Babbitt Column | Interpreting Libra's Asset Reserve

Answer a few questions: 1. What is the purpose of the reserve? 2. How is the reserve established? 3. How do different participants participate and interact with the reserve? 4. How does the reserve change over time?

Note: The description of the reserve is Libra's economic model. Libra's economic model essentially has three parts: as a functional token, the Libra token itself that acts as a global currency in the future; maintaining Libra stability, maintaining value, and providing Libra with a reserve of cash flow gains; A security token that is used to finance the operation of the project and pay back in the later stages.

Purpose of reserve

Note: Libra is a combination of stable currency and public chain. It intends to use the global stable currency to function as currency in many regions, and at the same time provides the function of public chain smart contract, which makes Libra "programmable" and becomes an application platform. As a result, Libra will become a global online payment currency under the most basic conditions, and will also open a new phase of asset-winding and chain application traffic.

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At present, many digital currencies, such as Bitcoin and Ethereum, are not supported by the underlying assets. The result is that investment or speculation has become the main application scenario, that is, when users purchase, they hope that the price of the currency will rise and can be in the future. Sell ​​at a certain point in time to make money. But because the market's long-term value and success in these digital currencies, and how many successful expectations, are rapidly changing, the prices of these digital currencies are also changing, and in many cases are very big changes.

So in order to serve a wide range of applications, Libra's design is essentially a stable currency. People with Libra can expect a Libra price today to be about the same as tomorrow, and the price will be similar in the future. That is, consumers can basically have confidence in Libra's price stability, just as people who hold the euro know that the amount of euros used to buy a cup of coffee today and tomorrow is similar.

This reserve is the core mechanism for achieving value preservation. By having each Libra backed by stable and liquid assets and working with competitive liquidity providers and exchanges, users can have confidence in Libra's liquidity and value stability, that is, Selling any amount of Libra at any time will keep the price stable. This gave Libra intrinsic value from the outset, helping it to withstand the price volatility of other digital currencies due to speculation. In short, the significance of setting this reserve is to keep Libra safe and stable.

How is the reserve set up?

Note: Libra's reserve deposits are all legal currency, and as time goes by, some of the legal currency is used to invest in low-risk securities, so the Libra reserve will be a portfolio of legal currency savings and low-risk securities.

Here are a few questions to explore. First, where does the money for purchasing these reserve assets come from? Second, how are these assets invested? Third, where are these assets placed? Fourth, what is the reserve asset behind Libra?

Where does the money come from? There are two sources: investors from investment tokens (note: a high probability is a security token, ie a securities token), and Libra users. The Libra Association will issue Libra tokens to founding members as an incentive to promote Libra's use among merchants, users and developers. The funds used for incentives will come from privately funded funds. On the user side, any new Libra tokens must be produced with the same amount of legal currency to purchase these Libras. Therefore, the size of the asset reserve will rise as the demand for Libra increases. Simply put, Libra can only be created in one way, whether through investors or through regular users—that is, buying more Libra through legal currency while growing asset reserves.

How is the reserve funded? Libra users will not receive investment income from the reserves. Reserves are used to invest in low-risk assets with long-term gains. The revenue generated by these benefits will first be used to support the Libra Association's operating expenses – investing in ecological growth and development, donating related non-profit organizations and multilateral organizations, funding for engineering and research, and so on. After all the expenses have been paid, the remaining part of these investment proceeds will be used to pay dividends to early investors to reward their early contributions to Libra. Because these reserve assets are low-risk, low-interest, early investors (note: investors in securitization tokens) will only be successful if the Libra network is truly successful and the reserves grow to a large scale. Significant return.

Where is the reserve? The reserve will be placed in geographically dispersed custodians with investment-grade credit ratings, which will eliminate default risks, protect reserve pool assets, provide high auditability and transparency, and avoid the risk of centralized reserves. . Achieving efficient operations is a key factor in the choice of hosting organizations and the design of managed infrastructure.

What are the specific assets behind Libra ? The actual reserve assets will be a collection of low-volatility assets, including bank deposits, government-issued securities, and the currency settled by these securities should be issued by a stable, credible central bank. Since Libra's value will be effectively linked to a basket of currencies, Libra's price fluctuates from any single currency point of view. The reserve is set to shift the likelihood and impact of these fluctuations, especially the negative ones, including during the economic crisis. In order to achieve this goal, the reserve and reserve asset pools are set up in consideration of both capital preservation and liquidity. In terms of capital preservation, the Association invests in stable government bonds with low default risk and low volatility. Not only that, but the reserve also diversifies investment risks by investing in multinational government bonds. From the perspective of liquidity, the association will invest in short-term securities issued by the government. They are all very liquid, and the daily market turnover can reach tens of billions or hundreds of billions of dollars. These measures allow the size of the reserve and the size of the Libra issue to be dynamically aligned, that is, the assets of the reserve can be quickly realized.

