Why use blockchain for a CBDC?

[legiteum]

I just wrote another Medium article on Central Bank Digital Currencies (CBDCs).

Here's the gist of it:

Using blockchain to create a CBDC is a waste of time and resources, and will lead to the CBDC project failing.

CBDCs, by definition, are centralized in terms of their governance. It makes no sense for a central bank to use a technology designed principally to evade centralized oversight. In short, if it weren't for the problem if evading centralized oversight into transactions, then Bitcoin would have never been invented.

Decentralized architectures cannot scale to mainstream transaction volume. This is underscored by Bitcoin's transactions that can cost 30 dollars and take 30 minutes to complete. Credit card transactions take a few seconds and typically cost less than a dollar. Haypenny currencies take single-digital milliseconds to complete and cost $0.005. Blockchain, in short, is a terrible choice, technically speaking.

And then there's the usage model, which requires users to have a key pair, which hinders the spread of the currency and makes the whole process much more clunky for end-users, which is especially problematic when introducing a brand new way of doing things to millions of users used to doing it the old way.

In short, from a pure technology and user experience standpoint, using blockchain for a CBDC is bonkers. CBDCs should instead be based on a traditional centralized architecture.

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[bte]

In short, from a pure technology and user experience standpoint, using blockchain for a CBDC is bonkers. CBDCs should instead be based on a traditional centralized architecture.

Various officials and news sources report that in the Johannesburg Declaration of 2023, the leaders of the BRICS countries agreed on the need to increase the volume of mutual settlements in national currencies. And the participants of the XV BRICS summit agreed that such an independent payment system will be based on blockchain.
Why do you think that this cannot be some really new single currency based on a closed blockchain, which the central banks of the BRICS countries will have access to, or a ledger in which all transactions of states with each other in their own fiat currencies will be recorded? This does not have to be a fast system, because payments will be made between corporations (international payments are not fast now), and not between ordinary people. The use of blockchain in this case can increase the level of trust between the participants.

[legiteum]

In short, from a pure technology and user experience standpoint, using blockchain for a CBDC is bonkers. CBDCs should instead be based on a traditional centralized architecture.

Various officials and news sources report that in the Johannesburg Declaration of 2023, the leaders of the BRICS countries agreed on the need to increase the volume of mutual settlements in national currencies. And the participants of the XV BRICS summit agreed that such an independent payment system will be based on blockchain.
Why do you think that this cannot be some really new single currency based on a closed blockchain, which the central banks of the BRICS countries will have access to, or a ledger in which all transactions of states with each other in their own fiat currencies will be recorded? This does not have to be a fast system, because payments will be made between corporations (international payments are not fast now), and not between ordinary people. The use of blockchain in this case can increase the level of trust between the participants.

Thank you for pointing that out.

Governments make stupid technical decisions all of the time because they are decided by committee. They will change their mind when they discover that blockchain doesn't scale and doesn't add any features they are interested in.

Blockchain does not, "increase the level of trust between the participants" any more than having a simple database would. Blockchain is relies on a consensus between many untrusted nodes to create a collective trust. Having just one (logical) node on either side wherein the trust is implicit (e.g. like any ordinary B2B connection) makes the use of blockchain superfluous--and blockchain has a ton of overhead in terms of system complexity, usage complexity, code complexity, and so on--and all of those factors reduce system security because they add unnecessary new things to fail, add places where the system can be breached, add new untested code and practices, and so on.

Once they figure out that they can do exactly what they want without blockchain and the system will be faster, cheaper, safer, and easier to maintain... then the committee will eventually change its mind (and given the speed at which governments work, this will probably take them about five years ).

In the mean time, governments who actually want a solution for their people with a CBDC that actually scales to handle the country's everyday transactions, they will choose a centralized architecture, not blockchain.

[bte]

In short, from a pure technology and user experience standpoint, using blockchain for a CBDC is bonkers. CBDCs should instead be based on a traditional centralized architecture.

