Will Facebook’s Libra cryptocurrency transform money as we know it or is it “the most invasive and dangerous form of surveillance devised thus far?” How does the Libra compare to Bitcoin and the U.S. dollar in terms of the attributes of money.
In this episode you’ll learn:
- What is the Libra and how does it differ from Bitcoin.
- What are the different attributes of money.
- What is proof of work versus proof of stake for cryptocurrencies.
- What is the difference between permissionless and permission-based systems for cryptocurrency.
State Machine Replication in the Libra Blockchain by Mathieu Baudet, Avery Ching, Andrey Chursin, George Danezis, François Garillot, Zekun Li, Dahlia Malkhi, Oded Naor, Dmitri Perelman, and Alberto Sonnino
Facebook has announced the arrival of a new cryptocurrency—the Libra. While some find the effort to be a revolutionary and positive influence in the world of currency, others view the Libra as an invasive and poorly structured project that is better avoided. Be sure to listen to the entire episode as David unpacks what makes up the Libra cryptocurrency and whether or not it truly measures up to the definition of money.
Does the Libra fall within the definition of money?
As David has discussed in previous episodes, there are several characteristics that make up what we consider money.
It must store value: Does the currency fluctuate in value as the economy rises and falls? Does
inflation affect how much of the currency you need to purchase things?
It must be a medium of exchange: Does the currency facilitate transactions? Are there fees associated with transactions?
It must be a unit of account: Is the currency used by banks and businesses to calculate their earnings and value their assets?
To be considered money, the currency must also be widely available and able to bear interest—among other things. Does the Libra meet these standards? Comparable to other cryptocurrencies, such as Bitcoin, Libra is distributed ledger technology. It is essentially a database that is shared across those who are part of the Libra community—the validators. In order to buy Libra, the transaction has to be validated by the Libra validators to ensure that everything is above board and that there is actually money backing up the purchase of Libra.
The value of Libra does rise and fall because it is backed by currencies from all over the world. As the economy shifts, so will the value of the Libra. It does facilitate transactions—although there is a fee involved. It is not used as a unit of account. Most cryptocurrencies aren’t. The libra is still permission-based, meaning not just anyone can join as a validator, but anyone can purchase Libra through a verified reseller. It is available 24/7, but it also does not bear direct interest.
Comparing proofs: the Libra vs. other cryptocurrencies
While Bitcoin validators—called “miners”—have to solve complex mathematical equations in order to approve a transaction (proof of work), Libra validators act by proof of stake. Libra validators are speculating that as the currency grows in popularity, their investment in the currency will provide profit. They also receive the interest off of the reserves backing the Libra.
Unlike Bitcoin, Libra is a permission-based currency. You have to be approved to join the network of validators. To do that, it is required that you have a large and valuable collection of manageable assets. Though Libra does eventually want to move into a more permissionless structure, they are unsure of how to do that—especially considering that the founding members of Libra backed up the project with their own money.
How the Libra works: who validates it and where it finds value
One of the top goals of the Libra network is maintaining honesty and the integrity of the currency. In order to keep the network of validators in check, the Libra uses the BFT—Byzantine Fault Tolerance. With the BFT, they can track transactions and transaction signatures.
The reserves backing up the Libra mostly come from the private purses of the validators—those who want to buy into the currency and invest in its future. One of the differences between Libra and Bitcoin is that Libra is backed by other fiat currencies and short term assets. There is something of equal value backing it up. Technically, however, it isn’t backed by hard assets—such as gold. It is backed by the U.S. dollar, which is more a liability than an asset of intrinsic value. The situation begs the question—does the Libra have intrinsic value if the assets backing it up don’t?
Because of the variety of assets backing up the Libra, there are political ties created as well, which could have a huge influence on the value and trustworthiness of the currency. The fact that it is tied to the government and to the influence of inflation could be a turn-off for some who prefer the decentralized Bitcoin.
The projected success of the Libra compared to other forms of currency
Though the goal of the Libra network is to one day be decentralized and permissionless, the working components of that transition are unclear. While there is the opportunity to make money off of the Libra through the reserve interest and growth of the Libra community, there are some drawbacks. One is possible capital gains taxation of the profit made off of the interest on the reserves. A second is the heightened attention of regulators. Because of the way it is structured, it should be regulated, but that also takes away from the autonomous nature that most find attractive about other cryptocurrencies like Bitcoin.
Scheduled to release in 2020, the Libra is an exciting development in the world of cryptocurrencies. While there is no sure way of knowing how well it will launch or maintain its hopes of successfully transitioning from a centralized to a decentralized system, it is certainly something to consider as an option for diversifying your currency holdings. Listen to the entire episode for more detailed insight into what makes up the Libra and what it promises future buyers.
- [0:17] Praise and criticism of the Libra.
- [1:56] What defines money, and does the Libra match up?
- [3:53] Proof of work vs. Proof of stake: Libra vs. Cryptocurrency.
- [9:52] The role of Libra BFT: creating a permission-less and sustainable currency.
- [12:30] Libra’s claim that it has intrinsic value by being backed by assets.
- [16:00] Measuring the reserves and political power of Libra.
- [17:46] How new money is created by Libra compared to other currencies.
- [21:05] Who makes up the Libra validators?
- [22:36] Possible issues with taxes and regulation.
- [24:42] Comparing libra to other cryptocurrencies and the U.S. dollar.
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