Soo… We had another uneventful day yesterday and we thought we would talk about Libra. In other words, that cryptocurrency thing Facebook wants everyone to use so that it can rule the world.
The Big Bet on Libra
Ever since Facebook said it was looking to introduce a digital currency for people to transact on its platform, there’s been considerable interest on what this means for currencies altogether.
Should we be worried about the Rupee? What happens to the almighty Dollar. Will Bitcoin lose its charm?
These are excellent questions of course. But the answers aren’t exactly straightforward.
For one, I don’t think people fully understand what Libra is. Facebook will tell you it’s a digital currency that runs on a blockchain, a cryptocurrency if you like.
1. Nobody controls the currency. '
2. Nobody decides who gets to transact with the currency
3. And most importantly it provides an unalterable record of all transactions ever committed on the network.
Libra kinda violates rule 1 and rule 2. It is not fully decentralised and is controlled by the Libra Association i.e. a Swiss Group that includes the likes of Uber, Paypal, Mastercard, Visa. You get the point.
So, it’s possible that someday the association might deem a transaction illegal. What happens then? Are they going to abide by the time tested principle of letting things be or will they intervene?
In a fully decentralised blockchain, say a bitcoin, an intervention is near impossible because it belongs to nobody. Everybody is an equal stakeholder.
Screw the governments, screw the banks, the people are in control. That’s the motto and it’s also one of the things that makes bitcoin so appealing.
So why won’t Facebook just go ahead and build that?
Well, for one, it’s much easier to build a currency where YOU get to exercise more control on how best to verify transactions made using the currency. Facebook says that you could do about 10,000 transactions a second with Libra. On the Bitcoin network, we are looking at about 8 transactions a second, because EVERYBODY is in control.
That’s a pretty big difference.
Also, there is this one other thing. Bitcoin is a bit of an enigma. I mean, it derives its value from what people think it's worth. Of course, there is a finite limit on how many bitcoins you could have in the system. But it isn’t backed by anything. No guarantee of any sorts and that makes it particularly volatile.
People change their minds, they do stupid things. One day you’ll have them saying bitcoin is worth $900. The next they’ll be telling you it’s worth $20,000. How do you transact with a currency whose value fluctuates by this much?
Well, it's challenging. Which is why Libra is backed by a basket of currencies, meaning, there’s always going to be a bunch of currencies stored somewhere every time you buy a Libra. So its value is not derived from what people think Libra’s worth. Its value is derived by the mishmash of dollars and euros backing the damn thing.
And that makes it much more stable in nature. So now they are calling it a Stablecoin. Yeah!!!
Anyway, this brings us to the last, most important distinction. If Libra is simply a placeholder for a basket of currencies, what on earth is this thing anyway?
Is it a token that gives you the right to own a few currencies, an ETF of sorts?
More importantly, will regulators the world over, give Facebook a free pass or will this pave way for a brave new world where there is increasing competition to the Rupees' and the Dollars' of the world?
Well, honestly, we don’t know. But irrespective of what happens, you should know this much - The future of money is at stake and it’s best you pay attention.
Sensex drops 600 points on Tuesday
Also in other news, the markets saw a lot of pain yesterday.
And almost immediately people began to speculate about all the things that might be leading the sell-off. Some people said it’s because of the rise in oil prices. Some were saying it’s because of fears of an impending war between US and Iran. Even others were saying it’s because of Prime Minister Modi’s birthday.
Maybe that was a joke. But sometimes... you can never tell.
Anyway, if you have a hypothesis of your own or you think you can tell us why the markets took a low blow yesterday, please write to us. We will be glad to hear you out.
Many thanks. And we will see you tomorrow