5 Reasons Plasma Blockchain Is The Perfect Fit For Central Bank Digital Currency (CBDC)

In Blog, Enterprise by OMG Network

This blog is a transcript of a segment from our webinar “Why Blockchain For CBDC?” that we held on the 12th November. If you’d like to get first dibs on tickets to our events and webinars, sign up for our newsletter.

Up till now, we’ve discussed topics that could apply to any CBDC or any blockchain platform. Now we’ll address why we think plasma technology, in particular, is the right choice for a retail CBDC system. As we mentioned previously, there’s a strong alignment between our mission and the goals of a CBDC. As such, we also have a strong alignment between Central Banking needs and plasma functionality.

In a recent BIS Paper, they outlined the foundational principles and core features of a CBDC. These covered three types of features, system, instrument, and institutional. While institutional features are beyond the control of a tech provider, we believe we can help shape those while meeting system and instrument requirements.

Before we get into the features of plasma, let us quickly scan through the items that will likely be met simply through the use of blockchain technology. Or, as Kasima mentioned, through thoughtful system design.

5 Reasons Why Blockchain For Central Bank Digital Currency (CBDC)

Convertible – There is some skepticism that a stablecoin can hold its peg in the long term. However, as long as the Central Bank and the financial system continue to honor CBDC at a 1:1 exchange rate, our hope is that a secondary market with a different value is unlikely.

Convenient – and widely accepted is dependent on the platform’s architecture and the regulations that control access. We recommend an open platform that can ease integration with third-party systems.

Cost – will be determined by network participants with the Central Bank governing that range. While infrastructure costs may play a role in pricing, those costs are likely to be absorbed by national budgets.

Programmable – is an instrument feature we added to the BIS list. There is much discussion around smart contracts and their ability to trigger automatic payments, support the safe exchange of payments between untrusted parties, etc. Smart contracts do have the ability to create transformative features. However, in addition to the possibilities that smart contracts provide, open architecture can provide similar advanced functionality – without the complexity of smart contract design – by allowing business logic and application layers to be built on top.

Security – will always be a needed feature for a system of this importance. Blockchain meets that need with some of its basic features such as an immutable log, consensus mechanisms, and the cryptographic algorithms behind public/private key pairs.

Resilience and Availability – are met mostly by the fundamental nature of having a distributed system. Without a single source of failure and data availability apart from a central entity, balances and access to them is difficult to disrupt. There are concerns around access during electrical or internet disruption. And while those are problematic, off-line or emergency balances are possible and could additionally support government aid in the case of a natural or other type of disaster.

5 Reasons Why Plasma Blockchain Can Make Central Bank Digital Currency (CBDC) A Success

That leaves five key features that we believe plasma can uniquely solve. Before we delve into the benefits of plasma, let us give a high-level overview of the technology. The plasma protocol is a two-tier system with an Ethereum-based rootchain and a plasma Childchain. Ethereum, as one of the two leading blockchain networks, has proven itself capable of handling large scale systems securely. However, it does have some limitations.

The More Viable Plasma (MoreVP) protocol was designed to overcome these and optimize functionality for value transfer. It does this by batching transactions on the Childchain through the creation of child blocks. These childblocks are then hashed with the hash submitted to the rootchain at regular intervals. This allows the Childchain to remain non-custodial and retain the security level of the rootchain while achieving a throughput in the thousands per second.

Thus, while plasma maintains the benefits of Ethereum, it also enables the following CBDC requirements:

a) Near-Instant Settlement

First, as just mentioned, by batching transactions into child blocks, we can achieve throughput in the thousands.
Second, it leverages the Proof-of-Authority consensus mechanism to increase block production efficiency.
And third, through transaction chaining, outputs can be used as an input for a subsequent transaction without having to wait for finality on the rootchain. This enables fast sequential transactions.

b) Scalability

Plasma is also both horizontally and vertically scalable. A single Childchain can host a practically infinite number of nodes and wallets to meet a particular nation or consortium’s needs. Plus, a single rootchain can host an increasing number of plasma Childchains as well, supporting future integrations across multiple CBDC networks. With the ability to handle high transaction volumes and scale as needed, the plasma protocol can support the transaction needs of today and tomorrow.

c) Ease of Integration

Image

Our CBDC platform is visualized above. Its core component is the distributed ledger consisting of the root and child chains and watcher network. It is optimized for CBDC by the API integration suite designed to support all business-level functionality with the ability to adapt to meet the needs of next-gen fintech services.

This API suite communicates directly with our CBDC software that allows the central bank and intermediaries to interact with the system. Supporting systems can also be integrated directly to the API suite or through the CBDC software platform. These systems include identity services, financial systems, wallet providers, cashless payment services, and more.

And depending on the design decisions made by the central bank, intermediaries, wallet providers, and non-custodial wallets can all communicate directly with the API suite as well. The CBDC-optimized functionality is abstracted, making integration easy and allowing for multiple fintech and wallet providers to leverage the same ledger without needing to understand the complexity of the blockchain.

We’ve also developed a working prototype of our CBDC platform to manage the entire CBDC lifecycle. We’ve engaged with multiple central banks to understand their needs and have incorporated them into our platform.

d) Supports Convertibility

The CBDC wallet application can support multiple asset types. We foresee integration with multiple CBDC networks as a high possibility. In addition, the tokenization of government securities is a logical next step after CBDC implementation. Thus, the wallet needs to be able to hold and transact with multiple token types. The wallet will also serve as the main interface for accessing token balances and transaction history.

In addition, to support convertibility, users can purchase or redeem CBDC for traditional fiat through the wallet by leveraging a linked account or possibly through an in-person kiosk. Finally, as all wallets do, transfers of all types are supported from B2B, P2P, B2C, and a series of other acronyms.

e) Ease of Use

The CBDC platform also has two dashboards. One focused on Central Bank functionality and the other on Intermediaries.

For the Central Bank, they will have the ability to:

  • Mint, issue, and burn CBDC tokens

And for both central banks and intermediaries, they will have the ability to:

  • Create new custodial wallets

  • Perform custodial wallet management

  • Complete disbursement and transfer functions

  • Implement system access management to ensure only authorized users are able to act on behalf of the central bank or intermediary.

  • Access transaction data in support of audit, regulatory, and analytical needs.

With the available platform and supporting software, we envision the future monetary system will transform from an analog to a digital system – all the way from issuance to customer spending. Leveraging lessons learned from the current blockchain ecosystem as Kasima discussed, the new lifecycle involves multiple wallet types and settlement accounts. Highlights include:

  • Secure issuance of CBDC within the platform.

  • Quick distribution and redemption between the central bank and intermediary wallets.

  • Permanent destruction of CBDC by burning tokens, rendering them unrecoverable.

  • And easy access to CBDC for a variety of uses through integration with existing cashless systems or creation of innovative new services.

This is just one possible flow as the possibilities for a CBDC are endless, just like the ones for cash.


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