Digital payments have gained profound popularity in recent times with an increased focus on flexibility for financial transactions. People are slowly getting better levels of internet accessibility with the facility of cost-efficient smartphones. With the majority of economic activity happening online in the present times, the news of digital currency alternatives such as Facebook Diem has caught the attention of many.
The digital payment landscape is already dominated by notable companies such as PayPal, MasterCard, and Visa. At the same time, the power of Facebook in social media is very well known, especially with a user base of 2.6 billion spanning different countries. Facebook announced the launch of its own cryptocurrency, Diem in 2021, and it has created substantial anticipation among industry experts. Let us find out more about the new Facebook-backed crypto project and what it entails for the future of the economy.
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The Need for Facebook’s Diem
The arrival of the internet and mobile broadband has been responsible for enabling billions of people all over the world to access knowledge and information about the world. The internet allows people to enjoy the benefits of high-fidelity communications with the facility of various cost-efficient services with assurance of higher convenience. Interestingly, all you need is a smartphone worth $40 to access internet services.
However, a major share of the global population is still deprived of the services from internet connectivity. Almost 1.7 billion adults all over the world do not have access to traditional banking services despite around one billion people having mobile phones, with half of them enjoying internet connectivity. So, does the Facebook cryptocurrency, Diem, have a chance at resolving the issue of financial inclusion?
Even if the cost of communication was higher almost ten years ago, they were the same for everyone. In the present times, people with limited financial resources have to pay additional costs for using financial services. One of the prominent examples to validate this claim refers to remittances, ATM charges, and wire costs.
At this point, Facebook Diem brings the possibilities for utilizing blockchain to address the prominent issues of trust and accessibility. Blockchain can facilitate distributed governance, thereby ensuring that a single entity does not control the whole network. The use of blockchain in cryptocurrency design ensures open access to all willing participants with an internet connection.
In addition, it also facilitates the benefit of security by leveraging cryptography for safeguarding the integrity of funds. However, many of the blockchain systems available presently have not achieved mainstream adoption. The concerns over volatility and scalability of existing blockchain-powered cryptocurrencies have created doubts regarding their suitability as mediums of exchange.
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Foundations of Diem
Facebook Diem, which was formerly known as Facebook Libra, introduced the promising solution everyone wanted. The objective of Diem focuses on combining the various components of blockchain-driven technological innovation with promising regulatory frameworks and all-around compliance. The Libra project can help in making the most of specific compliance requirements for improving the efficiency of cryptocurrency variants.
It can prevent illicit activities such as anti-money laundering alongside fighting against financing for terrorism through crypto projects. It can easily sanction compliance, thereby providing a strong base for trust. The developers, consumers, and merchants can get advantages of security and compliance with the Libra coin. So, the need to look forward to a global financial system with lower costs, improved connectivity, and accessibility must get the boost of technological innovation and collaboration among experts and regulators.
In order to learn more about Facebook Diem, it is essential to understand the values driving its design. The following tenets serve as guiding principles for the design and functioning of Facebook’s new cryptocurrency.
- More people should have the capability to access financial services.
- People should have the inherent right for controlling the outcomes of their legal labor
- Open, global payment networks with better speed and cost efficiency can lead to promising economic opportunities alongside improved commerce worldwide.
- People would slowly develop their trust in different distributed forms of governance.
- Every individual and institution has the responsibility for driving the growth of financial inclusion while supporting ethical agents and upholding the integrity of payment systems on a continuous basis.
- A broader and open payment network with the highest levels of interoperability must follow the design and governance practices with high compliance standards.
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The Diem Payment Association
As clearly evident from the discussion till now, the world has to bring an interoperable and trustworthy payment system. The future wants us to secure our financial assets on a mobile device with simplicity and intuitiveness. The movement of money throughout the globe with proper compliance must be cost-effective and easy. The Facebook Libra ecosystem emerged as an outcome of lower barriers for access and frictionless payments with emerging product innovation and more entrants.
Components of Facebook Diem
Libra, now known as Diem, primarily focuses on creating a global payment system that is simple to understand and use. The financial infrastructure of Libra aims at empowering around billions of people. So, what can you find in the design of the Facebook Diem project? The Diem project includes three distinct parts working in collaboration for creating a financial system with better scope for inclusion. Here are the three distinct components that you can find in the new Diem cryptocurrency.
- A blockchain infrastructure with reliable security and scalability serves as the technological foundation for the payment system.
- Libra Association and the related subsidiary Libra networks support governance by including a focus on the development and operations of the payment system.
- Libra coin is also another important component with the backing of the Libra Reserve that includes assets of cash or cash equivalents alongside extremely short-term government securities.
Another important detail that you should know here is the Libra blockchain, the foundation of Diem. Now, it will be known as the Diem blockchain, and it employs open-source software because it wants to deal with a global audience. It allows almost anyone to build cryptocurrency solutions, thereby helping billions of people with their financial needs.
A massively open and interoperable payment system can help developers and organizations in helping people as well as businesses to hold and transfer Libra Coins suitable for daily use. As the number of people on the internet continues to grow substantially, people could access the Diem payment system. The Facebook-backed cryptocurrency has followed a ground-up approach for developing the blockchain. It can ensure prioritization for scalability, throughput, efficient storage, future adaptability, and better security.
Check out the official Diem White Paper to know more about the Facebook Diem!
