In the current digital process, the increasing smartphone penetration rate worldwide provides a vast stage for online economic activities. International payment giants such as PayPal, Visa, and Mastercard are responding to the trend by competing to introduce various online payment solutions. Meanwhile, the cryptocurrency field is experiencing an unprecedented wave of innovation, with new projects emerging one after another.
However, what sets Facebook apart among these explorers is its unparalleled advantage in user base. By the third quarter of 2020, Facebook had approximately 2.7 billion monthly active users. This massive social network empire reaches every corner, which could potentially become a breeding ground for explosive growth of its new payment system. Therefore, when Facebook announced its entry into the digital payment field and the launch of Libra (now renamed Diem), it undoubtedly caused shockwaves in the global financial and tech industries. People are watching how this potential disruptive product, backed by its enormous number of users, will significantly impact the existing payment landscape.
Diem (formerly known as Libra), initiated by social media giant Facebook, is an innovative global payment solution built upon blockchain technology. The core objective of the Diem project is to provide inclusive financial services for those who are underbanked or lack easy access to traditional banking systems.
The initiative was spearheaded by key figures such as Morgan Beller, David Marcus, and Kevin Weil, and it is managed and operated by the independent membership organization, the Diem Association, headquartered in Geneva, Switzerland. This association consists of companies and non-profit organizations from the blockchain, tech, payments, telecommunications, and venture capital sectors. These members collectively participate in governance decisions for the Diem project, oversee the operation of the payment system built on the Libra blockchain, and provide necessary funding support.
While the Libra project is built on blockchain technology and employs cryptographic means to ensure transaction security, it does not fully conform to the commonly perceived characteristics of a "cryptocurrency." Strictly speaking, Libra lacks core attributes of cryptocurrencies such as decentralized issuance, total supply limit, and complete transparency that are immutable.
Therefore, when discussing the essence of Libra, defining it as a "digital currency" may be more appropriate. This term emphasizes Libra's feature of realizing value transfer in digital form while distinguishing it from the highly decentralized and censorship-resistant goals pursued by traditional cryptocurrencies. Readers with an in-depth understanding of cryptocurrency properties will realize that Libra's design philosophy and operating mechanism lean more toward building a controllable and compliant global payment network rather than challenging the underlying architecture of the existing financial system.
When delving into Facebook's Diem project, its core technology - the unique architecture and working principles of the Diem blockchain - is crucial to understanding the essence of its payment system. Unlike permissionless blockchains like Bitcoin and Ethereum, Diem adopts a permissioned blockchain model.
In a permissionless blockchain, any user can participate in the network and perform operations such as transaction validation and block creation without specific authorization. On the other hand, Diem opts for a more centralized approach by employing a permissioned blockchain structure. This means that only members who have undergone rigorous screening and been authorized by the Diem Association can act as validators and participate in network operations, executing transaction validation tasks.
Diem abandons traditional consensus mechanisms like mining or proof-of-stake and instead relies on a pre-selected group of validator nodes to ensure the security and stability of the network. This design aims to achieve efficient transaction processing while mitigating potential risks and uncertainties brought about by decentralization through a pre-established trust layer.
Regarding why PoS was not directly adopted in the initial phase but planned to be gradually transitioned to within the next five years, the Libra team explained in its whitepaper that current permissionless systems are unable to meet the demand for secure and stable transactions at a scale of billions of people. Therefore, choosing a permissioned blockchain and gradually shifting towards a more decentralized PoS consensus mechanism as the technology matures is deemed a more robust development path for realizing large-scale global payment scenarios.
The launch of Facebook's Libra (now renamed Diem) project in the blockchain world has sparked extensive discussions regarding its degree of decentralization. Compared to permissionless blockchains like Bitcoin, Diem adopts a permissioned blockchain model, meaning that its operating mechanism is more similar to traditional corporate database systems, with weaker decentralization features.
Specifically, the validator role in the Diem network is performed by pre-selected members of the Libra Association, rather than being open to any global user for mining or validation rights as in Bitcoin. This characteristic determines that Diem does not possess the same level of censorship resistance as cryptocurrencies like Bitcoin, as network activities are subject to some degree of centralized control by association members.
