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Your Guide to Libra Crypto

March 02, 2021 · 6 minute read

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Your Guide to Libra Crypto

As cryptocurrency rises to prominence, some major data and technology companies look to enter the crypto space themselves. One of the more notable initiatives by a large corporation is Diem, formerly known as Libra, a blockchain project backed by social media giant Facebook Inc.

While it’s casually referred to as crypto, some don’t consider Libra a cryptocurrency at all. While it shares some underlying similarities to blockchain-based peer-to-peer payment networks like Bitcoin, it is specifically designed to work within a certain technology and regulatory framework. And then of course, there’s Libra’s association with a multinational company.

This article will cover everything a curious investor might need to know about Libra/Diem, including:

•  What is Libra?
•  Why Libra Rebranded to Diem
•  What is Libra Used For?
•  How Does Libra Work?
•  What are the Risks of Libra?

Learn more about cryptocurrencies with this beginner’s guide to crypto.

What is Libra?

Libra, more recently known as Diem, is a blockchain-based permissioned global payment system and cryptocurrency stablecoin conceived and initially co-funded by social media company Facebook Incorporated. The Libra currency was initially intended to be a multi-currency stablecoin, a type of cryptocurrency tethered to a currency, like the US dollar.

Following a mixed response to Libra’s initial launch in 2017, it has undergone significant changes to its original proposal for a blockchain-based stablecoin that could be integrated with Facebook. Since then, it has reemerged as a global payment system with seamless tie-ins to Facebook’s platform while playing by the rules.

The project was officially rebranded to Diem in a December 2020 announcement , which also reported that it now operates as an independent company and cited changes in the project’s end product, executive leadership, and vision.

Why Did Libra Rebrand to Diem?

Because Libra’s cryptocurrency stablecoin was intended to compete with the global fiat (government-issued currency) market, the initial announcement sparked immediate regulatory opposition domestically and abroad. With the Diem rebranding, the project’s mission has evolved into a global payment system and infrastructure meant to complement domestic currencies, not replace them.

However, the project’s proposal also calls for a native currency to be released as a cryptocurrency stablecoin, a cryptocurrency that is pegged to a traditional monetary denomination, providing low volatility and borderless fungibility. Buying Diem is not the same as investing in crypto, as stablecoins are designed to maintain a close monetary value to an underlying asset, such as the US dollar, as opposed to appreciating like Bitcoin or Ethereum.

Facebook co-founded the Diem Association (DA), a non-profit member organization of payment, technology, telecommunication, venture capital, and nonprofit companies who would have equal control and oversight in Diem decision-making. The DA is intended to serve as a monetary authority for Diem’s currency and provides member organizations that provide $10 million in funding to the project with equal representation in Diem matters. As of January 2021, the DA has 27 members including Facebook, but leadership hopes to have as many as 100 members.

Libra was initially planned to go live by early 2020 but after significant delays it’s now targeting an early 2021 project launch pending regulatory approval. The launch will feature a US dollar-backed stablecoin, but potentially later add collateral based on other fiat currencies.

What is Libra Used For?

Diem, formerly known as Libra, will be used for fast, low-cost international payments. It has the added benefit of being conceived and developed, at least indirectly, by the largest social media company with billions of users all over the world.

Diem would allow users to send, receive, and pay for things with a digital currency—presumably within Facebook, but also beyond it.

The fact that Diem is pegged to the US dollar reduces volatility and provides borderless fungibility to potentially billions of people who have smartphones but no bank account.

How Does Diem Work?

Diem aims to provide a US dollar-pegged stablecoin built on its own permissioned blockchain. Unlike cryptocurrencies like Bitcoin, Diem will not rely on proof-of-work mining. Instead, all transactions on the Diem permissioned blockchain are powered by validator nodes run exclusively by members of the DA.

These nodes are responsible for confirming transactions and validating blocks on the network per the Libra Byzantine Fault Tolerance (LibraBFT) consensus protocol. This protocol ensures no single network participant gains excessive control over the network.

