Author: Xu Siyan (Tencent Research Institute Senior Fellow), for suit (Tencent Research Institute Research Assistant)
On the afternoon of June 18, 2019, Beijing time, Facebook, the world's largest social networking platform, officially released Libra, a blockchain platform that provides simple and borderless digital cryptocurrency and financial infrastructure services to billions of people around the world. Libra test network has been open sourced on Github, and published official website and white paper to publish project related information.
The move has caused a huge stir in the traditional Internet and blockchain, and is considered to be the most important event in the blockchain field since the birth of Bitcoin in 2008. They have interpreted Libra's project details and the future of the entire blockchain and the world. Possible impact of the financial system.
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So why is Facebook going so far into the cryptocurrency field to release Libra? What is Libra? Where will the future go?
1. Why is Facebook publishing Libra?
As the first company in the "classical" Internet company to test the water encryption currency , Facebook's motives for launching Libra are both internal and external.
As can be seen from the white paper, with the rapid development of the Internet and mobile broadband, almost all mobile phones can now access a variety of low-cost and convenient services. However, there are still 1.7 billion people around the world who do not have bank accounts, are unable to enjoy financial services and traditional cross-border transfers are cumbersome, time consuming and costly. In response to the pain of traditional finance, Libra was born to enable all people around the world, rich and poor, to use a smart phone that is convenient, cheap, and reliable.
This is a magnificent vision portrayed by Facebook and one of the starting points for its launch of the stable currency Libra , but there are still more complicated reasons behind it. The most direct motivation is to enrich existing business models and seek new growth breakthroughs. Advertising revenue has consistently accounted for more than 90% of Facebook's annual revenue. Once this single profit model is constrained, it will pose a fundamental threat to Facebook. In particular, the user privacy leak scandal that broke out last year has strengthened the government's emphasis on user data protection. If the user's control over data is increased, it will undoubtedly increase the cost of Facebook data analysis and thus shake its advertising revenue.
But if it is just to seek new growth breakthroughs, the super-social empire with more than 2 billion users can choose to develop business models, such as cloud computing, games, e-commerce and other more traditional Internet business models. However, Facebook chose to use the stable currency in the field of encrypted digital currency as a breakthrough. It was endorsed by Facebook, other members of the Foundation and the blockchain's own technology, reshaping the global payment system and creating a global currency without borders.
In China, mobile payments can be described as commonplace. Mobile payment is one of the important cornerstones of the in-depth development of the mobile Internet era . In the United States, due to various historical burdens, the penetration rate of mobile payments is very low , and Americans still rely on credit cards and checks. This gave Tencent, Ali and other Chinese Internet companies the opportunity to overtake the corner, and Libra clearly gave Facebook a chance to go beyond the corner.
Second, why did Facebook choose stable currency?
So why does Facebook choose a stable currency instead of other types of digital currency?
First, with regard to the cross-border payment problem that Libra white papers are about to solve, the current global cross-border payment total size is 125 trillion US dollars, and digital cryptocurrency has a natural advantage, which can be cost-effective and time-independent. Conveniently, if Libra has opened up the entire distribution system, Facebook is expected to charge an order of magnitude. However, most word cryptocurrency prices fluctuate drastically and it is difficult to meet the stability requirements as a currency.
Before Facebook, there were also many influential stable currencies in the digital cryptocurrency market, such as USDT, DAI, etc., which were mainly used for deposits and hedging in the digital cryptocurrency market. Stabilizing coins rely on different “stability mechanisms” to increase the degree of stability, thereby increasing their monetary attributes and liquidity, and helping to build a closed-loop of value within the business and financial systems.
At present, there are mainly three kinds of “stability mechanisms” . From the historical market conditions of stable currencies, the best stability effect is the legal currency asset mortgage model (such as USDT, GUSD and PAX, etc.), followed by the digital asset mortgage model (such as DAI). And BitUSD, etc.), the worst is the imitation of central bank regulation mode (such as NuBits). Facebook chose the most stable legal currency asset collateral model, but there are still many differences from the stable currency that has been run.
The biggest difference is the anchoring object . Almost all stable currencies that use the legal currency asset collateral model anchor the US dollar in a 1:1 ratio. The difference between them is mainly in terms of compliance and ecological application, such as fund custodians and banks. Account auditing, smart contract auditing and regulatory agencies, etc., but Libra has clearly adopted a more difficult and radical approach – linked to multiple mainstream currencies (such as the US dollar, euro and yen), anchoring a basket of currencies, which is greatly increasing Libra's stability also undoubtedly increased the project's propulsion resistance.