However, this tendency towards centralization is not entirely negative. By restricting participants and implementing strict admission standards, Libra can effectively filter out and prevent malicious applications and potential scams from entering the payment ecosystem, thereby providing a more controlled and secure service environment. Nevertheless, this also means that Diem compromises on achieving complete decentralization and free flow in exchange for stronger regulatory compliance and risk prevention capabilities.
Facebook's Diem payment system has created a unique digital currency ecosystem, centered around a stablecoin system pegged to fiat currencies. The Diem system supports a series of single-currency stablecoins anchored to the value of dollars, euros, pounds, and other legal tender, with their stability stemming from the "Diem Reserve" composed of cash, cash equivalents, and short-term government securities. This design ensures that each Diem stablecoin has a solid asset foundation supporting its value, effectively mitigating the risk of severe price fluctuations commonly seen in traditional cryptocurrencies.
In addition, Diem also introduces a multi-currency token called Diem Dollar (originally named LBR), which functions as an aggregate of multiple single-fiat stablecoins and is jointly collateralized by various assets within the reserve. Aimed at providing users with a broader and more liquid medium of exchange, the Diem Dollar enables seamless transactions across different fiat currencies.
Users will be able to store and manage their Diem digital currencies in the upcoming Novi wallet (previously named Calibra wallet). Expected to be deeply integrated into Facebook's suite of social media products, including but not limited to Facebook Messenger and WhatsApp, the Novi wallet will facilitate easy conversion between fiat money and Diem tokens.
On the technical front, the Diem project is based on the open-source code library "Diem Core," written in Rust for enhanced efficiency and security. Moreover, to expand the functionality even further, Diem plans to introduce the Move programming language to support the development and deployment of smart contracts, driving innovation and growth in financial applications within the Diem payment system.
While both Facebook's Libra (now renamed Diem) and Bitcoin fall under the category of digital payment systems, they exhibit significant differences in design, objectives, and use cases. As a result, they are more inclined to complement each other within the future financial ecosystem rather than directly replacing one another.
Bitcoin, as the first successful decentralized cryptocurrency, centers its core value around censorship resistance and scarcity, positioning itself as a potential reserve asset or store of value for investment purposes and anonymous transactions in certain specific scenarios.
In contrast, Libra/Diem proposes a novel framework for a permissioned-based digital currency that operates in a more centralized manner, aiming to provide convenient, low-cost, and compliant cross-border payment services to global users. By adopting a stablecoin mechanism pegged to a basket of fiat currencies, Libra/Diem endeavors to address inefficiencies and inclusivity issues prevailing in traditional financial systems.
After the launch of the Libra project, Facebook quickly faced intense scrutiny and criticism from global central banks, legislative bodies, and regulatory agencies. The main concerns centered around potential disruptions to the traditional financial system, possible risks to monetary policy, and issues with user privacy protection. Despite efforts by Facebook and its partners to address these challenges and adapt to regulatory requirements – such as renaming it Diem and redesigning its architecture to reduce decentralization – doubts about compliance and feasibility persisted.
It is noteworthy that in the face of mounting pressure and uncertainty, Facebook decided to shift its focus to other areas, such as the development and application of emerging technologies like the metaverse. This move effectively signals the end of the Libra (Diem) project. However, this exploration process has profound implications for the future application and direction of blockchain technology in the global payments sector and provides valuable lessons for subsequent similar projects.
Facebook's Libra (now renamed Diem) project aims to reshape the global payments landscape with its unique advantages and global influence. Despite not being a fully decentralized cryptocurrency, but rather a permissioned blockchain model, it achieves value stability through a stablecoin strategy linked to fiat currencies, hoping to break the boundaries of traditional financial services and provide inclusive financial solutions.
However, facing concerns from regulatory agencies about potential monetary policy risks, user privacy protection, and financial system stability, the project has undergone significant strategic adjustments and challenges. Although it ultimately failed to launch as planned, its exploration of digital currency and payment system innovation undoubtedly set important reference points for the industry, also foreshadowing that the future digital payments field still needs to find a balance between compliance, security, and inclusiveness to adapt to evolving financial market environments.
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