Libra

Libra (LBR), Facebooks digital currency initiative was revealed in June 2019. Libra is a consortium-based blockchain network enabling feeless payments. The project and currency are governed and the transactions are validated by the Libra association members (see picture below).

Libra association members

Unlike with bitcoin, there is a limited set of validators on the network. These are said to be independently chosen, but many have connections to Facebook.

While Libra is neither decentralized nor permissionless, it is still an upgrade to the current financial payment system. Given the backing behind Libra, this project may truly have a positive impact at scale. Furthermore, Libra may be a gateway for new users to enter the decentralized digital asset space.

There is more to Libra than what meets the eye: Libra has smart contracting capabilities and may be a key element in Facebooks ambition to develop a Metaverse.

Libra 2.0 (Refresh)

Following the announcement in June 2019, Libra faced some backlash from regulators which lead to members such as Visa and PayPal leaving the consortium. In order to appease regulators, Libra's Whitepaper was updated. Here are the key changes:

  • The intention to transition to a fully permissionless system was abandoned
  • Libra will offer single currency stable-coins (e.g., ≋USD, ≋EUR, ≋GBP, etc.) in certain jurisdictions backed 1:1 by cash or cash equivalents and short term government securities of that jurisdiction. On top of this, Libra will also offer ≋LBR which is a composite of these single currency stable-coins with fixed nominal weights (e.g., ≋USD 0.50, ≋EUR 0.18, ≋GBP 0.11, etc.).
  • There will be a stronger compliance framework and a desire to work more tightly with regulators and central banks. This is also evidenced by Libra appointing a new CEO and new CLO with a background in the regulatory space. Libra wants to easily be able to integrate CBDCs in the future, which would remove the need to physically hold fiat currencies and securities by the association.
Previous roles of new CEO and CLO of the Libra Association

Libra is more than a payment network

One of the main goals of the Libra project is to decrease transaction fees for cross-border payments. Furthermore, micropayments are a clear use case for a blockchain based payment system, especially if used in the web/social network setting. The consortium based structure, enables practically feeless payments. But Libra most likely has broader ambitions beyond the initial payment use case.

Smart contracts, which have enabled a range of applications on Ethereum, most recently in Defi and in the NFT space, may enable the creation of additional services way beyond payments. As can be read in the Whitepaper, Libra will have smart contracting functionality:

We expect that smart contracts have the potential to add useful functionality to the Libra network beyond its core functionality
(Section 5, Libra Whitepaper)

While Libra is open source, smart contracts cannot be deployed without approval. Unlike on protocols such as Ethereum, using and building on top of the protocol is not permissionless. This will surely stifle innovation but makes sense as Libra is positioning itself as a compliancy first chain.

Identity

While Virtual asset service providers (ex: large wallets and exchanges) will have to follow KYC/AML regulations, verifying their users identity, the Libra whitepaper also hints at ambitions to develop an on-chain identity system:

An additional long-term goal of the Association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition. (Section 7,  Libra Whitepaper)

While the identity format is still unclear, Libra's definition of 'decentralized identity' needs to be taken lightly as Libra itself is not truly decentralized. Portability of the identity also does not mean that it will be truly self sovereign (owned by the individual).

Novi, How it works. ID verification

Novi (ex: Calibra) is Facebooks Libra wallet. As seen above, the Novi website stipulates that users will have to verify their accounts using government issued IDs in order to use Novi. It may be in Facebooks interest to keep identity at the Wallet level. Sign in with Novi could be used by apps such as Uber to quickly verify your identity. This would reinforce the value proposition of Novi, and Facebooks dominance in the online identity space.

Libra will not collect usage data about you. Allegedly Novi won't either. So how will Facebook make money?

Facebook's strategy

Current revenues

Facebook Revenue (Q2 2020)

Currently Facebook makes most of its revenues from advertisements. Libra would enable Facebook to increase its ad sales.

According to David Marcus (Head of Facebook financial):

"If Libra is successful, Facebook will first benefit from it by enabling more commerce across its family of apps. More commerce means ads will be more effective, and advertisers will buy more of them to grow their businesses."

Novi stipulates that it will not share financial data with Facebook to improve advertisements. Naturally, integrating Libra will make it a lot easier to purchase on its social apps, which do collect data. Facebook has already unveiled Facebook Shops which:

...make it easy for businesses to set up a single online store for customers to access on both Facebook and Instagram. Creating a Facebook Shop is free and simple. Businesses can choose the products they want to feature from their catalog and then customize the look and feel of their shop with a cover image and accent colors that showcase their brand. This means any seller, no matter their size or budget, can bring their business online and connect with customers wherever and whenever it’s convenient for them. (Facebook Newsroom)

Facebooks massive user-base and its targeted ad engine are non-trivial to customer acquisition for many merchants (ex: Shopify shops). With Facebook shops, the company is backwards integrating, hoping to offer shops as well as customers a more frictionless shopping experience. By owning purchasing data, targeted ads can become increasingly efficient. Facebook surely also hopes to tap into instagram product placements, from which Facebook is currently completely cut off from. Libra is central in making Facebook shops (and any payments on fb) as frictionless as possible. No more credit card fees, lengthy sign ups etc

New revenue streams

Libra will also create new revenue streams for Facebook. As seen in the previous example, Facebook may take a fee on each sale made through Facebook shops. Furthermore, while Facebook is still heavily reliant on ads, Libra gives it the opportunity to explore novel revenue models in social, around microtransactions, subscription models for creators etc... It will be interesting to see how Facebook reacts to the social token movement.

