On June 18th, Facebook announced Project Libra, a global cryptocurrency and payments system that utilizes blockchain technology. As expected, the eagerly awaited reveal caused a flurry of speculation in both the traditional finance and blockchain industries.
Although the focus has now shifted to Facebook’s regulatory battle with the US government, there is still lively debate occurring regarding what Libra means for the blockchain space as a whole.
Some are hailing it as a major catalyst for adoption, while others believe this will be the end of blockchain startups as we know it. In reality, it is more complex than simply good or bad, and we need to delve a bit deeper into specific industries to understand the ramifications of Project Libra.
Blockchain applications fall into two broad categories: financial and non-financial. The main use cases for Libra are in the financial realm, facilitating things like cross-border payments, remittances, and acting as a stable Store of Value (SoV). Companies in these industries, whether in the traditional finance or blockchain space, are Libra’s main competitors.
One area where there is a clear overlap between Libra and other cryptocurrencies is the stablecoin space. Libra will reportedly be a stablecoin backed by a basket of fiat currencies and government securities. Stablecoins have the major benefit of low volatility, but come at the price of counterparty risk. Users must trust that the issuer will act responsibly with the reserves, which can become very substantial in size.
Given this added risk, why would anyone choose to use reserved-backed stablecoins such as Tether, which requires trusting relatively unknown third parties, instead of Libra, which is overseen by a hundred of the largest and most reputable institutions in the world?
In short, current stablecoin providers could see themselves maintaining most of their current users due to lax regulations and high liquidity.
On the other hand, Libra is likely to become heavily regulated, with governments already scrambling to figure out how Libra will fit into current regulatory frameworks. In most instances, using Libra will require KYC/AML (Know-Your-Customer / Anti-Money Laundering) checks, which could make it unappealing for many crypto users and exchanges. This will give current stablecoin projects an advantage in the short term.
Longer term, as governments crack down on other reserved-backed stablecoins, this advantage will diminish, and the choice between things like Tether as opposed to Libra will lean towards the latter.
Interestingly, barring a total collapse, stablecoins like Tether could actually be more stable than Libra. Tether is pegged 1:1 to the US Dollar, backed by an equivalent amount of USD, while Libra will be using a mixture of short-term government securities and fiat currencies to collateralize their coin. Short-term securities can actually fluctuate somewhat, which could cause the price of Libra to move. For most regular people, a fluctuation of a few percent once in a while won’t be a concern, but for traders and some institutions, it could be a factor.
Although stablecoin issuers might be sweating a bit after the Libra announcement, there are other incumbents who may have it worse. If anyone should be worried about Libra, it is companies in the traditional finances sectors; particularly those in payments and remittances.
Libra could revolutionize the remittance industry, easily outcompeting the likes of MoneyGram and WesternUnion. Transaction fees on Libra will be far lower, and sending money could be nearly as simple as sending a message through WhatsApp or Messenger. This will make it very hard for companies using the traditional financial infrastructure to compete.
The stability of Libra could also provide real value to those living in developing countries, where inflation is out of control. Banking services are desperately needed by people in these and other developing areas, and Project Libra could be part of the solution.
The Libra whitepaper does indeed express the goal of banking the ‘unbanked’, which is one of the core ideals put forth by many blockchain projects, including Bitcoin. While Libra could be considered a “competitor” in these areas, it does have some additional challenges.
In its current form, Libra is centralized and permissioned. As a result, it will be a huge target for regulators, given its extremely ambitious goal of essentially becoming a world bank and currency. This could cause Libra to become much more restricted, which might end up creating barriers to entry.
On the other hand, cryptocurrencies built on decentralized and permissionless blockchains are not so easily controlled, which could actually make them more accessible and allow for continued expansion. Case in point, the US has already called for a moratorium on Project Libra until regulators can grapple with its ramifications, an action that would not have been possible with something like Bitcoin.
Providing financial services to those in developing countries is touted as one of Libra’s main use cases. However, Facebook has only vaguely mentioned how they will solve the last mile problem — the issue of exchanging fiat to Libra and Libra to fiat — particularly in the poorest countries. They basically state that it will be left to local exchanges, but if the exchanges are gouging customers, then the cheap transfer fees are meaningless.
For example, Coinbase charges very high fees for exchanging crypto to fiat, comparable to or even higher than what traditional money transmission companies charge for exchanges between fiat currencies. Additionally, seeing as Libra’s underlying reserve of fiat currencies and government securities will exclusively derive from what they deem as stable countries, it may be difficult for those in developing countries to actually obtain their local fiat currency, which is needed to actually purchase things in their local economies.
Libra definitely has massive potential to provide financial services to the many unbanked people around the world and compete with the likes of Venmo and PayPal in terms of money transmission. However, from a technical standpoint, it is clear that Project Libra is not capable of handling every blockchain application, and it does not seem like they plan to. In fact, the technology is rather mundane, consisting mostly of reused open-source code — certainly not a bad thing — but without any real technical innovations to show.
That being said, the reported maximum of 1,000 TPS (transactions per second) would certainly be sufficient for things like remittances. It is also possible that Libra’s limited smart contract design using their “Move” programming language could facilitate a slow branching out into various DeFi (Decentralized Finance) applications.
However, for high-volume applications involving micro-payments and constant smart-contract calls with complex business logic, the Libra Blockchain won’t suffice — especially if they are facilitating money transfers between billions of people as planned.
For non-financial, real-world businesses in sectors such as communications, gaming, social media (ironically), and other higher-volume industries, the throughput needs to be much higher.
There are several blockchain projects emerging that are much more suitable for these types of applications. Platforms such as Ethereum 2.0, Ontology, and TOP Network are perfecting scalability solutions such as sharding that will provide far greater throughput than Libra, while also remaining decentralized and permissionless.
The fact that the Libra Blockchain is not setting a new technical standard is the best-case scenario for DApp (Decentralized Application) platforms. Facebook and the Libra Association companies can use their vast user bases to make Libra a very successful payments network, but the lack of technical innovation means that most next-generation DApps won’t be able to run on the Libra platform.
So, for payments focused projects and possibly stablecoins, Project Libra poses a threat. However, Libra is looking to be very positive for general-purpose DApp platforms. It will validate blockchain and cryptocurrencies to the general public, while educating and making millions of people comfortable using digital wallets and cryptocurrencies. This could bring in millions of users to the DApp ecosystem, who may have previously been hesitant. The best part is that Libra cannot really handle most general-purpose decentralized applications, which means the DApp platform sector can gain all the benefits of increased awareness, without being outcompeted.
With all this being said, Libra may never even emerge from the thickets of regulations, so for now, blockchain startups can rest easy.
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Asia Blockchain Review is the largest initiative for media and community building in Asia for blockchain technology. It aims to connect all blockchain enthusiasts on a regional scale and facilitate the technological foundation of blockchain through a range of group discussions, technical workshops, conferences, and consulting programs.
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