What is Facebook's Libra (Diem) currency?

Introduction

Digital payments offer vast opportunities and potential. With more people worldwide accessing the internet via affordable smartphones, a growing portion of economic activity now happens online. Major players like PayPal, Visa, and MasterCard already meet many of these market needs. Additionally, numerous cryptocurrency projects are developing products and solutions for this expanding sector.

However, Facebook stands out from other projects thanks to its enormous user base. Over recent years, Facebook has maintained millions of active monthly users. This extensive reach could enable its proposed payment system to gain rapid traction if it launches successfully.

What Is Facebook’s Libra (Diem)?

Libra (later rebranded as Diem) is Facebook’s proposed blockchain-based payment system. The project aims to offer financial services to individuals without traditional bank accounts. Several experienced and notable industry founders contributed to its development.

Libra was designed to be governed by the Libra Association (later renamed the Diem Association), an independent membership organization headquartered in Geneva, Switzerland. Its members include companies from a range of sectors—blockchain, technology, payments, telecommunications, venture capital, and nonprofits.

Libra Association members make key governance decisions, oversee the Libra payment system’s operations, manage projects built on the Libra blockchain, and provide grants and support to promising initiatives. Facebook sought to bring a large number of members into the association at launch.

Is Facebook’s Libra a Digital Currency?

Libra is built on blockchain technology and uses advanced cryptography. However, the term “digital currency” typically refers to characteristics that may differ from Libra’s traditional classification.

In practice, it’s more accurate to call Libra a digital currency or digital asset, rather than categorizing it with classic decentralized cryptocurrencies. Libra blends blockchain features with a centralized operational model distinct from traditional cryptocurrencies.

How Will Facebook’s Libra Work?

The Libra blockchain (later renamed the Diem blockchain) is a permissioned blockchain that forms the foundation of the payment system. How does this differ from other leading blockchains?

Blockchains like Bitcoin and Ethereum are typically public and open. Anyone with internet access can interact with, transact on, or build atop these networks freely. No single authority controls access.

A permissioned blockchain operates differently. To use it, you need authorization from those who control the network. More specifically, applications require special access and prior approval.

Libra is a permissioned blockchain, meaning it won’t use mining or staking to validate transactions, unlike many other blockchains. Instead, a group of approved validators (members of the Libra Association) will verify transactions and ensure network integrity.

According to its creators, Libra may transition to a Proof of Stake system in the future. However, this change is considered a longer-term development in this rapidly evolving space. Why not start with Proof of Stake? Libra’s whitepapers explain that, in their view, no current public system can efficiently support billions of users.

Is Facebook's Libra Centralized or Decentralized?

Many in the blockchain industry argue that permissioned blockchains cannot achieve the same level of decentralization as public blockchains; they more closely resemble traditional corporate databases. In practice, the controlling parties retain significant authority over operations and decision-making.

In this respect, Libra is less censorship-resistant than Bitcoin or other decentralized digital currencies. Because validators must be members of the Libra Association, the network could become relatively centralized under the control of its backers.

On the other hand, controlling which applications can access and audit the distributed ledger can have benefits. For example, it may be easier to exclude malicious or fraudulent apps, providing users with a higher level of protection.

Libra Payment System

The Libra payment system (later renamed the Diem payment system) supports several single-currency stablecoins pegged to major fiat currencies, such as the US dollar, euro, British pound, and others. These stablecoins operate similarly to conventional stablecoins, with their value backed by the Libra Reserve. The reserve consists of cash, cash equivalents, and short-term government securities to maintain price stability.

Additionally, the Libra payment system will support a multi-currency coin called the Diem Dollar (formerly LBR). This composite coin aggregates all the other stablecoins and is backed by a basket of diversified assets to ensure value and stability. Essentially, it’s a stablecoin backed by other stablecoins (and potentially other assets, such as securities and bonds). The key idea is that this diversified collateral protects it from sharp volatility—a crucial trait for a reliable payment method.

The Libra digital currency will be stored in a forthcoming wallet called Novi (formerly Calibra Wallet). As expected, this digital wallet may be integrated with Facebook Messenger, WhatsApp, and other social media platforms. According to published plans, users should be able to seamlessly exchange between US dollars (or other supported fiat currencies) and Facebook’s currency.

The Libra source code, known as Diem Core, is open source and written in the modern Rust programming language. Looking ahead, Libra also plans to support smart contracts via a specialized programming language called Move.

Will Facebook’s Libra Replace Bitcoin?

Libra and Bitcoin are fundamentally different and could coexist in the future. While both are digital payment systems, they serve very different purposes.

Bitcoin is a decentralized, censorship-resistant digital currency, often used as a reserve asset or long-term store of value. In contrast, Libra is a permissioned network proposal with a more centralized model, focused on facilitating daily transactions.

What Is the Future of Libra (Diem)?

After its initial announcement, Facebook faced criticism and resistance, particularly from central banks, legislators, and regulators worldwide. Concerns centered on privacy, financial stability, and regulatory compliance. Whether Facebook can assemble all the necessary components for Libra’s real-world success remains uncertain.

Final Thoughts

Libra is Facebook’s proposed payment system built on a permissioned blockchain. Its goal is to deliver financial services to the unbanked through Facebook’s social media platforms. While it differs fundamentally from decentralized digital currencies like Bitcoin, Libra represents a significant attempt to bring blockchain technology into mainstream finance and reach billions of people worldwide.

FAQ

What is Diem and how did it originate as a Facebook project?

Diem is a digital currency developed by Facebook, previously called Libra. It began as a project to create a global decentralized payment network and was rebranded as Diem in 2021. It’s based on permissioned blockchain technology.

How does Diem differ from other digital currencies like Bitcoin and Ethereum?

Diem is a centralized currency backed by a major corporation, while Bitcoin and Ethereum are decentralized. Diem prioritizes stability and regulatory compliance, whereas Bitcoin focuses on peer-to-peer transfers and Ethereum on smart contracts.

Is Diem secure, and what risks are associated with it?

Diem faces multiple risks, such as significant price fluctuations, potential hacks, and technical failures. Since it relies on blockchain technology, it may be exposed to additional vulnerabilities. The risks grow as the user base expands.

What is the current status of the Diem project, and will it actually launch?

Facebook officially discontinued the Diem project in 2022. The digital currency was never launched due to global regulatory challenges and criticism from oversight bodies.

How can you buy and store Diem?

To buy Diem, use reputable exchanges and then transfer your funds to a secure digital wallet such as Novi. Protect your private keys carefully to safeguard your assets.

What are the main future use cases for Diem?

Diem aims to focus on international remittances, digital payments, and cross-border e-commerce, with the potential to serve as a reliable, stable store of value within decentralized financial systems.