How Does the Diem Payment System Work?
The payment system for Diem offers support for single-currency stablecoins as well as a multi-currency coin, known as Diem coin. The Diem coins must be acceptable across different places with ease of access for people interested in using them. People should slowly develop their trust in Diem on the basis of the assurance of stability over the course of time.
Diem can achieve this by backing every single currency stablecoin at a 1:1 ratio against the Diem Reserve. Every Diem or Libra coin is actually a composite of single-currency stablecoins supported on the Diem network in a 1:1 ratio. Interestingly, the multi-currency coin also brings the backing and stability associated with stablecoins that make it up. The Diem Reserve can help in safeguarding the value of Diem coins over the course of time.
Diem Association: Evolution of Facebook Diem Payment System
The Diem Association itself offers you a detailed impression of the scale and stability of the project. Facebook has created the Diem Association as an independent membership organization with its headquarters in Switzerland. The association primarily serves the objective of coordination and offering suitable governance frameworks for decision making in the Diem network and Reserve.
It is primarily responsible for monitoring the operations and evolution of the Facebook Diem payment system. The association also takes care of the facility of services over the Libra blockchain with better safety and compliance alongside allowing the flow of grants for social impact to drive financial inclusion.
Interestingly, Facebook teams do not enjoy any special privileges or rights within the Association despite serving as crucial contributors in creating the Association and Diem blockchain. The first Association members signed the Association Charter on October 14, 2019. The organization of members in the Association Council ensures the allocation of similar privileges and responsibilities to all members.
According to recent reports, the Diem Association has plans for launching a US dollar stable coin with a focus on the United States only. The Association would shift its main operations to the US from Switzerland while withdrawing payment system license application with Swiss financial regulator. The Association has also stated that this initiative will help them create a safe payment system for consumers and businesses with speed and cost-efficiency benefits.
The Diem Blockchain
The most important requirement to understand ‘what is Diem?’ would turn your attention towards the Diem blockchain. The Diem blockchain would provide the basis for all financial services, the prime highlight of Facebook’s cryptocurrency. The detailed evaluation of present options could provide the scope for developing a new blockchain on the basis of specific requirements. So, the Facebook Diem cryptocurrency would rely on the following requirements for achieving the desired objectives.
- A storage system with higher transaction throughput, capacity, and efficiency with lower latency offers the ability to scale capacity up to billions of accounts.
- Flexibility is essential for powering up the scope for innovation in the future for financial services.
- Improved security is obviously a mandatory requirement in the design of blockchain-based cryptocurrency for ensuring the safety of the financial data and funds of participants.
The Facebook Libra blockchain employs three critical decisions for fulfilling the three requirements mentioned above. They are,
1. Design and Use of Move Programming Language
Move is a suitable programming language to help you implement custom transaction logic along with smart contracts on Diem blockchain. It features safety and security of the highest standards and helps in the simpler creation of code on the basis of previous security incidents with smart contracts for reducing the risks of security incidents or unintended bugs.
Move programming language supports the Facebook-backed cryptocurrency with the facility of automatic proofs about transactions fulfilling certain requirements. The prioritization of such features helps in maintaining the security of Diem with better definitions for managing validator nodes and payment transfers.
2. Byzantine Fault Tolerant Consensus
The next important highlight in the design of Diem refers to the BFT consensus mechanism. The BFT consensus approach can facilitate three significant objectives. First of all, it can help in developing trust in the blockchain network. BFT protocols ensure continuous functionality even if around one-third of validator nodes in the network fail or are compromised.
The next highlight of BFT protocol in Diem blockchain refers to the facility of better transaction throughput alongside better energy efficiency and lower latency approaches for consensus. In addition, the Diem BFT protocol provides a clearly defined transaction finality. As a result, participants can be assured of the completion of transactions when they witness confirmation from different validators.
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3. Adoption and Iteration of Commonly Used Blockchain Data Structures
It is essential to notice transaction data safeguards on the Facebook Diem blockchain with Merkle trees. Merkle trees are basically a data structure leveraged by different blockchains for identifying any modifications in existing data. The Diem blockchain would be a single data structure documenting the transaction histories and states over the course of time.
The implementation of Merkle trees can help in simplifying the work for applications that are using the blockchain. So, it can ensure a unified framework with the facility for allowing readability of data for verifying data integrity. As a result, anyone, including law enforcement, third parties, and Virtual Asset Service Providers (VASPs), could ensure proper audit of operation accuracy. At the same time, the Diem blockchain would also offer promising advantages in protecting the privacy of all network participants.
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On a final note, it is quite clear that the Facebook-backed cryptocurrency, Diem, would spark new cryptocurrency evolution. With the wide user base of Facebook, it has the potential to create a completely new internal financial ecosystem. At the same time, Diem also aims at shattering all the barriers to global financial inclusion. It is capable of bringing cryptocurrency to the masses rather than keeping the concept restricted to corporate society only.
Many blockchain-based cryptocurrency solutions other than the Diem coin already exist in the cryptocurrency market. However, they don’t have many takers. On the contrary, the Diem association could foster the acceptability of Diem in the long run. Furthermore, the assurance of better stability in comparison to other cryptocurrency alternatives can work in its favor. As a groundbreaking initiative by Facebook, the Diem cryptocurrency can spell a new future for the global economy.
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Author: Gwyneth Iredale