Facebook’s Libra project is going to be announced soon. If the Block’s reporting is accurate, it will be announced on June 18 with an impressive list of partners. Everybody from Coinbase to Stripe to Andreessen Horowitz has signed up to be a launch partner of some sort.
Whatever happened to Credits?
This isn’t the first time that Facebook has tried to launch an online currency. It is over 10 years now since Facebook launched Facebook Credits. I was a big fan of Credits back when it launched, and I even bet that it would take off and grow explosively. But Facebook mismanaged the whole project and ended up shutting it down in 2013.
- Facebook charged an insane interchange rate of 30% for users of Credits. This killed it as a payment option for anything other than virtual goods on online games like Farmville.
- Facebook never really integrated Credits into the platform. They didn’t make it easy for users across the globe to get Credits, or for businesses to pay Facebook for things (like advertising) with Credits. So Credits were always a niche payment system that most Facebook users didn’t even know about.
- FinCEN released new rules relating to online currencies in 2013. This made the whole online payments space even more complicated in the US, and it probably impacted Facebook’s decision to ditch Credits later that year.
Thankfully nobody took the other side of my bet.
A Global Payments (and Treasury) Network
Since the early 90s, it has been clear that the internet needs protocols for identity and money. This was so obvious to Tim Berners-Lee that he even built support for it into the http protocol. Status code 402 is as old as its more famous counterpart 404.
Reserved for future use. The original intention was that this code might be used as part of some form of digital cash or micropayment scheme … but that has not yet happened, and this code is not usually used.
Since then, everybody from Paypal to Stripe has been trying to build a new global digital payments system. Stripe calls it their “Global Payments and Treasury Network”. Of course, identity is at the very heart of money, so building a global digital payments system requires building a global digital identity system as well.
Till 2009, all attempts to build a global payments network, whether SWIFT, Visa, or Paypal, were centralized systems accessible to a handful of select participants, usually banks. All that changed when Satoshi Nakamoto launched Bitcoin. It was finally possible to build a decentralized ledger, and hence a decentralized payments network.
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.
But a decentralized ledger needs a native currency that it moves around —and so BTC was born.
Since its launch in 2009, Bitcoin has grown tremendously. My co-founders and I at Simple first played around with it in 2010, and we found the technology amazing. But even back then, it was clear that Bitcoin had a few problems:
- Scalability: Bitcoin was never designed to scale to 100s of millions or billions of users. Peak transaction rates are a few Transactions Per Second at best. Contrast this with Alipay, which claims to do 200,000 TPS at peak volumes around the Chinese New Year.
- Stability: With a fixed supply and varying demand, the exchange rate between BTC and traditional currencies such as the US Dollar has always been highly volatile. Volatility can be great for an asset, but a fundamental trait of money is that its value is pretty stable. Even the most ardent Apple fan would hate to have their salary paid in Apple stock, or have to pay their bills in Apple stock. And BTC is way more volatile than AAPL.
- Governance: The downside of decentralization is lack of consensus. Who exactly decides that its time to upgrade the software? You would think the answer is the Bitcoin foundation, but in practice, disputes around the direction of the network have led to major forks, leading to multiple versions of the network used by different people.
Scalability and Stability
Bitcoin unleashed a massive wave of interest in blockchain technology, and many people have tried to address its shortcomings. The most popular current blockchain, ethereum, scales to a few dozen TPS, and has a lot more functionality than Bitcoin. The Proof-of-Work mining system that Bitcoin pioneered has inherent scalability limitations, but approaches such as Proof-of-Stake and Sharding are being used to scale blockchains faster. Zilliqa for example has tested its blockchain to 1000s of TPS.
Stable digital currencies have also received huge amount of interest, with dozens of stablecoin projects launching in the last few years. The most successful ones have been asset-backed tokens, and there is academic literature showing that marrying asset-backed tokens with blockchains is a very promising approach.
And so to Libra
Clearly, the dream of a native currency never really died at Facebook. But Libra is much more than just another in-platform loyalty program like airline miles. Facebook wants to build a global payment system accessible to all 2.5 billion Facebook users. Almost half the adult population of the planet will be able to buy a digital currency online, use it pay for goods and services, and store their hard-earned money online. If Facebook pulls this off, it will revolutionize the way the world spends, saves, and earns money.
Some predictions about Libra:
- It won’t be launched in the US initially. Facebook is under a lot of regulatory scrutiny in the US, and the chances that a regulator such as the CFTC will grant Facebook a license right now are very slim. In fact, Libra probably won’t launch with any bank partners till its regulatory issues are fully settled.
- It will be pegged to the IMF’s SDR. The IMF launched a global currency a long time ago, but limited its users purely to central banks such as the ECB and the Federal Reserve. However, the SDR offers a generally accepted way of calculating a global currency. If Facebook decides to peg to a basket, it will most likely borrow the IMF’s approach.
- It will be based on a Proof of Stake protocol. Proof-of-Stake is the most promising way to scale a network to 1000s of TPS, and Facebook will almost certainly use it. The initial partners will be “staking” their $10M contributions. The contribution allows them to not only participate in the Libra network, but also potentially earn a return from helping to confirm transactions.
The last time Facebook launched a currency, I was convinced that its reach and scale would allow it to change the US financial system rapidly. Since then, Facebook has grown massively, but I’ve also come to respect the scale and complexity of the global financial system. Global advertising, the business that Facebook is rapidly disrupting, is ~$600 Billion in annual revenue. Global Financial Services, which Facebook is boldly taking on, is ~$15 Trillion in annual revenue. This time around, I am posting a new bet on longbets — Facebook’s Libra won’t take off.
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