Facebook reported around 2.6 billion users at the beginning of 2020. No wonder Libra, the payment system backed by Facebook and two dozen supporting technological and financial companies, is touted as a financial system for billions of people. Libra is often compared to Bitcoin. Are these comparable? Let us look at the differences between Bitcoin and Libra.
The obvious differences between Bitcoin and Libra can be seen from the very beginning of their white papers.
Bitcoin white paper from October 31, 2008, states:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution… an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Libra white paper from June 24, 2019, brings out:
“The goal of the Libra Blockchain is to serve as a solid foundation for financial services, including a new global currency, which could meet the daily financial needs of billions of people… we decided to build a new blockchain based on these three requirements: Able to scale to billions of accounts… Highly secure… Flexible.”
In fact, Bitcoin and Libra differ a lot, although both use a white paper and are spoken of as virtual currencies or cryptocurrencies
Bitcoin is designed for peer-to-peer payments without any financial institution, without intermediaries. Bitcoin’s priorities are freedom without reliance on authorities, governments, and regulators.
Libra, on the other hand, is designed as a foundation for global financial services, not just payments. Libra’s priorities are inclusivity and scale, while not avoiding intermediaries, regulators and authorities.
The Differences Between Bitcoin and Libra
Many comment on the fact that Libra Associations want to create an entire ecosystem with a transnational currency that its users will be able to utilize to bypass some of the more traditional financial and banking networks. On the surface, it looks similar to what Bitcoin can already do. Is that really so? Let’s have a look at some main points, starting with the different use cases.
Bitcoin: Bitcoin is designed for peer-to-peer transactions where anybody can send payment to anybody else directly, without going through a bank. All payments are transparently recorded on the blockchain that serves as a public ledger. Still, the transactions are anonymous or pseudo-anonymous. Because of its deflationary nature, some people also use Bitcoin as a form of investment.
Libra: Libra is designed for easy international transactions and payments. To avoid volatility of cryptocurrencies, it is linked to a basket of fiat currencies (backed by governments) and other assets. Promoted as a “stable coin,” Libra aims to keep its value “stable” and work more like a traditional fiat currency than a cryptocurrency.
Backing and Support
Bitcoin: Bitcoin is not backed or supported by any financial and technological companies but by individual users who trust it and use it, and by miners who mine Bitcoins and verify the transactions on the blockchain.
Libra: What sets Libra apart from Bitcoin and other cryptocurrencies is the fact that it is backed by around two dozen technological and financial companies, for example, Anchorage, BisonTrails, Novi, PayU, Shopify, Spotify, Uber, and Xapo. These partners intend to help build, fund and govern the Libra Association system.
Centralization, Governance, and Permissions
Bitcoin: Bitcoin is permissionless (it doesn’t need permission from anybody). Bitcoin’s blockchain is transparent, public, fully decentralized, not governed by any entity, organization, association, etc. A Bitcoin node or a full node can be run by anybody. Bitcoin is not pegged to any fiat currencies or any other assets.
Libra: Libra is permissioned, with only a few trusted entities that can keep track of the ledger. In other words, although the ledger is public, it is based on permission. Only foundation members can run a node. Libra is also centralized, governed by the Libra Association, and pegged to fiat currencies, government securities, and other assets.
Bitcoin: The total number of Bitcoins that we’ll ever be minted is hard capped at 21,000,000 – which means that Bitcoin supply is fixed. Bigger market demand might drive the price of Bitcoin up. Lower market demand might push the price of Bitcoin down.
Libra: Libra is governed by supply and demand, which means that the Libra Foundation or the Libra Association and its partner companies could adjust Libra’s supply to match the quantity of other assets held in reserve. To put it simply, based on market demand, Libra can be created or burned.
Intermediaries and Regulations
Bitcoin: Bitcoin has no headquarters, no board of directors, and doesn’t use any intermediaries, thus there’s no no need for regulation aimed at safeguarding against the risk presented by intermediaries. Bitcoin’s network involves the so-called miners who verify the transactions on the blockchain. It wouldn’t make sense to regulate them.
Libra: First, Libra has to pass the scrutiny of regulatory authorities to be used for payments; it relies on the Libra Association headquartered in Geneva, Switzerland, with its board of directors and other supporting entities. Some experts point out the company’s blockchain project could be similar to regulated CBDCs (Central Bank Digital Currencies) some central banks are trying to create.
