Facebook’s recent announcement of Libra and the Libra Association has left Congress with a lot of questions. Before understanding Libra, it is helpful to understand blockchain networks and cryptocurrency. Blockchain networks have the potential to revolutionize digital services in ways that solve many important public policy issues that we are grappling with today, including data privacy, information security, and the proliferation of centralized tech companies that monopolize so many areas of our lives.
The Blockchain Association represents the most reputable companies in the cryptocurrency industry, and while neither Facebook nor the Libra Association is a member of our trade association, we’re excited that their project has focused Congressional interest on the potential of cryptocurrencies. We represent developers of new projects, cryptocurrency exchanges, as well as investors who see blockchain networks as the next big thing.
Here are key concepts for those in Congress looking at the world of blockchain and cryptocurrencies for the first time:
Cryptocurrency is the fuel for open blockchain networks — and these networks are what give this technology so much potential
Cryptocurrency is a digital representation of value. But this definition doesn’t mean much without understanding the open blockchain networks that they fuel. An open blockchain network is a network of computers running open source software that communicate with one another to agree upon a common set of data.
So what’s the big deal about a common set of data? Almost every digital service that we enjoy — social networking, photo applications, online payment platforms — relies on a database of information that is held by the company offering the digital service. In the case of social networking, it’s your list of connections and your interactions with them; in the case of photo applications, it’s your collection of digital photos; in the case of payments, it’s a record of your transactions. We currently trust centralized companies to accurately and securely maintain this information for us.
Unfortunately, centralized databases are inherently vulnerable, as we’ve seen with wave after wave of cyber attacks compromising user data. No amount of digital security measures can overcome the core weakness of centralized databases, as they offer hackers a single point to direct their attacks. Furthermore, the business models of centralized services often hinge upon profiting from the data, which puts these companies permanently at odds with their users, who often believe their data is private until it’s too late.
Open blockchain networks are alternative systems to provide the computing power, software, payments infrastructure, and databases that are needed to deliver a digital service. This means that many of the same services we use today, as well as services that we can’t yet imagine, can be offered to us from a decentralized network instead of a centralized organization. Just as the internet created amazing new types of social and commercial interaction, we believe open blockchain networks will improve the world in surprising ways.
There are a variety of open blockchain network designs, but they all share key common elements
Because there are so many digital services that can be offered by an open blockchain network, there are a variety of ways that these networks are structured. However, there are three common elements that all of these networks share: a blockchain, a computer network, and a consensus mechanism.
First, all open blockchain networks have a shared set of data, which is recorded on a blockchain.The data stored in an open blockchain is public and incredibly difficult to change once recorded.
This leads us to the second feature shared by open blockchain networks: the peer-to-peer network of computers that all have access to the data ledger and participate in the operation of the network. Most cryptocurrency projects allow anyone to participate, while others limit participants to a select group.
So how do all these computers in the network decide which is the accurate data to add to the record? They use what is known as a consensus mechanism. There are many ways to do this, but the bottom line is that the software is designed in a way that allows everyone to agree to the same truth. Cryptocurrencies are critical to this process because they incentivize these computers to reach and maintain consensus as well as validate that the process is completed properly.
Facebook’s Libra project is just one early-stage project, and we’re still learning how it stacks up against other open blockchain networks
The first open blockchain network, the Bitcoin blockchain, was launched over ten years ago. Since then, the crypto industry has grown to include multiple blockchains and token projects developed by top computer scientists and funded by top venture capitalists. Many of these projects are in the early stages of development, and few have reached mainstream adoption, but their potential is vast and new breakthroughs occur every day.
So how did these crypto industry players react to the news that Facebook is working to launch Libra? Well… it’s a mixed reaction. On one hand, many industry participants were drawn to the industry because they see that open blockchain networks can be more secure, more privacy-focused, and provide much-needed competition to large Internet platforms like Facebook. But on the other hand, if the Libra succeeds, it could be the catalyst that introduces the benefits of cryptocurrencies to billions of people. Regardless of its differences from other projects, Libra has raised the profile of the industry and that excites us.
As Congress moves forward with its hearings, it is our hope that Facebook is asked tough questions and provides thorough answers. But more importantly, we hope Congress will recognize that the open blockchain industry is vast and complex — and so much more than just Facebook’s Libra project. The people involved in the industry are investing and founding companies because they view open blockchain networks as better mechanisms to deliver digital services to consumers and businesses. The industry looks forward to working with Members of Congress as they look to learn and contemplate regulation of these promising networks.