Various officials and news sources report that in the Johannesburg Declaration of 2023, the leaders of the BRICS countries agreed on the need to increase the volume of mutual settlements in national currencies. And the participants of the XV BRICS summit agreed that such an independent payment system will be based on blockchain.
Why do you think that this cannot be some really new single currency based on a closed blockchain, which the central banks of the BRICS countries will have access to, or a ledger in which all transactions of states with each other in their own fiat currencies will be recorded? This does not have to be a fast system, because payments will be made between corporations (international payments are not fast now), and not between ordinary people. The use of blockchain in this case can increase the level of trust between the participants.

Thank you for pointing that out.

Governments make stupid technical decisions all of the time because they are decided by committee. They will change their mind when they discover that blockchain doesn't scale and doesn't add any features they are interested in.

Blockchain does not, "increase the level of trust between the participants" any more than having a simple database would. Blockchain is relies on a consensus between many untrusted nodes to create a collective trust. Having just one (logical) node on either side wherein the trust is implicit (e.g. like any ordinary B2B connection) makes the use of blockchain superfluous--and blockchain has a ton of overhead in terms of system complexity, usage complexity, code complexity, and so on--and all of those factors reduce system security because they add unnecessary new things to fail, add places where the system can be breached, add new untested code and practices, and so on.

Once they figure out that they can do exactly what they want without blockchain and the system will be faster, cheaper, safer, and easier to maintain... then the committee will eventually change its mind (and given the speed at which governments work, this will probably take them about five years ).

In the mean time, governments who actually want a solution for their people with a CBDC that actually scales to handle the country's everyday transactions, they will choose a centralized architecture, not blockchain.

If I understand the essence of the blockchain correctly as a database, consists in the fact that any data is added to it in the form of a continuous chain of data that cannot be changed and which is stored simultaneously on several computers. Probably, the BRICS governments are interested in this when creating CBDS and are not considering a solution with a conventional database. Do I understand you correctly that such a decision by government agencies cannot be implemented because of their clumsiness? But still, if we assume hypothetically that the governments have agreed and found a technical solution, do you think this is possible at all?

[legiteum]

If I understand the essence of the blockchain correctly as a database, consists in the fact that any data is added to it in the form of a continuous chain of data that cannot be changed and which is stored simultaneously on several computers. Probably, the BRICS governments are interested in this when creating CBDS and are not considering a solution with a conventional database. Do I understand you correctly that such a decision by government agencies cannot be implemented because of their clumsiness? But still, if we assume hypothetically that the governments have agreed and found a technical solution, do you think this is possible at all?

You can safely store data using any number of technologies, e.g. the traditional data stores that hold bank accounts and other critical financial information. Every day, trillions of dollars in wealth are moved around using these systems, and they run the everyday lives of basically everybody on the planet.

Blockchain doesn't guarantee a server on the network can't change anything--it absolutely can--it merely creates a consensus among nodes that you do not trust.

In other words, if somebody was able to simultaneously hack most of the Bitcoin nodes all at once, they would effectively control all of Bitcoin. The reason Bitcoin (and other broadly used cryptos) are safe from this attack is that they have so many nodes that such an attack is extremely unlikely.

This is what blockchain is for. Now you can understand how ridiculous that is to use for two known and trusted entities to communicate with each other.

As for whether a government could implement some sort of solution for very low volume transactions, well, I guess if you throw enough money at a problem you could do almost anything. But I suspect the people working on the project will wonder why they are wasting their time like this. And the project would get bogged down when they discover that their project has all of the other safety and security challenges of a financial project like this in addition to dealing with blockchain.

For me, the CBDC silence right now is deafening: no major country has achieved any sort of ubiquity with their CBDC, they are all currently in the exploratory phase, or in a pilot phase, or adopted very sparsely.

I predict there will not be a mainstream CBDC until countries figure out they need to drop blockchain.

[bte]

You can safely store data using any number of technologies, e.g. the traditional data stores that hold bank accounts and other critical financial information. Every day, trillions of dollars in wealth are moved around using these systems, and they run the everyday lives of basically everybody on the planet.

Blockchain doesn't guarantee a server on the network can't change anything--it absolutely can--it merely creates a consensus among nodes that you do not trust.

In other words, if somebody was able to simultaneously hack most of the Bitcoin nodes all at once, they would effectively control all of Bitcoin. The reason Bitcoin (and other broadly used cryptos) are safe from this attack is that they have so many nodes that such an attack is extremely unlikely.