Deflationary vs. Inflationary, and Value
Bitcoin: Economic scarcity is the basis of Bitcoin’s value because its supply is fixed and cannot change. Thus, the price is created naturally by demand. Bitcoin with its final supply is in essence deflationary and can be viewed as a store of value.
Libra: Rather than working with a fixed supply of coins like Bitcoin, Libra’s value and supply is adjusted by the Libra Association together with other corporations to match the quantity of other assets held in reserve and maintain “stable” value, similar to fiat currencies. (It should be noted that “stable” is a very relative term here, since the fiat currencies are known to lose their value and undergo inflation, even hyperinflation.)
Proof of Work
Bitcoin: Bitcoin is based on the “Proof of Work” (PoW) consensus mechanism, requiring proof that work of some kind occurred, usually meaning a processing time from a computer. Such a computer has to process data which is difficult and costly to produce but easy for others to verify. During this Proof of Work process, new blocks are added to the blockchain, for which miners earn a reward – newly mined Bitcoins each time a block is added. In principle, this is similar to physical mining (gold, silver, minerals, etc.) where without work nothing is ever mined, or created. For many users, this is a highly transparent and ethical concept.
Libra: Libra aims to be tied to a basket of government-backed fiat currencies and other assets. Thus, 1 Libra can be tied to 1 USD, 1 GBP, 1 JPY, 1 Euro, etc., which are all fiat currencies. A fiat currency is money that a government has declared to be legal tender. As it is not backed by anything tangible or physical, such as gold or silver, it can be freely printed “out of thin air.” That’s why it is susceptible to inflation. It is valuable only as long as it is supported by the government that stands behind it.
Bitcoin: Bitcoin is resistant to censorship. Anybody wishing to censor Bitcoin transactions would need to spend more computing power than the rest of the Bitcoin network combined.
Libra: Libra is not resistant to censorship at all. To censor Libra transactions, some influential entity just needs to “persuade” the Libra Association to do so.
Bitcoin vs. Libra in a Table
As it can be helpful to see things in an even more simple way, you can have a look into the table below that compares some features of Bitcoin and Libra (as of July 2020). Please keep in mind that Libra is still being developed, thus some features might be added or changed.
|Centralization||BTC is decentralized; no single entity controls it.||Libra Association controls Libra and its usage.|
|Governance||No governance at all.||Corporate, governed by Libra Association.|
|Headquarters||No HQ, board of directors, etc.||HQ in Geneva, Switzerland, with a board of directors.|
|Supply||21 million BTC will ever exist.||Unlimited supply subject to demand, controlled by Libra Association.|
|Comparison with fiat||BTC is deflationary, not tied to fiat.||Libra is tied to and similar to inflationary fiat currencies.|
|Value||BTC price does not depend on any government or financial system.||Libra is tied to national currencies.|
|Volatility||Volatile, depending on the market.||“Stable,” similar to fiat currencies.|
|Mining||Miners can mine at their discretion.||Issuers/miners must get an approval.|
|Blockchain & permission||Running on permissionless blockchain.||Running on a permissioned blockchain, with the approval of authorities.|
|Blockchain node||A node or a full node can be run by anybody.||Only foundation members can run a node.|
|Censorship resistant||Yes. You would need more computing power than the rest of the network.||No. You just need to persuade the Libra Association.|
|Proof of Work||Yes, BTC is based on the Proof of Work consensus mechanism.||No, Libra is supplied according to demand.|
|User anonymity||Yes, anonymous.||No anonymity, mandatory KYC.|
What Will You Prefer: Bitcoin or Libra?
If the Libra Association with its partners manage to overcome the regulatory hurdles, the Libra currency might influence the global economy in unprecedented ways. Still, Libra is designed as a scalable currency, is based on permission, works with intermediaries, and basically brings in another form of fiat money based on trust. In case Libra doesn’t succeed, other projects with similar intentions might come up.
On the other hand, Bitcoin focuses on a payment system without any intermediaries, all transactions are recorded on a censorship resistant ledger that anyone can access, the Bitcoin ledger is public and permissionless. To put it simply, Libra seems to be an upgraded variation of the fiat system as we know it. Only the future will show what its impact on Bitcoin will be, although Bitcoin attracts its users with quite a different proposition.