Many strive to create actual blockchain use cases. Various projects based on clever ideas have been set out to apply blockchain to everyday lives. However, there are only a handful of successful cases, which is why many pay attention to the news that Facebook has plans to develop stablecoin.
According to an interview with Facebook officials by Bloomberg, Facebook plans on developing stablecoin through its messaging service WhatsApp. (See DECON’s Stablecoin series to learn about stablecoins)
Why did Facebook make this decision? What does it seek to achieve with stablecoin?
As Facebook CEO Mark Zuckerberg said in the interview, Facebook plans on leveraging blockchain to enhance private data autonomy. However, since a corporation’s main purpose is to raise profit, Facebook will not jump into this project just to promote private data autonomy.
Instead of explaining the entire potential of Facebook utilizing blockchain, this article will touch on why Facebook strives to develop stablecoin and how it plans to raise profit.
· Facebook needs to diversify its revenue streams
· Facebook is attempting to introduce a payment method to diversify its revenue streams
· Developing stablecoin can be interpreted as Facebook’s effort to secure its payment method
Facebook Needs to Diversify its Revenue Streams
Facebook is a company that rakes money in. It has an annual revenue of USD 40 billion and 653 million, and is ranked 76th on Fortune’s list (as of 2018).
How does Facebook earn so much when people use Facebook for free?
The answer lies in advertisement. Facebook’s main source of revenue is the ads that pop up on news feed. Facebook developers tailor the ads shown to individuals based on what they like and share, what videos they watch, and what ads they click. This leads to spontaneous purchases. Advertisers can effectively promote their products and Facebook earns money through them.
While making money is certainly a priority for companies, there are other matters to consider than immediate profit. This statement is even truer for large global corporation such as Facebook. Facebook is criticized for heavily depending on ads to increase its sales. In the last quarter of 2018, 98% of Facebook’s profit came from ads. In fact, the share of the profit from ads in Facebook’s sales volume never went below 90% in its history. Therefore, it is not an overstatement to say that ads feed Facebook.
This profit structure needs to be improved by considering two aspects. The first one is growth, and the second one is stability.
First, profits from ads alone cannot guarantee continued growth. Facebook is characterized with a rapid increase of users. However, not everyone in the world has access to the Internet; therefore, the number of Facebook users cannot increase forever. While the absolute number of new users is growing, the number of new users from advanced countries is growing at a slower pace than before. It means that there are not many people left who can newly join Facebook.
If the number of Facebook users does not grow anymore, it will be difficult to earn more from advertisers; the more users, the more people see ads. Advertisers pay fees based on the number of people who see their ads. While it is possible to make ads more specific and effective to increase fee per ad, this method cannot guarantee sustained profit growth. Subsequently, when the number of users stagnates, it directly leads to stagnation of sales volume.
Second, a company’s reliance on a single source of income can be problematic for its stability. When something happens to the single source of sales, overall stability of the company can suffer. If advertisement industry undergoes turbulent times, it can put Facebook at risk. As the saying goes, you should not put all your eggs in one basket.
Having a payment method together with social media
to diversify revenue streams
How can social media sites like Facebook earn money without having ads? There can be many answers, but as of now, developing a payment method is the most popular option. Think of WeChat that began as a messaging service provider. It now offers a payment method called WeChatPay.
Most people have a social media account, so people can easily pay without going through complex process. Therefore, social media network and payment method can be used together as a good business idea. It makes a win-win relationship because social media sites can generate profit from many users, and the users can take advantage of convenient payment service.
Having a payment method can make a company powerful because no one can live without a payment method. Therefore, offering a payment method will have a strong impact.
A social media site can take a fee as a card company does, or provide a CRM solution by understanding consumption patterns of users. Or it can manage surplus funds accrued in its customers’ social media accounts to increase its revenue, or it can provide new financial services for funds accrued in customer’s social media accounts.
WeChat (China) shows the best practice case of integrating social media and payment method. While Facebook mostly depends on income from ads, WeChat added diverse lines of business by offering payment service as well as social media network. That is why you see 20 or more ads (unlimited) on Facebook news feed per day, but only two or less ads per day on WeChat.
