What is Facebook Libra (Diem)?
Libra (renamed Diem) is a payment system proposed by Facebook. It is based on a permissioned blockchain intended to support an ecosystem for digital payments and other financial services.
Its currency, called Diem (originally known as Libra), will be guaranteed by a basket of stablecoins and is scheduled to launch in 2021. But what else do you need to know about Facebook’s cryptocurrency? Let’s find out together.
Introduction
Digital payments are an industry with many opportunities. More and more people have access to the internet via smartphones, and much of the economic activity takes place online. Companies like PayPal, Visa and MasterCard already handle a lot of this business. Furthermore, many projects in the crypto sector are trying to build products for this sector.
However, unlike other projects, Facebook already has a large user base. Well, big might be an understatement. In the third quarter of 2020, Facebook had approximately 2.7 billion monthly active users. This could potentially make their payment system an instant hit.
What is Facebook Libra (Diem)?
Libra (renamed Diem) is a blockchain-based payment system proposed by Facebook in 2019. Its goal is to provide access to financial services for people without a bank account. Founding members include Morgan Beller, David Marcus and Kevin Weil.
The launch was originally scheduled for 2020, but has been postponed for various reasons and will likely take place in 2021.
Libra will be governed by the Libra Association (renamed the Diem Association), an independent association based in Geneva, Switzerland. The members of the association are various companies from the blockchain, tech, payments, telecommunications, venture capital and non-profit sectors.
Libra Association members are responsible for governance decisions, overseeing the operations of the Libra payment system, projects developed on the Libra blockchain, and granting grants. Facebook aims to have 100 members in this association by launch.
Is Facebook Libra a cryptocurrency?
Well, Libra is based on a blockchain, and it uses cryptographic technology. However, the term cryptocurrency usually implies specific properties that Libra does not possess.
If you want to find out more about these properties, we talked about them in our in-depth analysis of the cryptocurrency. In short, it would be more correct to call Libra a digital currency.
How will Facebook Libra work?
The Libra Blockchain (renamed Diem Blockchain) is a permissioned blockchain that forms the backbone of this payment system. But what sets it apart from other blockchains?
We often talk about permissionless blockchains such as those of Bitcoin or Ethereum. This means that anyone with an internet connection can freely access them, transact or develop on them. There is nothing and no one controlling access.
In the case of a permissioned blockchain, however, the situation is quite different. To use it, you need permission from whoever is controlling the network. More precisely, the applications you use will need to have special access.
The fact that Libra is a permissioned blockchain also means that it doesn’t use mining or staking to validate transactions like many other blockchains. Instead, it will rely on a group of authorized validators (the members of the Libra Association) to validate transactions.
According to its creators, after the first five years Libra could turn into a Proof of Stake (PoS) system; however, this is a very long time in such a nascent industry. So, why not use PoS right from the start? Libra’s white paper explains the reasons behind this decision. In their view, there is currently no permissionless system capable of supporting the activity of billions of people.
Is Facebook Libra decentralized or centralized?
According to many in the blockchain industry, permissioned blockchains cannot have the same degree of decentralization as their permissionless counterparts, as they are more like a traditional corporate database.
In this sense, Libra is not as resistant to censorship as Bitcoin and other cryptocurrencies. Since these validators must be members of the Libra Association, the network could end up being relatively centralized.
On the other hand, controlling and verifying which applications can interact with the distributed registry can have its advantages. For example, it may be easier to rule out malicious applications and scams.
The Libra payment system
Libra payment system (renamed as Diem payment system) supports several single currency stablecoins pegged to fiat currencies, such as USD, EUR, GBP. These work in a similar way to the stablecoins you may already know, in that their value is derived from a reserve called the Libra Reserve. This reserve consists of cash, cash equivalents and short-term government bonds.
Additionally, the Libra payment system will also support a multi-currency coin called the Diem Dollar (formerly LBR). It is a kind of a combination of all the other stablecoins in the system, and is backed by a basket of assets that ensures its value. You can think of it as a stablecoin of stablecoin (and possibly other assets, such as security). The idea is that these various forms of collateral can protect you from volatility – an important aspect for something that aims to act as a form of payment.
The Libra cryptocurrency can be stored in an incoming wallet called Novi (formerly Calibra Wallet). As expected, this digital wallet could be integrated into other social media products, such as Facebook Messenger and WhatsApp. According to the plans, users should be able to easily convert between US dollars (or other fiat currencies) and Facebook’s currency.
Libra’s source code, called Diem Core, is open source and written in Rust – you can consult it directly on Diem’s GitHub page. According to plans, Libra will also support smart contract functionality through a programming language called Move.
Will Facebook Libra Replace Bitcoin?
At this point, it is evident that Libra and Bitcoin are fundamentally different and may very well coexist in the future. While both can be considered digital payment systems, they aim to serve different use cases.
Bitcoin is a decentralized and censorship-resistant cryptocurrency that often serves as a reserve asset or store of value. Libra, on the other hand, is a proposal based on a permissioned network that suggests a more centralized model.
What is the future of Libra (Diem)?
Facebook has received several criticisms following the original Libra announcement, mostly from central banks, lawmakers and regulators. It remains to be seen if they will manage to combine all the elements necessary to make Libra a successful project.
Closing
Libra is a payment system proposed by Facebook based on a permissioned blockchain. Its goal is to offer financial services to people without access to the banking network through Facebook’s social media apps.
Do you have any other doubts about Facebook Libra and digital payments? Check out our Q&A platform, Ask Academy, where the Binance community will answer your questions.
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