To put it simply, Libra is a currency based on blockchain distribution. It is currently targeted at the transfer, payment and remittance markets and can be distributed in the Facebook ecosystem and in practical applications such as Uber and Spotify. Different from the well-known tokens issued by the company such as Q coins, Libra is a stable currency linked to real assets, rather than a commodity credit system. The attributes of the blockchain further increase Libra's credit to the sovereign currency level, making global settlement possible.
3. How does Libra work?
So, how does Libra, a stable currency that carries Facebook to reshape the vision of financial ecology, work?
“Libra is divided into three parts to build an inclusive financial system: a secure, scalable and reliable Libra blockchain; a reserve asset that supports its intrinsic value; and a Libra Association that governs and promotes ecosystem development. ." – "Libra White Paper"
The Libra blockchain is currently a coalition chain based on the LibraBFT consensus mechanism . The newly designed programming language “Move” implements transaction logic and smart contracts with high throughput, low latency, flexibility and high security. In view of the frequent security incidents such as smart contract vulnerabilities in recent years, the Move created for digital asset trading is undoubtedly a highlight of this release.
Because of the infinite legal ability of legal currency, it is risky to make smart contracts on French currency, and Libra itself does not have this burden. In the past, smart contracts promised similar functions such as issuing bonuses, automatic repayment of loans, and other digital currencies such as Ethereum.
And with the mortgage interest token Libra things are much simpler, enabling a truly programmable currency. In addition, in the future, various financial assets can be digitized, so that they can be circulated globally. This imagination is much larger than today's mobile payment settlement system. Nowadays, mobile payment is limited to transaction payment and settlement at the retail end. If the financial assets are circulated and traded, Libra's volume will be immeasurable.
In terms of reserve assets, Libra uses a similar amount to anchor a basket of currencies to stabilize the currency price. Therefore, the exchange of legal currency exchange channels, the allocation of reserve assets and the distribution of income generated are also the focus of public attention. At present, in terms of the currency exchange channel, Libra adopts the authorized agent model, that is, users buy and sell Libra through authorized exchanges or other institutions. The KYC verification, transaction fees and supervision involved in this process are still unclear. For user-valued French currency assets, Libra plans to invest it in assets with low volatility, such as bank deposits and government securities.
In order to alleviate the possibility and severity of Libra price fluctuations, the allocation of reserve assets tends to be low-definition government bonds. At the same time, in terms of ensuring liquidity, Libra plans to use part of the funds for short-term securities issued by the government to meet the daily trading volume.
This kind of asset allocation basically meets Libra's demand for stability, but has already moved a lot of cheeses of vested interests, whether it can survive the interests of all parties and successfully carry out the test of time. Of course, Libra also has a plan for the distribution of revenue generated by this process—priority is used to maintain project operations, and residual income is distributed to early-contributing members and other investors.
The Libra Association, which maintains the core of the Libra project, is a non-profit membership-based international organization based in Geneva, Switzerland . Its members are the verification nodes of the Libra blockchain, which can also control new members through voting by the board of directors. Join, rulemaking, management and regulation of reserve assets, and other day-to-day affairs.
At this stage, the Libra Association is mainly composed of 28 companies, non-profit organizations, multilateral organizations and academic institutions from different fields, mostly in the fields of Internet, finance and blockchain, including venture capital, e-commerce, payment, telecommunications and Industry giants such as Mastercard, PayPal, eBay, Uber and Facebook, the number of members is expected to expand by more than 100 in the future, and strive to open up more commercial payment scenarios with strong penetration. Foundation members have naturally solved Libra's new and scene problems , and with the richness of Libra's ecology, its multinational, low-cost convenience will also bring network effects. There is no doubt that if the super-business payment ecosystem around Libra is established, it will have a violent impact on the existing global payment system.
As the number of members grows, Libra's governance mechanisms become more important. At this stage, each member (ie, the verification node) sends a representative to the Libra Association Board of Directors, and has one vote. If there are more than two-thirds of the votes in the major decision, this management mode can be efficient and fast at the beginning of the project. Promote the development of the project, but it is easy to bury a series of hidden dangers.
Although Libra said that it will gradually increase the degree of decentralization and reduce the barriers to entry, it will gradually transition to a non-permitted governance model within five years to enhance the flexibility of the entire ecosystem, but how much decentralization and various interests can be achieved in the future. How to balance with regulation remains to be verified by time.
4. What will happen to Libra's future?
At this point, Libra's vision is earth-shattering, but the road to landing is still full of uncertainties. Judging from the current white paper, official website dynamics and external performance, there is still much concern about the subsequent development of Libra.
