T

Facebook Libra belongs to the first category, so it’s designed to be used as a digital currency. It’s not a direct competitor for Bitcoin, though. Libra can be placed in a subcategory called stablecoins.

Stablecoins are cryptocurrencies backed by fiat currencies, gold or other assets. The idea is to replace fiat currencies in the digital world and provide a stable value.

See Facebook’s presentation of Libra:

Libra is designed to be a digital currency used inside Facebook and other apps the company owns (such as WhatsApp). It’s very likely that Libra can be also used in partner sites like eBay, Uber and Coinbase.

There is more in Libra than just the currency part. Libra is indeed a stablecoin, but Facebook launches an open source ecosystem around it. This allows software developers to build apps, which use Libra as the native token.

If we take a step back and look at the big picture, Libra can bee seen as a competitor to PayPal, Skrill or perhaps even Ripple.

Who controls Libra and how does it work technically? Let’s have a closer look.

Libra explained : a revolution in payment systems

Our cryptocurrency reviews being typically by going through the development team’s background, ICO process and so on. The Libra story is a bit different.

Libra is an outcome of a longer development process, which Bitcoin started over ten years ago. We are talking about the disruption of digital payment networks, which has accelerated in the past years.

Youngsters of the internet generation are very much used to doing everything online with a mobile device. Digital payments in mobile games are part of the daily routines. Most of the active internet users want to pay with their mobile device in real-time when they buy and sell things in a Facebook group, for example.

Each country has its own payment applications, which are usually launched by local banks. Then we have global operators like Skrill, PayPal, Western Union and Moneygram. Bitcoin has disrupted this field significantly by bringing a payment system, which requires no third-party trust.

western union
Cryptocurrencies (and Libra) threaten the business model of Western Union.

Operators mentioned above are known to have high fees, which can be up to seven per cent from a single transaction. This money is often taken from the poorest people on earth. We are talking about tens of billions of dollars in fees of remittance services.

Even if the current systems are functioning well, the problem is the lack of integration. We can see similar issues with streaming services. You have Netflix, HBO, C More and a large number of other local operators with sports clubs and other entities. Each charging their own fees.

Facebook’s Libra has made so much noise because the company has an exceptional market share globally. Even if Facebook is not very popular among millennials, it has about 2,4 billion users worldwide.

This is the reason why banks and other payment providers aren’t happy to see Libra entering the market. Facebook can adopt get their currency and payment network to 2+ billion users very fast.

Libra is still a work in progress. The TestNet has been launched and the year 2019 will be used for extensive tests with partners. Libra is expected to be launched in the spring of 2020.

That is, if Libra is not banned by governments.

Facebook won’t control Libra alone

Libra explained shortly: a new cryptocurrency by Facebook? In fact, it’s a much larger project.

There is a Libra Association, which has been founded recently in Switzerland. Facebook wants 100 partners to this association, eventually even more than that. At the time of Libra’s white paper release (June 2019), there were 28 members. The most known ones are VISA, Mastercard, Uber, eBay, Vodafone, Spotify and Coinbase. There are no banks involved, which isn’t surprising.

libra association partners

Each Libra Association member has one vote for governing issues. Facebook’s vote carries no more strength.

It’s not exactly easy to become a member of Libra Association if you are thinking about that right now. An applicant must fill at least two of the following three criteria:

  1. More than $1 billion USD in market value or more than $500 million USD customer balances
  2. Reach more than 20 million people a year, multinationally.
  3. Be recognized as an established top-100 industry leader by a third-party association. Examples would include the Fortune 500 and the S&P Global 1200.

You can read more about Libra Association from this article.

Each Libra Association member brings also 10 million dollars to the pot, which is used to back the Libra currency. When 100 partners are involved, the total backing grows to one billion dollars. The idea is to launch one billion Libra coins with a face value of 1$ each.

In practice, the backing is not just a pile of US dollars. It is the total value of all assets the association holds. Each member has an incentive to be involved because the Libra Association can invest the funds to bonds or other interest-paying instruments. Proceeds will fall to association members.

Libra Association members have also one other crucial role: each will run a validating node in the Libra network. This way they’ll also get access to all the transaction data.

The Swiss foundation is the one holding all the transaction data, user accounts and so on. This way it’s not in Facebook’s possession.

Libra blockchain is run by Proof of Stake consensus

Libra is a cryptocurrency run on a blockchain. There is a lot of debate right now about this fact, meaning if Libra should be called a cryptocurrency. This is because it’s not permissionless, it’s not decentralized, and it doesn’t have any other properties of Bitcoin either.

We can call Libra anything we want, but it is part of the crypto universe for sure. It’ll be traded for other cryptocurrencies, which should be obvious when looking at Coinbase’s involvement.

Libra is technically a platform like EOS or TRON. Just like other 3rd generation platforms, Libra’s consensus is also based on Proof of Stake method. It means there are no physical miners like the Bitcoin network has.

