Libra and Bitcoin — Differences

An article by Conflux Community Member: Michael - 三丰

As the whitepaper of Libra puts it: “Blockchains and cryptocurrencies have a number of unique properties that can potentially address some of the problems of accessibility and trustworthiness. These include distributed governance, which ensures that no single entity controls the network; open access, which allows anybody with an internet connection to participate; and security through cryptography, which protects the integrity of funds.” These words describe the similarities between Bitcoin and Libra, however, Libra and Bitcoin are still different in many ways!

The following points describe fundamental differences between the blockchain projects Libra and Bitcoin:

1. Decentralization and Cryptocurrency Value

As a permissioned blockchain, Libra is fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra reserve for every Libra that is created, building trust in its intrinsic value. According to the German news page “Der Spiegel”, 50% of the basket will be made up of USD, 18% of Euros, 14% of Japanese Yen, 11% of the British Pound and 7% of Singapore Dollars. Therefore, Libra has no currency system hedge or independent investment status. Because of Libra’s high percentage of USD in its bank deposit basket, it is tightly bound to the US federal reserve. Given the USD background of Libra, governments of many countries have paid attention to it, as it is in their interest to maintain the status of their currencies instead of a cryptocurrency that is strongly bound to the USD.

Bitcoin was born with a hope to substitute the current currencies system as a global currency. It is decentralized without the need for a trust endorsing central bank, thus, central entity. Therefore, Bitcoin is not restricted by a fiat currency such as the US dollar but is only affected by the market, which causes price fluctuation. At the same time, the difficulty of monitoring Bitcoin due to its decentralization has led to different views among governments on it.

2. Transaction History and Traceability

Libra is a new cryptocurrency that intends to work with regulators in an innovative way to find the best way to combat the use of Libra for money laundering, tax avoidance, privacy violation or other evil purposes. In other words, Libra’s transaction history, accounts, and identities should be traceable.

The rapid development of Bitcoin and its adaptation has a lot to do with the anonymity of its transactions and its ability to transfer funds between different people across different countries under complete confidentiality. Although all Bitcoin transactions are transparent and traceable, the data of any given transaction does not correspond to any real-life identity of a person. The usage of Bitcoin to transfer assets has created obstacles for law enforcement through actions such as anti-money laundering and anti-tax avoidance, as it’s hard to pinpoint the real-life identity of the users. Unconstitutional actions are part of the reason why blockchain systems, like Bitcoin, are not accepted by the mainstream.

3. Association and Validator Nodes

The Libra Association is managed by the Libra Association Council, which constitutes a representative for each validator node. Together, they decide on the governance of the network and the reserve. All decisions are submitted to the Council, and policies or technical decisions require two-thirds of the all nodes votes for reaching consensus. Therefore, the reliability of Libra lies in the user's trust towards the members of the Libra Association.

Bitcoin’s validation method is to take all decisions across the whole network, so if more than 51% of the nodes agree, then a collective decision will be put onto the ledger. With the decentralization and expansion of nodes for validation, transactions will not be subject to a certain node or organization, but to everyone who participates in it.

4. Creating and Destroying the Cryptocurrency

Libra coins are not generated through mining but created when authorized resellers have purchased those from the LIbra Association with fiat assets to fully back them. The Libra coins are only destroyed when the authorized resellers sell Libra coins to the Association in exchange for the underlying assets. As mentioned above, Libra is backed by a reserve of assets, such as bank deposits or short-term government securities, which are held in the Libra Reserve for every Libra coin that is created. The Libra Association serves as the entity managing the Libra Reserve and is the only party that can create (mint) and destroy (burn) Libra Coins.

Bitcoin’s maximum supply has been set on the day of its creation: 21 million. The only way of creating Bitcoins is through mining. Currently, more than 18 million Bitcoins have been mined. Thus, the creation of Bitcoin purely depends on the rules written in the code of it and cannot be influenced by any given association. The Bitcoin market is not controlled by a single person or association.

5. Discrepancy of Technical Characteristics

Libra utilizes the programming language Move, which was developed for the Libra Blockchain. Move is a new programming language to implement custom transactions and smart contracts. Move is designed with safety and security as its number one priority and is improved based on insights from security incidents that have happened with smart contracts before. Move is a language that makes code-writing according to the author’s intentions easier and reduces the risk of unintentional bugs or security breaches. To reach consensus amongst all validator nodes regarding the transaction execution and the execution order, the Libra Blockchain uses the BFT approach called LibraBFT consensus protocol. The LibraBFT consensus protocol is of higher transaction throughput, lower latency, and improved energy efficiency compared to other consensus protocols, such as Proof-of-Work.

Bitcoin’s core code is implemented through the programming language C++ and uses the Proof-of-Work consensus algorithm to achieve the consistency of transaction data. Due to the throughput capacity of the network, the smart contract capability on the Bitcoin network is limited.

6. Interest and Income

Libra Association's interest on the reserve assets will be used to cover system costs, to ensure low transaction fees, to pay dividends to investors that provided a jump-start capital for the ecosystem, and for the growth and adaptation of Libra. The exact allocation of the interests on the reserve will be set in advance and will be overseen by the Libra Association. “Normal” Libra-users do not receive a return from the reserve.

Since the issuance of Bitcoin is determined by its algorithm and not by any individual or organization, the revenues and returns from the Bitcoin network are market behavior of Bitcoin owners.

In a nutshell:

Libra is a cryptocurrency based on blockchain technology with many differences compared to Bitcoin, sometimes it is even opposite to Bitcoin.