From the perspective of external factors, whether it is possible to pass the national regulatory compliance requirements is a difficult test for Libra . First, the nature of digital cryptocurrencies has challenged some of the regulations that prohibit cryptocurrency transactions, such as China and Iran. Secondly, Libra's issuance and design mechanism has challenged the most important functions of the central bank, which has shaken the status of national currency, especially the third world countries with currency instability. Furthermore, the questions and concerns expressed by national regulators are still focused on the reliability of mortgage assets, the security of data privacy, and whether they meet the needs of countries in anti-money laundering and counter-terrorism financing.
Then, before Libra officially landed, the game with national regulators became the most difficult problem for the Libra team. How to achieve commercial payments based on regulatory compliance, how to ensure that user data is not abused, and how to avoid Libra becoming a financial tool in grey areas such as money laundering are issues that the Libra team needs to answer to regulators and the public.
Following the announcement of JPM Coin by JPMorgan Chase four months ago, Facebook led Libra to enter the field of digital cryptocurrency. The entry of top players opened up a new situation for the development of the blockchain and made the competition between the tracks more intense. . How will other industry giants respond? Is it the opportunity to join the Libra Association to contribute to it, or to start a new business model and ecological curve overtaking? These also bring a lot of uncertainty to Libra's future development.
From the internal factors, Libra's ultimate goal is to transition to non-permitted governance and gradually decentralize. However, the early stage is still the chain structure of the alliance. In order to balance the forces of various parties, enterprises, non-profit organizations, multilateral organizations and academic institutions are recruited. At the same time, the core principles of the Byzantine fault-tolerant mechanism are also incorporated into the decision-making rules of the council, but with With Libra's expanding volume and expanding scope, it is still unknown whether existing members are willing to sacrifice their own interests to achieve Libra's ultimate goal in the face of unprecedented temptations.
In addition, in terms of the distribution of income from reserve assets, Libra plans to first cover the operating costs of the system, ensure low transaction costs, and then distribute dividends to early-contributing members and other investors, and support subsequent development. However, the entire distribution rules are formulated and regulated in the process by the Libra Association, and most of the members of the association are also early contributors, ie future income earners. Whether this self-regulatory approach can be accepted by the public is also an unknown. .
Various factors have put Libra's landing on the road, but in any case, Facebook's launch of the stable currency Libra is a bold, open and meaningful attempt. Within two years, Libra has far more significance for Facebook itself than it is for the global monetary system.
It opens another business path for Facebook, enabling it to cut into the online payment space and make its business ecosystem more network-friendly. Users can make payments and send money faster and more conveniently in Facebook's Messenger, Instagram, Whatsapp and other applications, even if it is familiar to Chinese users.
For geeks, Libra may be a compromise to the real world . But new technologies, from inventions to large-scale burst applications, are often the first variants. “Who is going to do it” is more important than “how to do it” in many cases.
Libra wrote in the white paper that “transferring funds globally should be as easy, cost-effective, and even safe as sending text messages or sharing photos.” This echoes Bitcoin’s original intention of “a peer-to-peer electronic cash system”. However, over time, the deflationary nature of Bitcoin has made it a digital asset that cannot achieve its digital cash goal.
Now, Facebook has continued this goal with a (multiple) centralized approach. Before Facebook, there were many star teams, academic elites and engineering elites who tried blockchain projects, but they lacked the necessary conditions from the real outbreak. And Libra, which is later than the industry to reach the battlefield, has a strong latecomer advantage because of Facebook's massive users, multinational attributes and multi-scene ecosystem.
In the long run, the giants opened a Pandora's box, making virtual currency an irreversible element of the digital world. Once global Facebook users are used to using Libra in a variety of scenarios, then people no longer need to convert Libra to French currency, and no longer need third-party asset support. This will pave the way for the digital cryptocurrency to truly spread among users, inciting the traditional monetary system.
Digital cryptocurrency will be truly popular among users, inciting the traditional monetary system. At this point, Zuckerberg showed the power to lead the giants to turn around and win a ticket for Facebook in the future digital currency field, ensuring that Facebook will remain an important player in the future digital economy.
Regardless of success or failure, Libra has laid the first cornerstone for a more free, more inclusive, globalized digital currency world in the future. In the end, the giants set up a platform, and the multi-centered payment clearing network reversed the popularity of the digital cryptocurrency that was born in the private, decentralized, and competed for a pricing power in the traditional monetary system. This is also interesting in the history of spiraling again and again.
Source: WeChat public number @Tencent Research Institute Original title: "Libra: The Transforming Ambition of Social Empire Facebook"