The network validators are the Libra Association members, which we mentioned already. According to Libra white paper, the network should reach 1000 TPS (Transactions Per Second) capacity. This can be increased in the future with 2nd layer solutions like Bitcoin is doing now with the Lightning Network.

Libra’s PoS consensus mechanism is called LibraBFT, which means it’s based on a traditional Byzantine Fault Tolerance algorithm. Libra’s developers have used existing components and then made some changes.

”LibraBFT belongs to the class of classical BFT consensus algorithms. It is based on another consensus algorithm called HotStuff, which in turn borrows some of its consensus logic from yet another classical BFT algorithm called Practical Byzantine Fault Tolerance, pBFT

LibraBFT improves upon HotStuff with a detailed specification and implementation of the Pacemaker mechanism. It also comes with a liveness analysis that consists of concrete bounds to transaction commitment.” (Source)

 

LibraBFT looks very much like the consensus algorithm used by Binance chain and Cosmos. You can read more of the technical part from this article.

The picture below shows the difference between JP Morgan’s coin and Libra coin. It can be found from Binance Research article, which I recommend to read.

JPM Coin vs Facebook Libra

As mentioned earlier, Libra is much more than just a stablecoin. Libra blockchain is open source, which means software developers can create their own dApps using the Libra framework.

Libra TestNet has been launched already. Apps can be programmed with a new language called Move. It’s based on a programming language called Rust, which has a syntax similar to C++.

Libra cryptocurrency and LIT token

Libra has created more discussion than any other cryptocurrency in years. Every single person has an opinion about it, and not just members of the crypto industry.

This is such an important project, that it already scared the central banks just hours after it was launched. The US Senate has also called a hearing regarding Libra.

Libra is a stablecoin backed by a basket of currencies and other investment instruments. It is not a competitor for Bitcoin as an investment, because the value of Libra will always stay in one dollar. It can and will be a competitor for many cryptocurrencies and payment networks, though.

Is Libra a competing with Ripple too? Here is what Ripple’s CEO Brad Garlinghouse has to say about that.

Libra’s planned launch takes place in early 2020. That is if Facebook doesn’t get into legal troubles with governments before that. If they get Libra out, it can reach over 2 billion people very fast. But, how are you going to get Libra?

Facebook is going to launch a wallet called Calibra, which is similar to PayPal and cryptocurrency wallets. Users will go through a KYC process and they can buy Libra for example with a credit card. Possibly (or probably) with other cryptos as well.

Calibra - Libra
Facebook’s current vision of Calibra wallet.

Calibra is developed by a Calibra company. Its task is to develop services and applications around Libra network.

Facebook can speed up the adoption significantly with the help of its partners. Spotify, Uber or PayPal could offer discounts for people using Libra. It’s very likely going to be traded in Coinbase as well.

Let’s go through one more important thing as well, before wrapping up the article. There is also another token called LIT – Libra Investment Token. This is governance token used to govern the network. The value of LIT will be totally separate from Libra.

LIT is only offered to Libra Association members and accredited investors. All profits coming from the assets backing Libra coins will be channelled to LIT owners. There can be also hedge funds and other organizations holding LIT, who haven’t made the 10 million USD investment (like Libra Association members).

Libra Beginner’s Guide – final words

Libra has electrified the crypto scene after its publication. Even non-crypto people are interested in it and everyone seems to have an opinion – for or against.

It is obvious that Libra is more than just a cryptocurrency. We can only guess how big this milestone will eventually be. Time will tell. It’s likely, that Facebook won’t be the last global giant to launch their own cryptocurrency. Google and Amazon might follow suit.

Facebook will be also under heavy criticism and pressure from governments and the banking industry. There are lots of people who want to stop this project in its tracks. It’s possible, and even likely, that Libra will be banned in many countries.

We should remember that Facebook has also many aces up in its sleeve. It’s interesting to see the debate between Facebook and its opponents. How dirty a fight it will be?

Many people see Libra as one of the biggest steppingstones in terms of adoption. It has also given Bitcoin price a boost after its launch. To me, it’s obvious that Libra is needed to speed up the cryptocurrency adoption. If people start to use Libra, they start to use Bitcoin and other cryptocurrencies as well.

There are many critics, who don’t see the value of Facebook’s creation. Here is a tweet storm by Aleksi Grym, who represents the bank of Finland.

Time will tell, who is right in this matter.

In any case, Libra won’t be a competitor for Bitcoin as an investment. It could replace the likes of Tether or some of the other coins in payment use. This is where it could be an alternative to Bitcoin as well.

But one should remember, that the market is full of payment methods and currencies right now. Libra is not going to take the market by itself. There will be always room for alternatives too.

This article was published at 24th of June, just a week after Libra’s white paper launch. It will be updated in the future when more information is revealed.

The official website is libra.org and the Twitter handle is @libra_. You find Libra also from FB at Facebook.com/LibraAssociation/.

Check also the following video for another Libra beginner’s guide.

Image credit: Youtube screenshotFB NewsroomGerd Altmann from Pixabay