Facebook may be following the WeChat model. WeChat famously expanded way beyond social, becoming a super app: payments, taxes, gaming... Facebook has already begun expanding into other verticals.

With Libra, Facebooks ambition is to move into banking and financial services through Novi.

Novi homepage
Additionally, if we earn people’s trust with the Calibra (now Novi) wallet over time, we will also be in a position to start offering more financial services, and generate other revenue streams for the company. (David Marcus)

Novi will most likely start by offering borrowing and lending. One can imagine Novi also enabling (social) trading. One thing is for sure, Facebook is looking at the future of Social. Libra enables it to dabble at the intersection of social and money.

Metaverse implications

What is the Metaverse? According to Pierce Kicks, adapted from Mathew Ball, and Tim Sweeney:

A Metaverse is a system-live digital universe, that affords individuals a sense of agency, social presence and shared spatial awareness, along with the ability to participate in a virtual economy with societal impact.

The Metaverse is our next big Milestone as a Networked species. It will allow us to live, work and create realities, redefining what it means to be human. It is the culmination of multiple technologies.

Facebooks Metaverse

Naturally, Facebook, as the largest social media company, which has the most users and user generated content per day, is looking at this space.

Facebook has the most to lose from the Metaverse as it will build an even larger and more capable social graph and represent both a new computing platform and a new engagement platform (Matthew Ball)

Facebook has been active in the space through investments:

Occulus Quest 2
  • And Facebook is building a virtual world: Horizon, which launched in 2020. While still in its infancy, it allows users to socialize, create and play.

So where does Libra fit in here?

As mentioned previously, the Metaverse is enabled by the convergence of multiple technologies. A key piece of the Metaverse is the blockchain component.

The most important part — what makes these worlds traversable and connected — is the shared data layer between them. Without a shared data layer it’d be impossible to travel around seamlessly as the same virtual “you”. [...] I’d argue the shared data layer is what makes the Metaverse the Metaverse. And that data layer will be blockchain-based. (Fred Ehrsam)

This is where Libra may come into play. If done properly blockchain can provide 'true' ownership, enable coordination at scale and be a foundation for the creation of virtual economies.

  1. Digital currencies can offer a frictionless way to transfer value and make payments within and outside of the virtual space. In a virtual world, many transactions are likely to be small (microtransactions). An in-game currency could work, however it would be limited to the game itself, it does not exist outside of the game. Facebook likely wants you to be able to move between its suite of apps and beyond Horizon. Libra would allow you to move beyond Facebook owned platforms, at least within the Libra network.
  2. The next level (more long term), would be to use blockchain technology as foundation layer for in-game scarcity. This would allow to tie land, art, objects and any creation permitted by the system to the blockchain as Non Fungible Tokens (NFTs). This would give each item in the game a unique identifier/token making it scarce within and outside of the horizon platform.
  3. Finally, blockchain and digital assets can provide ownership of the shared space to the users, allowing them to essentially own and govern the Metaverse (Vote on new features, changes, laws etc).

It remains important to note: Libra is not permissionless and does not follow the decentralized/permissionless ethos which is central to the crypto asset space.

Facebook remains a traditional company, with an entire business model reliant on ads. A user owned system is off the table in such a model: Facebook needs to own the ecosystem and the data.

The forced Facebook log-in on the Occulus Quest 2, highlights Facebook's intent to further integrate its products. While the Occulus still supports computer connectivity, this may only be transitionary as Facebook ultimately may want to control the platform that goes with the tool.

But the Metaverse can't be controlled by one company... Otherwise it could set the rules, take possession of your belongings and even delete you.

Libra may offer Facebook a middle-ground between a fully company controlled virtual world and a decentralized one.

For now, Facebook is pushing the space forward by investing in key technologies necessary to the emergence of the Metaverse. Its Occulus devices are making VR more affordable and opening the gates to the masses.

Over the long term, users will flock to the platforms with the best content - and content will be created on the platforms with the best incentives to create. Facebook will have to position itself accordingly if it wants to survive.

Word from the author:

MAX HATESUER

I believe that decentralized blockchain technologies will be the backbone for value transfer, assets, identity and governance within the Metaverse and in our physical world. While it will likely first be adopted in the digital space where the institutions are often lagging behind, these experiments will allow us to build a better, more participatory global economy online as well as offline.

With Tokemy I am exploring these experiments, the digital assets and the Token Economy. I publish regular articles with my thoughts and learnings. Feel free to subscribe and share your thoughts.