Note: This article was originally published on Zonotho, a financial education start-up, in July 2019. I was asked to explain the Libra technical documents to a general audience as many were confused by its premise and its differences to Bitcoin. Since this article was written, Libra’s design has fundamentally changed.
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Last month, the Libra Association, headed by Facebook, announced the launch of a new digital currency. While Bitcoin has been around for over 10 years, and thousands of other digital currencies exist, Libra will be the first digital currency to be backed by a major corporation.
What is it?
The basic idea of Libra is that it will be money, which you can send to people and eventually use to pay for goods and services. What makes it different from the South African Rand are firstly, that you will be able to send it as quickly and cheaply as sending a message with your smart phone, and secondly, that it will be issued by the Libra Association instead of the South African Reserve Bank.
This makes it similar to Bitcoin (read here), but with a few key differences that will be highlighted below. Right now, Libra is in development but is expected to launch in the first half of 2020.
How much is a Libra worth?
The value of a Bitcoin is how much someone else is willing to pay for it. Consequently, the price can go up or down on a given day. The value of Libra is expected to be relatively stable. The Libra Association plans to achieve this by holding bank deposits (and similar assets) of various currencies around the world, and Libra coins will be exchangeable for these deposits.
Let’s say, hypothetically, they create 1,000 Libra Coins and hold $1000 in these accounts; then each Libra Coin will be worth about $1 (in practice, it might be worth a little more or a little less). The Libra Association will create new coins by adding money to these deposits and will destroy coins when money is taken out of them. In this way, Libra works similarly to a Unit Trust (read here).
Who is in charge?
Bitcoin is controlled by anyone who runs the Bitcoin software. And since anyone can download and run it, no single entity is truly in charge of it. Libra, on the other hand, is controlled by the Libra Association operating in Switzerland. In the early stages, the Association will be led by Facebook, but other large companies such as Visa, Uber, and Vodafone are also members.
These members will have the responsibility of maintaining the Libra network, holding the deposits that back Libra, developing the software, and creating and destroying coins. To support itself, the foundation will keep the interest on the bank deposits for itself.
The White Paper mentions that there are plans to open the foundation within the next five years so that anyone can become a member and play a role in Libra. How this will unfold remains to be seen.