After years of preparation -- and months of buildup -- Facebook Inc. (FB, Financial) has launched Libra, its much-anticipated crypto product. In its white paper, Facebook defines its Libra coin digital currency as a “low-volatility cryptocurrency” that will be supported by a “decentralized, programmable database” dubbed Libra Blockchain.
There is just one problem: Libra is not actually a cryptocurrency at all.
Upon close inspection of Libra’s white paper, it seems as if Facebook has ditched much of the blockchain technology that underpins the very concept of a cryptocurrency. In other words, Facebook appears to be tapping into the crypto and blockchain zeitgeist simply as a means to market its new digital payments system.
Abandoning the blockchain
Blockchain technology has been the defining feature of cryptocurrencies. Simply defined, a blockchain is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way." The record of each transaction is called a block, and these blocks are linked together via cryptography into a chain. The distributed ledger system prevents tampering with the blockchain once it is formed.
According to Libra’s white paper, it appears that Facebook has essentially abandoned the blockchain as it is generally understood:
“In order to securely store transactions, data on the Libra Blockchain is protected by Merkle trees, a data structure used by other blockchains that enables the detection of any changes to existing data. Unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra Blockchain is a single data structure that records the history of transactions and states over time. This implementation simplifies the work of applications accessing the blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework.”
Thus Libra replaces the blockchain, which is a “collection of blocks of transactions”, with a “single data structure”. Moreover, the Libra white paper actually suggests that some data -- what would be called blocks in a true blockchain system -- might be archived separately. Once again, this “innovation” represents a fundamental rejection of a defining feature of the technology underpinning cryptocurrency.
So long, decentralization
A major source cryptocurrencies’ appeal has always been their freedom from any central control or monetary authority. Indeed, that decentralization is included among the elements that define a cryptocurrency:
“A defining feature of a cryptocurrency, and arguably its biggest allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.”
As decentralized digital currencies, cryptocurrencies cannot be controlled or manipulated by an authority, such as a government. Yet, turning once again to what Facebook has created, we can see quite clearly that this defining feature of cryptocurrencies is absent from Libra.
Indeed, despite repeated references to the idea of decentralization and to the ideal of “distributed governance” -- throughout the Libra white paper, it is clear that Libra coin will be anything but decentralized in practice. Rather, control of Libra is permissioned, which means that the rules are effectively set by the initial owners of the Libra coin tokens, i.e., Facebook and its development partners.
In other words, Facebook can wield immense power over Libra, far more than is considered normal for a cryptocurrency. While Facebook has waxed lyrical about eventual decentralization a la other cryptos, it is hard to imagine that many people will be willing to simply take the social media giant at its word.
A digital payment platform by any other name
With Libra, Facebook has effectively abandoned the blockchain as it is understood in favor of something else entirely, which it has decided to call a blockchain. In the same fashion, Libra coin is styled as a cryptocurrency, yet clearly is not.
While the broader public, unaware of the nuances of the technology, may not see what Facebook is doing, anyone with even a basic education in blockchain fundamentals can spot the difference.
So why is Facebook calling Libra a cryptocurrency, when it is really just a payments network with some digital banking functions bolted on? The answer may simply be publicity. With cryptocurrency still a hot commodity (even after its post-2017 cooldown), the entry of such a big player was always going to cause a stir.
Facebook would undoubtedly have won a great deal of attention simply by moving into the digital payments space, which is what Libra really is. But it could not have caused nearly the sort of splash it has achieved by hitching its wagon to the cryptocurrency express.
Verdict
Ultimately, Libra may prove to be a powerful tool for Facebook as it penetrates the huge digital payments market. But whatever it ends up becoming, a cryptocurrency it is not.
Disclosure: No positions.
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