In the first three parts of this blog I discussed how the Libra appear to its users, how the Association governs the Libra, and what the role of Facebook and its subsidiary Calibra is. In this part I will present a business model for the Libra ecosystem, which summarizes what we know so far about the commercial transactions in the Libra network.
The business model
I use the e3value notation to represent the business model. Don’t worry, you don’t need to understand e3value to understand this blog. I will explain the diagram as we go along.
The e3value diagram below summarizes what we know from current documentation. I first explain a few important parts of e3value and then walk you through the diagram.
The diagram shows actors in the Libra ecosystem such as the Libra Association and Libra Resellers, represented by rectangles. A set of actors with similar characteristics is represented by a stacked set of rectangles.
Actors have needs, represented by red bullets, and engage in economic transactions, represented by reciprocal connections between actors. For example, a Libra user has a need for account storage. It obtains this from the Association and it pays a rent in return.
Dependencies among transactions
One economic transaction of an actor may require another transaction. These are then connected with a dashed line. For example, when a Libra Reseller sells Libra for fiat money to a user, it obtains the necessary libras from the Association.
The bull’s eye inside the Association indicates that any further economic transactions needed for this are not represented. So our model does not represent what the Association does to sell libras to resellers. This is a modelling choice. If we wanted to show more information, we would have included it in the diagram. But whatever our modelling choices, the set of transactions needed to satisfy a need ends in a bull’s eye.
An e3value diagram shows how economic actors can do business with each other for a period of time, which we call a contract period. For example, it shows that in the contract period of this model, Libra users may rent account storage. The Libra Association offers this storage, and users pay rent for this. For example if we take a contract period of 12 months, and the monthly rent is 1 libra, then the users pay 12 libra for account storage.
In a quantitative analysis, we may estimate how many users there are and what the rent is, and then compute the revenue for the Association during the contract period. There is currently not enough information to quantify the entire model, but some first estimates of investor cash flows are possible, as we will see.
The business model shows only economic transactions
One final thing to point out: The business model does not show technology or business processes. It only shows which needs an actor may have in the contract period, and which economic transactions occur in the contract period to satisfy those needs. The ordering of transactions in time is not represented. Neither is the technology to realize the business model specified. This allows us to concentrate on cash flows only.
Now let me walk you through the business model of the Libra ecosystem in the rest of this blog. Information about the Libra ecosystem is incomplete and the following model is therefore incomplete too. But it is more complete than anything else published hitherto.
Facebook and Calibra
Calibra is the Facebook subsidiary that develops a custodial wallet for Libra. A custodial wallet is a piece of software with which you can send and receive payments in libras, and that manages your private Libra key.
Calibra supplies its custodial wallet to Facebook as embedded wallet functionality in Messenger and Whatsapp. There is as yet no information about how Facebook will pay for this. Here I assumed that Facebook pays for this in fiat money.
With embedded wallet functionality, Facebook users can do payments to each other in libras even if they do not have a Calibra app installed on their smartphone.
On the top left we can see that Libra users can buy a custodial wallet from Calibra. It is currently not clear how users would pay for Calibra’s custodial wallet, and here I assume they pay with their data.
Users can exchange fiat money for libras and back again with Resellers. To have libras, users need an account, and they can rent the necessary storage for this from the Association.
Once they have libras, users can spend them by performing transactions. For example, one user may be a consumer who buys some product from a shop, which would be another user. They pay the Association transaction fees for this.
The Assocation will authorize resellers to buy and sell Libra for fiat currencies. Only the Association can mint (create) and burn (destroy) libras, and it will do so only in response to demand from authorized resellers (The Libra Reserve, page 2). Resellers will make money by selling libras for a higher rate than they buy them. Resellers may be banks, currency exchanges, or other financial service providers.
The Association is responsible for governance of the Libra. Its members are organizations that maintain an exact copy of the database of Libra accounts and transactions, and that check and execute Libra transactions in the database. They receive storage rent and transaction fees for these services.
There is a hint that the Association will pay operating expenses to validators (The Libra Reserve, page 2). But this is not clear and I did not include this in the business model. Instead, I modelled the fact that by providing transaction validation services to the Association, members gain influence on the governance of the Libra.
Association members and Investors
There are two types of members:
- Founding Members have joined before the organization’s charter has been completed. They each have invested $10 million in the Libra network.
- Late members have joined after the charter has been completed. They have not invested $10 million in the Libra network.
In addition to the Founding Members, other organizations may also invest in the Libra network. This is shown at the bottom right of the diagram.
All Association members receive storage rent and transaction fees, but Founding Members additionally receive a dividend on their investment, just as other investors.
As explained in part 2 of this blog, the Association maintains a Reserve of stable and liquid assets to back up the value of the Libra. This reserve generates a yearly interest, which is paid out as dividend to Founding Members and Investors. We see this at the bottom right of the diagram.
Estimations of dividend
How much would this dividend be? Assuming 500 million users with a Libra account worth on the average $20 per user, a treasury bill rate of 1.17%, an operating cost of $37 million per year, Steven Perenod gets a profit of $80 million. Assuming 50 investors who jointly invested $500 million, this is 16% return on equity. A very attractive return on investment.
But Perenod’s assumptions are very modest. Assuming a much bigger supply of libras, and a higher rate for treasury bills, Kirk Philips and Adam Levine get a return on investment of 668%. In terms of Perenod’s computation, such an ROI will be achieved if 1 billion users have a Libra account worth on the average $300. These assumptions are not unreasonable.
And if and when the Libra gets used for more than just payments, its money supply will be larger, raising dividends to thousands of percent.
Are these user numbers outrageous? Not really. Facebook has 2.1 billion users. Whatsapp has 1.5 billion users. If only 15% of Facebook users would start using Libra, it would have more users than the U.S. dollar. The Libra ecosystem intends to include the 1.7 billion adults currently outside the financial system (White Paper), or at least the 0.5 billion of those with smartphones and internet access. Size matters a lot.
Are these returns on investment outrageous? Yes they are. It is clear why businesses want to become Founding Members and investors in the Libra. If sufficiently many people use the Libra, investors will earn money big time.
Social impact projects
In the middle of all this activity are the Social impact Projects. The Association funds social impact projects based on an advice by a Social Impact Advisory Board. The decision to fund a project is made by the Council. We can already see that grants probably will be small compared to the amount of cash passing hands in other parts of the business model.
David Marcus, who leads the Calibra development effort, has said
“If Libra is successful, Facebook will first benefit from it by enabling more commerce across its family of apps. More commerce means ads will be more effective, and advertisers will buy more of them to grow their businesses. … Additionally, if we earn people’s trust with the Calibra wallet over time, we will also be in a position to start offering more financial services, and generate other revenue streams for the company.” (Libra, 2 Weeks in)
Our business model of the Libra ecosystem shows that all of these new business models are bonuses. The business model for Association members such as Facebook and Calibra is that they receive storage rents and transaction fees. And for investors, again like Facebook and Calibra, the business model is that they will each receive a handsome dividend on the deposits of Libra users.
The bulk of the dividend on the deposits of Libra users will go the Libra Founding Members and other investors. If the Libra would be really motivated by the desire to empower the 1.7 billion unbanked, then most of the dividend should go to them rather than to a few tech companies, some of which are already very rich.
This brings me to the strategy that Facebook and Calibra have followed so far to get the Libra accepted. Is it really driven by the desire to empower billions of people? Is it an innovation that should not be blocked by governments? Can we trust Facebook and Calibra with our financial data? Is Facebook turning into sort of supranational state and should it be regulated as such? I will discuss these and more questions in the final part of my blog.