How are the relevant participants involved? How do they interact with the reserve?

Users will not directly contact and interact with the reserve. In order to ensure efficiency, there are association-licensed acceptors to carry out large amounts of legal currency and Libra exchange transactions. These acceptors will integrate with exchanges and other institutions that trade digital currencies to provide users with a redemption channel between Libra and French currency.

Libra's association does not have a monetary policy. It essentially carries out only two actions of “coining” and “destroying”, and these two actions are carried out through a concessionaire, when there is demand. So users don't have to worry about the Libra Association's unauthorized introduction of inflation or the depreciation of Libra. The new Libra will only be released when the acceptor puts the corresponding value of the legal currency into the reserve. Through interaction with the charter acceptor, the Libra Association will release Libra as demand grows, destroying Libra as demand shrinks. Because the reserves are not actively managed, all Libra's appreciation and depreciation will only be due to fluctuations in the foreign exchange market involved in the reserves.

The Libra Association will bring Libra tokens online to multiple compliant online exchanges around the world. These exchanges will provide users with tools to buy and sell Libra on the web and mobile.

User protection and enforcement

Customers of financial services and financial products may be vulnerable. The Libra ecosystem has a strong commitment to user protection, and the Libra Association also knows that regulators responsible for user protection are deeply involved in the construction of Libra services within their legal jurisdiction. In the early days of the Libra network, the founding members of the Libra Association promised that they would work with regulators to create a regulatory environment that encourages both technological innovation and high standards of user protection.

Just as there are bad guys in any currency and financial infrastructure, the bad guys will also try to use the Libra network to do bad things or gain illegal benefits. Although the Libra network is an open network that everyone can use over the Internet, the main terminals of the network, mainly wallets and exchanges, will follow appropriate legal and regulatory rules and work with law enforcement. Further, like many other blockchains, Libra blockchain transactions will be publicly visible, allowing them to be open to third parties for analysis, detection and punishment of fraud.

How does the reserve change over time?

The reserve will be fully collateralized. That is to say, today, tomorrow, or at any time in the future, users can maintain confidence in Libra's price stability, that is, users can exchange Libra into legal currency through the effective trading market at any time, and the price will only be in the value of its reserve assets. Floating in a small price range up and down. The Libra Association may occasionally change the composition of a basket of asset reserves to cope with large shocks in the market environment (such as dealing with economic crises in specific regions). But the goal is the same, and the goal is still to preserve the value. Furthermore, the adjustment of this portfolio requires a very special external environment and is approved by the majority of the members of the Libra Association.

Very importantly, the size of the reserve assets is determined by the size of the Libra held by the user. Because Libra is different from many other digital currencies, the supply of money is not limited by external factors. This is important for adjusting the size of the currency distribution in Libra's entire ecosystem. This mechanism will also eliminate the run-through problem, because the usual run is because a currency has only a partial value of the asset reserve, so users always want to get money before others. Libra is backed by 100% equal asset reserves and sufficient exchanges, so regardless of the Libra's liquidity, no matter how many people hold Libra, users can fully convert Libra back to French currency in a small price range.

Our goal is to have Libra coexist with the legal currency that already exists in the real world. Since Libra will be a global currency, the Libra Association decided not to develop Libra-based “monetary policy”, but naturally inherits the monetary policy of the central bank of the corresponding currency in a basket of asset reserves. This way of interacting with the reserves is more like the way the Hong Kong dollar operates (the currency board). Unlike the central bank, the central bank can independently issue additional currency, and the way to stabilize the currency is to have 100% of all issued currencies. Equivalent asset collateral. There are two main reasons for using this full mortgage. The first is stability because the underlying assets of the mortgage are low volatility. The second is to protect Libra from fugitives in the future without adequate asset reserves.

Note: The essence of Hong Kong dollar is a dollar “Currency Peg”, while Libra's mechanism is a “Currency Peg” consisting of a basket of monetary assets.

An important goal of the project is to provide low-volatility cryptocurrency for Shu billion people, which can be used as a global, low-friction cost exchange medium from the outset and can be used as an online payment. tool. The Libra Reserve has played an important role in maintaining Libra's value, building trust, and protecting users/business/developers' resources.

Gradually, Libra will gradually become an unlicensed network. The Libra Association will also explore further increases in the geographical dispersion of Libra reserves and continually improve the portfolio to combat price volatility.

Note: Libra is a licensed public chain so far, that is, the network needs to be licensed (for example, joining the association as a member, and the addition of new members requires the association's permission). The true decentralized public chain is the unlicensed public chain. Unlicensed, high-performance public chains have been deeply explored and implemented in the blockchain industry, and these technologies will merge in the future.

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