On June 18, 2019, Facebook announced the development of Libra, a new cryptocurrency that would be launched on its social networks (Facebook, WhatsApp, and Instagram) in 2020. While we don't have all of the details about how Libra will work and be distributed, Facebook did release a whitepaper outlining the basics of Libra.
For those who have heard of bitcoin, but that are still new to the world of cryptocurrency, there may be some confusion about how this all works and how Libra is different from bitcoin. Well, look no further, this article will outline the major differences between the two.
What is a Cryptocurrency?
First things first, what is a cryptocurrency? There are lots of definitions out there that can get really technical, really quick. For our purposes, I will try to strike a balance and limit the technical stuff as much as possible.
Here's my definition of a cryptocurrency:
A cryptocurrency is a digital form of money (currency) that uses cryptographic protocols (technology) to validate and secure transactions between parties over the internet. Transactions (e.g., transfers from one person to another) are stored on a shared ledger (giant list of accounts and balances), also known as a blockchain.
Cryptocurrencies are digital, there is no physical object (like a dollar bill or piece of gold). They only exist as data within software programs and their respective networks (people and companies interacting with and/or using the cryptocurrency). Cryptocurrencies can be held and sent by using a 'wallet' (mobile, web, or desktop application) or by connecting to other users in the network directly by running a 'node' (software that holds all or some of the blockchain and that can broadcast transactions to the network).
All cryptocurrencies have a way to validate transactions and agree upon who owns how much cryptocurrency. Transactions are validated using cryptography and are recorded in the blockchain according to a set of rules called a consensus algorithm. Cryptocurrencies have different ways of doing it, but all have a way to agree on account balances on the blockchain -- known as consensus.
Now, on to the subject at hand. How do Libra and bitcoin differ? Here are four key differences:
Centralized versus Decentralized
One of the hallmark characteristics of bitcoin is that it is decentralized. In this context, decentralized means that there is no single issuer of bitcoin, no company behind bitcoin, no CEO of bitcoin, no bitcoin bank, and no single government or entity that controls bitcoin. Bitcoin is fully peer-to-peer, there is no trusted intermediary like a bank that stores and sends money from one person to another.
Bitcoin is fully open-source, meaning that anyone can access the bitcoin code and modify it to launch their own cryptocurrency (many have). In addition, anyone can contribute to the development of bitcoin, by submitting code on the bitcoin Github repository. Changes to the codebase are ultimately controlled by a network of stakeholders (developers, miners, exchanges, investors, etc), who must come to a consensus for major changes to be implemented.
Libra on the other hand is centralized. New Libra coins are issued by a central party, called the Libra Association, which will sell Libra coins to authorized resellers. The Libra software codebase will be controlled by Calibra, a wholly-owned subsidiary of Facebook. However, the Libra codebase will be partially open-source in the sense that it will be made available to the public for download and modification. But in order to interact with or accept Libra, you will need to use the authorized/controlled version of Libra maintained by Calibra.
Public versus Private
The bitcoin blockchain is public. Anyone can download the entire bitcoin blockchain and very every single transaction that has ever occurred on the bitcoin network (it's a big file, so it might take a day or so). Bitcoin transactions on the blockchain are pseudonymous, meaning that they do not show the name or other identifying information of the parties transacting. Rather, each party has a public address, which is a string of letters and numbers that is associated with a bitcoin balance.
In contrast, some cryptocurrencies operate in a private network, where you cannot download the blockchain, view past transactions, and verify new transactions. Libra, at least in its proposed form, will be a private blockchain, controlled by the Libra foundation.
Permissioned versus Permissionless
As it relates to a specific cryptocurrency, a blockchain is the authoritative record of who owns what. As I mentioned earlier, a person can use a wallet to store and send cryptocurrency (sometimes called a "client"), but they need to use special software to download the blockchain and participate in validating new blocks (sometimes called a "node").
Bitcoin is a permissionless network. That means that anyone can run a node and mine bitcoin, no permission needed.
Libra is a permissioned network. The only people (really entities) that can run a node on the Libra Network are those who have the permission of the Libra Association.
Ultimately, this distinction relates again to the issue of centralization. In a permissioned system, there is a single gatekeeper who controls the network. In a permissionless system, there is no gatekeeper.
The more people running nodes in a permissionless network, the more robust the system becomes, because there is more accountability (more eyes) and no single point of failure. Additionally, it would take much more coordination to mess with (i.e., change) the history of transactions, as consensus only requires a simple majority (51%) to rewrite history (known as a "51% attack"). Therefore, as the number of nodes on the network increases, so too does the number of nodes needed to reach 51%.
In contrast, in a permissioned system, a central party controls who can run a node and how many nodes will be run on the network. Therefore, it is much easier to rewrite history, block certain transaction, and change the rules of the game. In the case of Libra, a select group of companies and non-profits will run the "validator nodes" (with public companies paying $10 million for the privilege). They set a target of 100 entities at launch, which means that just 51 coordinating entities may be needed to completely change the rules or rewrite the history of (presumably) the world's most widely distributed cryptocurrency. Nervous?
"Stable" versus (Errr...) "Not Stable"
In general, the value of a particular cryptocurrency is determined by the market. To purchase cryptocurrency, you need to find someone who is willing to sell it. Online exchanges are open 24/7 for those looking to buy and sell cryptocurrency. As of the time of this writing one bitcoin sells for about $12,000 USD. But as you probably know, the price of bitcoin can fluctuate quite a bit from day-to-day. Ultimately, the price is set by a pure market, supply and demand. As the most secure and scarce cryptocurrency, bitcoin has outpaced every competing cryptocurrency since it came to being ten years ago.
Some cryptocurrencies, called "stablecoins," tie their value to a fiat (government-issued) currency or real world assets (such as gold) and therefore stabilize the value (against the USD, for instance). There are two ways this can be accomplished: (1) by holding the underlying currency in reserve at a 1-to-1 ratio, or (2) algorithmically pegging the value through a smart contract (basically, through some fancy math and coding).
Facebook's Libra coin will be a stablecoins, though it will be backed by a bundle of different currencies and assets (versus one single currency or asset). As such, the price will remain relatively stable to the major world currencies, though it could have some movement depending upon the mix of assets chosen by the Libra Association.
There are, of course, other differences between Libra and bitcoin, particularly under the hood. However, I've highlighted the most significant differences for those seeking to understand at high level the structural and functional differences between the two cryptocurrencies.
Because Libra is still in the idea phase, this could all change before it reaches launch. But the differences laid out here outline the approach that Facebook is taking. In contrast to bitcoin, Libra will focus on providing a stable value and complying with the same rules that govern the current financial system. This has its advantages, but comes at a cost, primarily in the form of privacy. As of now, it's an exchange that nearly two billion people are willing to make -- trading free access to the world's largest social network for their personal information, web activity, personal preferences, and the willingness to be followed around on the web by advertisers.
Facebook will have to overcome a number of obstacles to realize its vision (such as the U.S. Congress), but they are in about as good a position as anyone to pull it off. Regardless, it's an exciting time for crypto and will likely introduce many millions of people to bitcoin and the myriad cryptocurrencies out there.