Abstract

Libra (renamed "Diem") is a payment system proposed by Facebook. It is based on a permissioned blockchain and is designed to support an ecosystem of digital payments and other financial services.

The currency, called the Diem Dollar (formerly known as "Libra"), will be backed by a series of stablecoins, scheduled to be released in 2021. What else do you need to know about Facebook’s digital currency? This article will provide a detailed introduction and analysis.

Introduction

Digital payment is an area full of opportunities. Nowadays, more and more people use cheap smartphones to access the Internet, and many economic activities can be conducted online. Companies such as Paypal, Visa and MasterCard have also followed market trends and launched many online activities. In addition, many projects in the digital currency field are constantly launching new products.

However, unlike other projects, Facebook has already established a large user base. "Huge" might be an understatement. In the third quarter of 2020, Facebook had approximately 2.7 billion monthly active users. With such a large user base, their payment system could become an overnight success.  

What is Facebook Libra (Diem)?

Libra (renamed "Diem") is a blockchain-based payment system proposed by Facebook. The system is designed to provide financial services to users who are unable to establish a bank account. Some of the founding members include Morgan Beller, David Marcus and Kevin Weil.

The project was originally scheduled to go online in 2020, but was delayed due to various reasons. It may be officially launched in 2021.

Libra will be managed and operated by the Libra Association (now renamed "Diem Association"), an independent membership organization headquartered in Geneva, Switzerland. The members of the organization are companies in the blockchain, technology, payment services, telecommunications industry, venture capital fields, and non-profit organizations.  

Members of the Libra Association are responsible for making governance decisions, overseeing the operation of the Libra payment system (projects built on the Libra blockchain) and providing financial support. Facebook's goal is to grow the association to 100 members once the project goes live.

Is Libra launched by Facebook a cryptocurrency?

Libra is built on the blockchain and indeed uses cryptography technology. However, Libra lacks the conventional attributes of a "cryptocurrency".

To learn more about these properties, we will discuss them in our in-depth analysis of cryptocurrencies. In short, for Libra, it is more accurate to call it a digital currency.

How does Facebook's Libra work?

The Libra blockchain (renamed "Diem blockchain") is a permissioned blockchain and is the backbone of this payment system. So, how does it compare to other blockchains?

The Bitcoin or Ethereum we often talk about are permissionless blockchains. This means that all users on the Internet are free to use such blockchains, conduct on-chain transactions, or conduct research and development activities based on them. No one person (or organization) can control their access.

Permissioned blockchain is just the opposite, users must obtain permission from the network controller. More specifically, the application requires special access permissions.

Libra is a permissioned blockchain. Unlike other blockchains, it does not use mining or staking to verify transactions. Instead, it relies on a group of licensed validators (Libra Association members) to verify transactions.

According to the founding team, Libra may transition to a proof-of-stake (PoS) mechanism five years after its launch. However, five years is a long time in such a nascent field. Why not use PoS from the beginning? The reason is clarified in the Libra white paper - they believe that there is currently no permissionless system that is sufficient to support billions of people conducting transactions.

Is Facebook's Libra a centralized or decentralized product?

The mainstream view in the blockchain field is that permissioned blockchains are more like traditional corporate databases, and their degree of decentralization cannot be compared to permissionless blockchains.

In this sense, Libra, unlike Bitcoin and other digital currencies, is not censorship-resistant. These validators must be members of the Libra Association, so the network will ultimately become more centralized.

On the other hand, there are many advantages to controlling and auditing applications that can interact with distributed ledgers. For example, malicious apps and scams can be easily ruled out.

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Libra Payment System

Libra Payment System (renamed "Diem Payment System") supports multiple and legal Single-currency stablecoins pegged to currencies such as the U.S. dollar, euro, and pound sterling. The value of such stablecoins is derived from the so-called "Libra Reserve", so the working principle is similar to the well-known stablecoins. This reserve consists of cash, cash equivalents, and short-term government securities.

In addition, the Libra payment system will also support a multi-currency token called Diem Dollar (previously known as "LBR"). It’s a combination of all these stablecoins, with a set of assets behind them to protect their value. You can think of it as a stablecoin for various stablecoins (and other assets like securities). Different forms of collateral protect Diem Dollar from price fluctuations. For a technology that is expected to become a means of payment, the importance of this effective guarantee is self-evident.

Libra digital currency will be stored in the upcoming Novi wallet (formerly known as "Calibra Wallet"). As you might expect, this digital wallet may be integrated with other social media products, such as Facebook Messenger and WhatsApp. According to the plan, users can freely exchange between US dollars (or other fiat currencies) and Facebook tokens.

“Diem Core” is Libra’s open source code, written in Rust language. You can visit Diem GitHub to view the specific content yourself. According to related plans, Libra will also use a programming language called Move to provide support for smart contract functions.

Can Facebook's Libra replace Bitcoin?

So far, Libra and Bitcoin have obvious differences in nature, and they are very likely to coexist harmoniously in the future. Although both can be classified as digital payment systems, the application scenarios of the services are quite different.

Bitcoin is a decentralized, censorship-resistant digital currency that is usually used as a reserve asset or store of value. Libra is an innovative proposal that relies on a permissioned network, proving to be a more centralized model.

What is the future of Libra (Diem)?

Soon after the Libra plan was announced, Facebook received many negative comments. Criticisms have come from central banks, legislators and regulators. It remains to be seen whether the founding team can integrate all the necessary elements and lead Libra to success.

Summary

Libra is a payment system proposed by Facebook based on a permissioned blockchain. It will rely on Facebook's social media app to provide financial services to users who do not have bank accounts.

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