Has Facebook built a better stablecoin with Libra?
Like a lot of blockchain afficionados, I watched the recent announcement of Facebook’s Libra project with mixed emotions. On the plus side, it should bring needed attention and credibility for blockchain among the masses, expanding the technology’s appeal in ways that may benefit the whole industry. On the other hand…. there’s Facebook. Home of rampant disrespect of user privacy, possible antitrust violations, and general executive cluelessness.
After reading the Libra documentation more closely, especially the official project whitepaper, I can honestly say Facebook’s poor track record in these areas isn’t my biggest concern about Libra now. They actually seem to have dealt with the most obvious issues around their involvement in Libra quite elegantly — by engineering themselves out of the project.
Thanks to the open-source licensing of Libra’s technology, the independent foundation that will manage governance issues for the token, and the consortium of several dozen partners (hopefully growing to 100 by the time of Libra’s full public launch), Facebook seems to be setting up a legitimately hands-off stance to Libra over time. If everything goes as planned here, including potential involvement by outside exchanges and wallet developers, it should eventually be possible to buy and sell Libra without any involvement by Facebook whatsoever. (Which is great by me, as that’s the only way I’d ever participate in Libra.)
What’s still not as clear to me even after reading the whitepaper is why I’d want to own Libra. The sheer economics of it, the structural features that will truly differentiate Libra from Bitcoin or Ethereum or dozens of other tokens as a currency, still seem at best fuzzy, perhaps even ill-conceived in some respects.
To function better as a true means of everyday transactions, not as a speculative vehicle like most cryptocurrencies at present, Libra is structured as a “stablecoin” whose value will fluctuate relatively little day-to-day. There are several such coins out there already, but unlike most of them, Libra doesn’t “peg” to a single asset like the U.S. dollar or gold.
Instead, Libra will be backed by a basket of supposedly low-risk assets managed by the Libra consortium. Why this approach is better remains unclear to me even after reading the whitepaper and a separate page that deals specifically with the reserve issue.
The basket approach also strikes me as perhaps needlessly complex, especially if the target market is average Joes and Janes. Why not just simply peg to the dollar, which would be easier for the layman to understand, and get on with it? But, hey, it could work in theory.
In any case, it’s probably a mistake to think constructing the right basket is easy. On the Financial Times’ Alphavile blog, Colby Smith and Izabella Kaminska have done a nice job comparing Libra’s reserve idea to other basket type approaches that have been taken elsewhere in the financial world, notably with the International Monetary Fund’s Special Drawing Right system. They also touch on the “breaking the buck” problem the U.S. had back when the dollar was on the gold standard.
I won’t belabor those comparisons here, although I’d certainly recommend reading the excellent FT analysis if you’re interested in the nitty-gritty. (Note, Alphaville requires a free registration to read articles.) Let it suffice for now that (a) properly managing a basket-based means of exchange over time is no small task. And (b) there are some historical examples in traditional finance that might be instructive for Libra.
Here’s hoping Facebook and its partners do indeed heed those lessons from here. To do so, they’ll have to steer clear of the main sin that’s plagued the company in other areas: hubris.
Thanks for spending some time with Indizr today. For regular updates about the Web 3.0 movement, subscribe to our free email newsletter.
