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Facebook's Libra Blockchain and Cryptocurrency Explained

Facebook announces Libra Blockchain: what does that mean for Bitcoin and the rest of the cryptoasset industry?


What is Libra Blockchain?

Libra Blockchain is a currently permissioned blockchain-like platform managed by a Facebook-led institutional consortium. Did that sentence make no sense to you? No problem, we’ll unpack it and explain it.

A permissioned platform means that a participant needs certain credentials to join the network as a participant, while a permissionless system allows anyone to join the network. Libra has a pre-selected group of institutional validators (aka the group of institutions that can write changes to the ledger) making it a permissioned system. On the other hand, systems like Bitcoin or Ethereum allow anyone with a computer to join the network, either as a miner (with rights to write to the network) or as a full node (where the participant has a full copy of the ledger and keeps the ledger updated with valid transactions inputted by the miners). 

The Libra consortium is planning to eventually open the network up to anyone who acquires the requisite number of staking tokens (the LIT token - more on this below) so that other parties (who are not necessarily “approved” by the consortium) may join as miners/validators to the network. Once this step has been taken, the Libra Blockchain can be considered a decentralized public platform and will have many of the same (although not as extreme) censorship resistant and security guarantees as other currently decentralized platforms. The shift from permissioned to permissionless is supposed to take place within the next 5 years.

If we’re being pedantic, the Libra Blockchain is not exactly a blockchain - as transactions are not grouped into blocks and chained together by hash functions (the literal definition of a blockchain) - but offers many of the same consensus-driven and immutability guarantees (although a bit softer on the guarantees). Further, the platform is intended to be smart contract enabled - allowing for decentralized applications to be integrated and deployed on the network, although initially, the platform will only allow developers to deploy a limited set of pre-approved and audited smart contracts.

The main takeaway here is that Libra Blockchain is the first of its kind - a consortium platform intending to become permissionless, allowing third party developers to leverage the power of its platform to develop new uses and products.

Okay, what about the Libra cryptocurrency?

The Libra Blockchain will be a 2 token platform: one token will act as a medium of exchange or typical currency (the Libra token) and the other will control rights to write to the platform (Libra Investment Token).

The Libra Blockchain is mainly (at least initially) intended to power the consortium cryptocurrency known as the Libra token (or just Libra for short). Libra is a cryptocurrency backed by a basket of global fiat currencies (initially USD, GBP, EUR and JPY) while other assets and currencies may be eventually included in the future. So while holding Libra doesn’t currently remove central bank risk for Libra holders, it does spread that risk across several jurisdictions and decision makers. The Libra token is unlikely to accrue any value as it’s intended to maintain somewhat stable value across a basket of currencies (and maybe commodities in the future).

The Libra Investment Token (LIT) will initially only be available to the founding consortium members but once made available to the public, will act as the gatekeeper for those who desire to run validators and earn transaction fees on the network. The LIT token will act like a security in that it will entitle the holder of the token to certain cash flows. These sources of cash flow are not entirely clear but may include interest on reserve assets and transaction fees earned from users of the network.

So what does this all mean for Bitcoin and the rest of the blockchain industry? 

In our opinion, this is a wildly bullish development for the industry. This is the most dramatic and concerted effort we’ve seen by a collection of name brand institutions to enter the cryptocurrency space. More impressive is that the consortium has made several concessions in the development of the platform, setting the stage for the platform to be opened up in a permissionless manner in the future. We view Libra is a stepping stone for new users into the crypto space at large.

This is where Facebook’s multi-billion user base comes into play. Currently, public blockchains are sparsely used (in the grand scheme of things). Bitcoin has approximately 600,000 daily active users (measured by number of daily active wallets, as we can’t accurately measure the number of individual users since users may control one or more wallets) and ~39.5 million total users (again measured by total active wallets on the Bitcoin blockchain).

Meanwhile, Facebook alone has 2.3 billion monthly (and 1.6 billion daily) active users located across the globe. These are all users who will be introduced to the world of peer to peer transactions, cryptocurrency management (wallets and private/public key pairs), and eventually personal data management, security, and account permissions. 

Why does this matter? In a few words, a platform or network is only as valuable as the number of users on that network (with some adjustment for the activities of the users on the network). Introduced and popularized as Metcalfe’s Law, it’s estimated that a network’s aggregate value follows a quadratic function of the total number of users of the network (i.e. each additional user to a network is more valuable than the immediately preceding new user). Metcalfe’s Law has been studied within the context of Bitcoin’s aggregate market cap and total number of wallets (if interested, you can find more information on the topic here or here). In short, the fundamental value of popular public crypto-networks may dramatically increase as new users are introduced and onboarded to the networks.

We believe that as users interact with and become comfortable using the Libra Blockchain they’ll begin to understand the many benefits of utilizing products built on distributed technologies and yearn for greater control over their assets and data. This logically leads to the desire to own non-sovereign, censorship resistant cryptocurrencies (e.g. bitcoin or ether) and use media and communication platforms built on web3 principles (allowing users to retain and control their data).

Viva la revolución! 

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