Initially, the founding DA members will be cryptographically entrusted with managing the project, currency, and transactions until the network eventually evolves into a fully operable system. Similar to Ethereum, Diem’s permissioned blockchain will be programmable, allowing developers to create custom applications on the blockchain using a custom smart language called “Move.”

Diem leadership has expressed the intention to transition to a permissionless proof-of-stake consensus mechanism within five years of the project’s launch—though there is currently no solution to the scale and security needed to support billions of people and transactions through a global permissionless network. Facebook subsidiary Novi Financial plans to release a digital wallet in 2021, “Novi ,” that will be available to Diem users through Facebook Messenger, WhatsApp, and Novi’s mobile app.

What are the Risks of Diem?

Diem has already been beset by roadblocks that have delayed it’s launch and caused it to rebrand. Now that Diem has what seems like a clear path to launch, here are just a few risks that still remain.

Centralization

Perhaps Diem’s chief criticism is its centralization. Though the project is theoretically governed equally by members of the DA, Facebook’s integral role in its conception, development, and rebranding leads some to believe Diem remains centrally controlled. Additionally, Diem’s blockchain is controlled by a small group of validators belonging to the Diem Association.

Decentralization has so far been an important distinction for cryptocurrency. The idea is that the currency is owned, exchanged, and governed by those who use it, rather than being issued by a central authority like a bank or a government.

While Diem promises global financial inclusion, much of its rebranding was an effort to show legal compliance, meaning the DA will be able to ban addresses and cancel non-compliant transactions. If this holds, Diem’s design arguably conflicts with blockchain technology’s core philosophy of absolute financial freedom and immutable transactions. Facebook may be able to effectively market Diem to its customers, but advocates for decentralization and the global crypto community may not be attracted to such a model.

Regulations

From its inception, Libra was met with opposition by central banks and regulators in the US and European Union (EU). Early on, EU finance ministers viewed the Libra currency as a threat to the monetary sovereignty of European states, while US regulators expressed concerns over how it would deal with cryptocurrency taxes, money laundering, and consumer protection.

Opponents also cited the social media company’s use of cryptocurrency and blockchain for implementation, creating competition to established fiat currencies, and thus fears of Facebook becoming a “shadow bank.” Accordingly, the team rebranded away from Libra to give it a fighting chance to win regulatory approval.

Following major cryptocurrency regulations and international opposition, seven of the 28 original founding members—including PayPal, eBay, Stripe, Visa, and Mastercard—withdrew from the DA. Only time will tell whether Facebook and Libra’s reputation remains stained by federal and state antitrust lawsuits and if Libra will forever be known as “the Facebook coin.”

Competition

Diem is far from the only global payment system and cryptocurrency stablecoin aimed at disrupting peer-to-peer payments. Incumbent payment processors PayPal and Stripe have controlled a huge amount of the digital payments market for years—and with PayPal now offering crypto trading directly on-platform, Diem looks to be entering a competitive space. Libra/Diem is behind other cryptocurrency platforms that are in beta or have already launched similar global payment systems such as Bitcoin, Ripple XRP, or stablecoins such as Tether (USDt) or DAI.

Lack of Privacy

Some skeptics have questioned whether Facebook’s user data leaks will bleed over to Diem as well. Diem leadership has shared they plan to allow users to transact and store Diem in digital wallets from Novi Financial, a Facebook subsidiary. Some industry insiders and followers are concerned that Diem users’ personal information might not be safe or will be shared without authorization—two issues over which Facebook has faced intense scrutiny before .

The Takeaway

Backed by Facebook, developed to work within their platform, and designed with regulations in mind, Libra—now Diem—has forged its own path distinct from prominent cryptos such as Bitcoin and Ethereum.

While Diem is being pushed as a useful form of digital payment, investors looking to invest in cryptocurrencies may want to consider their options, as Libra’s stablecoin price is fundamentally pegged to the US dollar.

If you’re looking to build a varied portfolio yourself, SoFi Invest® may be a useful tool in your investing arsenal.

Members can invest in Bitcoin, Ethereum, Litecoin and more through the ease and convenience of the SoFi app.

Find out how to start investing in cryptocurrency with SoFi Invest.


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