How Facebook has tried to introduce a payment
Now, let’s take a look at the history of payment methods that Facebook worked with to understand why Facebook is trying to diversify its revenue sources by using Stablecoin.
Facebook Credits is the first payment method that Facebook launched to become a leader in this area.
At first, Facebook Credits was created to become an online transaction method on Facebook. It was first launched in 2009, and 15 Facebook Credits had the value equal to $1 (USD).
Facebook Credits was a currency that was used on Facebook platforms, so it was used to purchase a game or an app based on Facebook. There was a time when Facebook games only allowed payment with Facebook Credits.
What Facebook tried was earning profit by taking 30% of paid amount and giving the remaining 70% to developers. Moreover, Facebook hoped that any leftover from Facebook Credits would make the users buy other products.
Unfortunately, Facebook Credits did not make it. In fact, it disappeared after its first three years. Public says that Facebook Credits did not survive because of poor marketing strategy, building developing environment, lack of places to use Facebook Credits, etc.
The biggest reason was the lack of places to use Facebook Credits. There were not many places that accepted Facebook Credits, and users were able to use Facebook Credits only when playing games on Facebook.
A simple transmittance or payment function would have prevented this issue; however, when Facebook Credits was introduced, there was no concept of mobile money transfer or mobile payment. There was not even a concept of simple offline payment at that time.
Facebook Messenger payments
Facebook Credits did not last, but Facebook continued its attempt to develop a payment method.
At the same time, the world continued to evolve and the concepts of mobile money transfer and payment have been born, which are clearly where a payment method can be used. Facebook did not let this opportunity pass and initiated its Messenger-based service, which was a mobile money transfer and payment service. It allowed people to use Facebook Messenger to make payments, send money, and receive money.
This Facebook Messenger payments is not available in Korea, and can be used only in a few countries including the United States, the United Kingdom, and France.
The question then arises is whether Facebook Messenger payments are widely used. None of you would have heard that Facebook Messenger payments are popularly used in other countries. According to the annual “How We Will Pay” report by Visa, Facebook is the least trusted payment method provider.
Why is Facebook not garnering trust from people as a payment method provider?
There can be a number of reasons, but the biggest reason is uncertainty about its ability to process payment data, which is sensitive data.
In 2018 alone, Facebook suffered over 80 million personal data breaches. If identity data and payment data are compromised, it can lead to a serious privacy issue. If your credit card information is stolen by hackers, your assets and property can be at risk.
Without addressing trust issue, Facebook cannot become a mainstream payment method provider. From June, Facebook Messenger payments will not be available in the United Kingdom and France. While the exact reason for this decision is not specified, one can infer that there might not be many users because of the lack of trust.
Even when Facebook Credits and Messenger payment both did not make it, Facebook has not given up on offering a payment method.
This time, Facebook tried to become a payment service provider by using WhatsApp. In February 2014, Facebook acquired WhatsApp for $ 19 billion dollars. WhatsApp is the leader in the market along with Facebook in terms of the number of users worldwide. In India, more than 90% of smartphones have WhatsApp installed.
WhatsApp is based on “end-to-end encryption” technology that allows only you and the person you are communicating with to read what is sent, and it stores messages in encrypted format in the company database. It has better reputation for its security. Using WhatsApp to provide mobile money transfer and payment service can prevent the trust issue that happened with Facebook Credits. It can also diversify revenue streams because there is no mobile money transfer and payment service in India yet, and the market size is expected to grow to larger than $ 1 trillion (USD).
After acquiring WhatsApp, Facebook experimented with WhatsApp Pay in India. Facebook successfully ran beta testing for 1 million users in India.
While it may sound like now Facebook can officially start its payment service in India, there is now a problem with the financial authority in India that prevents commercialization of WhatsApp Pay. Facebook tried to officially launch the service after the best testing, but the regulations in India are keeping Facebook from going for it.
In India, payment data should stay in India if a provider wants to offer financial payment service. WhatsApp cannot provide money transfer service or payment service because its database is not in India. It has claimed that the database is solely in India, but the Indian authority has not given any approval. There are continued attempts to negotiate with the Indian government, but nobody knows what will happen.
