“Everyone” says that Facebook’s Libra is a cryptocurrency. Long before Libra had been imagined, Bitcoin pioneered and established the brand new world of cryptocurrency. Bitcoin created the category, and has always been its leading exemplar. The white paper by the still-unknown Bitcoin creator and inventor spelled out his design goals and the main aspects of Bitcoin that supported those goals. Once you read and understand what cryptocurrency is, it becomes very clear that, whatever Libra may be, it is NOT a cryptocurrency. To claim that it’s a cryptocurrency is like claiming that a locked desk drawer is a bank vault—yes, they both have keys and are supposed to keep things safe, but other than that…
Satoshi, the brilliant creator of Bitcoin, designed a currency that involves cryptography. If you want to be extremely loose, you could say that Libra is the same thing, because it’s also a currency that somehow involves cryptography. But that’s like saying that the thing you use to “buy” properties and hotels in the board game Monopoly is “money.” Try depositing some of it at an ATM and see how far you get. Let’s explore the basics of what makes a cryptocurrency the way Bitcoin is a cryptocurrency.
First and foremost, there’s the concept that in Bitcoin, no one is in charge. How can you possibly make a computer system that works, does lots of computing, keeping lots of financial transactions and makes sure everyone’s account balance is correct … without anyone being in charge?? These things are hard to do when someone IS in charge! There’s quite a bit involved in making this happen, as I illustrate here, but here are some of the key points:
- Anyone who wants to can sign up to be a “miner,” who are the folks that make Bitcoin work.
- A miner has to put money into buying fast computers, running the mining software, and connecting with all the other miners to share work.
- Miners get new transactions that Bitcoin users want to perform and “make them happen.”
- This means that miners race each other to solve complex problems involving cryptography, the net result of which is a new page (block) of transactions that have been vetted, and “locked” by crypto-key.
- Every piece of work a miner does is paid for by newly-minted Bitcoin – the miners are paid with Bitcoin!
- Miners are highly incented to do the work and do it right, because they want to get lots of Bitcoin, and they want Bitcoin to continue to be viable.
- Miners come and go as they see fit – no one “approves” them, literally no one’s in charge.
- Miners can be anywhere, in any country.
Big corporations and regulators don’t like the unsupervised free-for-all of Bitcoin. They like to control things. And that’s exactly why Bitcoin was invented – to escape the control of a central authority but still have a system that works. It’s a brilliant concept, and Bitcoin’s success shows that it works.
Along comes Facebook and Libra. Facebook is ambitious. They keep trying to invent new things. They mostly fail when they build things themselves, so they buy companies instead. Facebook would LOVE to buy Bitcoin – but it’s not for sale, because no one owns it – darn! They’re forced to try to build it. But being a big corporation, they just can’t stop themselves from building their version of Bitcoin in a style that makes them comfortable – violating every single core principle of Bitcoin – the original cryptocurrency – along the way!
Here’s what Facebook is doing with Libra:
- In Bitcoin, literally no one is in charge. With Libra, Facebook is designing and building it. Facebook is in charge and owns it.
- Facebook has gone to considerable lengths to create the illusion that it’s not in charge with this fake Swiss-based consortium of prestigious companies that supposedly control things. Either way, some combination of big name-brand companies are in charge, which is pretty far from Bitcoin’s really-truly NO ONE is in charge.
- Just like Facebook owns and controls all the computers that run Facebook, Libra will own and control all the computers that run Libra in a private data center. To all the corporate computer types, this is a good thing, but it totally and completely violates a core principle of Bitcoin, leaving it open to the same kind of insider corruption that all such places are rife with. It’s also a silly idea, as explained here. Microsoft and Intel explain the issues here.
- One of the less pleasant side effects of Bitcoin’s miners and what they do with cryptography is the fact that “proof of work” takes time. It’s a cornerstone of getting all these strangers to play nice and do good things, but it takes a number of minutes to complete a transaction. To Facebook, this is unacceptable. So they’ve blithely discarded the key cryptographic cornerstone of Bitcoin, and replaced it with some light-weight encryption, so they can still say they’re a “cryptocurrency,” even though they’re not.
There’s more to be said, but that should be sufficient to make the basic point that Libra is a cryptocurrency the same way my cousin, who is sometimes allowed to sing in bars, is an opera singer. My cousin likes to think she is, and I’m nice to her. But she’s never so much as attended a performance at the Metropolitan Opera in New York, much less appeared on stage in front of an audience. Similarly, Facebook’s Libra likes to think it’s a cryptocurrency even better than the original, Bitcoin, but it swore off the core principles of Bitcoin from the start, and doesn’t deserve to be called by the same terminology.
Feature Image Credit: INDIA – 2019/08/30: In this photo illustration a popular decentralised digital currency Bitcoin –
I started programming computers in high school. Before graduating with honors from Harvard College, I wrote code for oil refinery optimization and the ARPA-net. I then wrote code for compilers, composition systems, operating systems, DBMS internals and applications, large scale financial transaction processing, document processing, workflow and more. The card software I led now handles half a billion cards. I started in venture capital in the early 1990s, investing in the whole stack, from hardware to media. I now concentrate on health care and financial technology investments as tech partner at Oak HC/FT. I blog, and I’ve published five books on software-based innovation.