Cryptocurrencies are booming again. Facebook’s draft digital currency Libra resembles the crypto currency Bitcoin, but there are significant differences. And these have an impact on users.
This is what the future could look like when Facebook’s plan to introduce Libra as the world’s single digital currency comes to fruition. Except in China, where Facebook services have long been blocked. However, it is not Facebook alone that stands behind the new currency, the Internet giant is only one of just under 30 companies.
In addition to the Libra project, Facebook also announced that it would develop its own wallet for Libra together with its subsidiary Calibra. It will be integrated into Facebook services such as Facebook Messenger and WhatsApp. In this way, the more than two billion Facebook users will become potential users of Libra.
The announcement of the company’s own digital currency has made waves – both in the world of crypto currencies and among regulators. With such a gigantic user base, Libra will be a competitor to Bitcoin from day one. But there are big differences between Bitcoin and Libra.
Exclusive Club Libra Association
It starts with the organization: Libra is to be backed by the Libra Association, an independent non-profit organisation based in Geneva, in which Facebook, MasterCard, Visa, PayPal, Spotify and Uber are also involved. In the end, there will be up to 100 companies to steer the fortunes of the Libra – the ticket for this exclusive club costs 10 million US dollars. Bitcoin, on the other hand, is merely a protocol, computer code, written and published by an unknown person under the pseudonym Satoshi Nakamoto.
The Bitcoin protocol is public, anyone can implement Bitcoin wallets, run nodes to validate the blockchain, or process transactions with a Miner. Anyone can also propose changes to Bitcoin or implement them themselves – if the majority of others take them over, they are introduced.
In short, Bitcoin is an open, global network in which anyone can participate. There is no central office and no ruler, Bitcoin is a decentralized network that cannot be shut down. While there are companies that base their business model on Bitcoin in some way or another, such as Exchanges or mining companies, the existence of Bitcoin does not depend on any company.
With Libra, things look a little different: The network is only open to the member companies of the Libra Association, only they validate new transactions. In addition, the members of the organisation are known. This centralisation around the Association brings with it points of attack. Regulators could exert pressure to censor certain transactions, reverse them, freeze accounts or completely exclude certain individuals from the network. This is simply not possible with Bitcoin’s decentralized peer-to-peer network.
It is questionable if freelancer we use it to get paid by, BTC is already too widespread used for payments.
Exclusion through immense admission fees
The US$10 million admission fee excludes private users from participating in the development of Libra from the outset. This also casts a shadow on the announcement that Libra’s code will be released under an open source license: Changes will only be adopted if they are submitted and approved by the members of the Libra Association. After all, Facebooks plans to open the network completely after about five years.
The difference between an open and a closed network has far-reaching consequences for the security and reliability of transactions. Since Bitcoin is open and everyone can get involved, the protocol must also take into account that participants do not trust each other or even work against each other. Satoshi Nakamoto solved this problem by introducing a dynamic proof-of-work algorithm, which has ensured that no one can manipulate completed transactions for ten years now.
Clients, nodes and miners work together in the Bitcoin network: The clients send transactions to the miners, who first collect them in the memory pool (Mempool for short) and gradually process them into blocks. The difficulty lies in arranging the data of the block in such a way that its hash value meets a varying degree of difficulty – the so-called Difficulty. Since hash values cannot be predicted, the miner has to rearrange the data of the block at random and recalculate the hash – until the block meets the requirements. The degree of difficulty is adjusted every two weeks so that statistically someone is lucky enough to find a new block every 10 minutes.
When a Miner has found a valid hash for its block, it sends it to one or more nodes. If the node’s check shows that the block is actually valid, it distributes it to other nodes and finally to the clients – the block chain has grown by one block and the search for the next block starts again. It is important here that the individual miners and nodes do not trust anyone else in the network, but always verify for themselves that only valid blocks are attached to the block chain.
Proof of Stake
In contrast to this is the model of Libra. The consensus algorithm used here is called LibraBFT and is a variation of the Proof of Stake. With the Proof of Stake no energy has to be used for the calculation of valid hashes. Instead, the validators use their participation in the digital currency as a guarantee for the validity of the confirmed transactions.
How much Bitcoin is in Facebooks Libra
The difference in the consensus mechanism also leads to different data structures. The data structure described in the Libra protocol has nothing to do with the blockchain known from Bitcoin, which only contains transactions: Libra uses so-called states that reflect the current account balance of the network. Transactions on the other hand are stored in a separate archive. The members of the Libra Association alternate with each other to validate transactions, they rely on each other and do not compete.
The Libra model of the states, i.e. quasi the account balances, stands in stark contrast to Bitcoin’s UTXO model (Unspent Transaction Outputs). An Unspent Transaction Output is, as the name suggests, the result of a transaction that has not yet been reissued. In addition, a Bitcoin address is usually used for a single transaction only, and since the addresses contain no information about the owner, an outsider cannot easily determine how much money someone has or what they have spent it on.
This difference also affects wallet applications. While a Libra Wallet only needs the most up-to-date data block with the account balances, a Bitcoin Wallet must first search the entire block chain from the very beginning to determine how much money is stored on the different addresses of a Wallet.
Libra won’t be anonymous: The wallet application Calibra, developed by the Facebook subsidiary of the same name, will contain a KYC process (“Know Your Customer”). This means that users must identify themselves with their official ID before they can use the wallet. One of the goals of the Libra Association is also to “develop an open identity standard,” because “a decentralized and portable digital identity” is a prerequisite for financial inclusion and competition.
- This means, however, that all transactions can be assigned to the persons involved, worldwide – the Libra user will therefore be transparent.
- Whether it is a good idea to entrust such intimate data to a Facebook subsidiary like Calibra and have it passed on to third parties “after approval” is doubtful in the past in view of Facebook’s handling of confidential user data.
- After all, Facebook should not have access to transaction data and Calibra should not have access to Facebook user data.
- Despite everything, Libra has what it takes to replace Bitcoin as the most important digital currency in the future. With Facebook and credit card companies behind it, Libra is doomed to success.
- Libra will probably not replace Bitcoin, however. With its compulsory identification and easily regulable structure, Libra has nothing of the free, independent, unregulable currency that Satoshi Nakamoto had in mind when developing Bitcoin.