Stablecoin signifies a continuous attempt to become a
payment service provider
Facebook is striving to have its own payment method, and is upgrading its approach to make it happen. In the end, what Facebook brings is Stablecoin. According to Bloomberg, Facebook wants to use stablecoin with WhatsApp Pay in India to be a leader in the Indian money transfer and payment market.
Simply put, stablecoins are cryptocurrencies with less price volatility. Their price does not fluctuate as the price of Bitcoin or Ethereum does. Since stablecoin is a cryptocurrency with lower price volatility, it can serve as a good payment method. It can also leverage Smart Contract since it is a cryptocurrency (for more details, refer to the Stablecoin series by DECON).
Paying with stablecoin can solve the trust issue and remove the regulatory barriers that are currently blocking Facebook from joining the market.
1. Using data security technologies like encryption can address the trust issue. When privacy solutions such as zero-knowledge proof(a technology that can check whether data is correct or not without looking at the content of the data) finally become commercialized and be used to guarantee trust; then people will not be concerned that payment data might be compromised. Moreover, blockchain technology is renowned for its security function, and will contribute to increasing trust for the payment method.
2. Using a transaction structure that does not go through a financial institution can resolve the regulatory barrier. A payment method can be censored by the government because payment always has to go through a financial institution. Even when you pay with your debit card, the payment has to go through PG (payment gateway) and bank to be finally accepted by a seller. Without a financial institution, payment is impossible; if the government controls the financial institution, it can therefore impose regulations on any payment system.
However, value transfer on blockchain is not carried out by a financial institution. Each node that forms blockchain should agree to transfer value. The nodes need to agree upon the record that the token has been transferred. In other words, if a token owner wants to pay with his or her token and the recipient wants to take that token, it is incredibly difficult to block their action.
So far we have looked at why Facebook is trying to develop stablecoin. Facebook has continued making efforts to diversify its revenue streams, and adding a payment method is one way to do so. Its decision to develop stablecoin is in the same vein.
While Facebook has not declared why it develops stablecoin, one can infer that the advantages of stablecoin listed above would have influenced the decision.
What needs to be addressed before Stablecoin becomes
a payment method
One can hope that Facebook can solve all the problems with stablecoin, but there may be more hurdles to overcome.
First, there are regulations.
There are not yet clear regulations on cryptocurrency usage. Whether a business that accepts cryptocurrency is legal or not and how to collect tax from the profit have not been determined.
Since cryptocurrencies can be paid without a financial institution working as a middleman, the regulations mentioned above can be temporarily avoided. However, the regulations set by one’s government still have influence. Stablecoin cannot become a mainstream payment method without reaching consensus with a regulatory body.
Second, functionality as well as trust should be secured.
There is no commercialized technology to speed up blockchain processing without making it less decentralized. There are technologies to make processing faster by making blockchain less decentralized, but we are yet to see a technology that has the best of both worlds.
A high speed is required for a payment method. It may not be the best example to use, but Visa card server processes 2,000 transactions per second; this speed may be needed to allow convenience for users.
Against this backdrop, it is likely that Facebook will compromise and develop a quicker blockchain model that is less decentralized. First of all, one needs to ensure speed to offer any service.
“Less decentralized” means that a few trustworthy nodes will maintain the blockchain. The few nodes will decide whether to confirm a payment or not; therefore, the soundness of the network depends on how trustworthy these nodes are.
It will be necessary to pay attention to what Facebook will do to secure trustworthy nodes and guarantee the integrity of their activities.
So far we have looked at why Facebook develops stablecoin. In the end, Facebook wants to have a payment method to diversify its revenue sources, and stablecoin is likely going to be the method.
There are other areas where stablecoin can be used of course. For instance, you might have heard that watching an ad on Facebook will reward you with a token. But it is more than clear that the stablecoin you get as a reward will be used as payment method.
Today, not only startups but also large corporations are striving to apply blockchain to their business. It seems indispensable to identify a blockchain application strategy that best suits a company’s status and purpose.
DECON is a trusted blockchain consulting company that provides consultancy and supervision services for government agencies, large corporations, and startups from home and abroad that would like to use blockchain technology. You can go to the website to learn more and ask query in email ([email protected]).