This is what blockchain is for. Now you can understand how ridiculous that is to use for two known and trusted entities to communicate with each other.

As for whether a government could implement some sort of solution for very low volume transactions, well, I guess if you throw enough money at a problem you could do almost anything. But I suspect the people working on the project will wonder why they are wasting their time like this. And the project would get bogged down when they discover that their project has all of the other safety and security challenges of a financial project like this in addition to dealing with blockchain.

For me, the CBDC silence right now is deafening: no major country has achieved any sort of ubiquity with their CBDC, they are all currently in the exploratory phase, or in a pilot phase, or adopted very sparsely.

I predict there will not be a mainstream CBDC until countries figure out they need to drop blockchain.

In my opinion, the traditional technologies of issuing money and storing it have compromised themselves, I mean that the US may have debts that will never be paid and a currency with which they can manipulate other countries. And perhaps other countries are considering blockchain precisely for the reason that this technology can ensure that none of the participants will engage in uncontrolled emission, for example.

In addition to Proof of Work, we know such a consensus algorithm as Proof of Stake, and in the case of creating a CBDC, we are probably talking about something similar, there is no need for such a number of nodes as in the Bitcoin network.

Thus, if I understand the problem correctly, states implementing a single currency for mutual settlements using blockchain technology can, in addition to standard legal procedures (intergovernmental agreements and so on) they can secure the emission and circulation of CBDC between each other, including technically.

[legiteum]

In my opinion, the traditional technologies of issuing money and storing it have compromised themselves, I mean that the US may have debts that will never be paid and a currency with which they can manipulate other countries. And perhaps other countries are considering blockchain precisely for the reason that this technology can ensure that none of the participants will engage in uncontrolled emission, for example.

In addition to Proof of Work, we know such a consensus algorithm as Proof of Stake, and in the case of creating a CBDC, we are probably talking about something similar, there is no need for such a number of nodes as in the Bitcoin network.

Thus, if I understand the problem correctly, states implementing a single currency for mutual settlements using blockchain technology can, in addition to standard legal procedures (intergovernmental agreements and so on) they can secure the emission and circulation of CBDC between each other, including technically.

Fiscal deficits and national debt is a political problem, not a technical one. We don't have a national debt because banks use relational databases to store bank accounts. Blockchain not only won't help this problem, it has nothing whatsoever to do with it.

And a CBDC--no matter how it's implemented technically--will not change the value of the currency that is being digitized.

A CBDC is just a digital form of an existing sovereign currency. It doesn't solve any broader problems than making it so people don't have to carry around physical paper cash and metal coins.

[bte]

In my opinion, the traditional technologies of issuing money and storing it have compromised themselves, I mean that the US may have debts that will never be paid and a currency with which they can manipulate other countries. And perhaps other countries are considering blockchain precisely for the reason that this technology can ensure that none of the participants will engage in uncontrolled emission, for example.

In addition to Proof of Work, we know such a consensus algorithm as Proof of Stake, and in the case of creating a CBDC, we are probably talking about something similar, there is no need for such a number of nodes as in the Bitcoin network.

Thus, if I understand the problem correctly, states implementing a single currency for mutual settlements using blockchain technology can, in addition to standard legal procedures (intergovernmental agreements and so on) they can secure the emission and circulation of CBDC between each other, including technically.

Fiscal deficits and national debt is a political problem, not a technical one. We don't have a national debt because banks use relational databases to store bank accounts. Blockchain not only won't help this problem, it has nothing whatsoever to do with it.

And a CBDC--no matter how it's implemented technically--will not change the value of the currency that is being digitized.

A CBDC is just a digital form of an existing sovereign currency. It doesn't solve any broader problems than making it so people don't have to carry around physical paper cash and metal coins.

Thank you for your article, your opinion and our interesting discussion! It's a pity that no one else joined her. This is probably too serious discussion for this serious forum thread

[bte]

Meanwhile, the official website brics-pay.com CBDC BRICS informs that when it is created, blockchain technologies will be used, which are based on decentralization and tokenized assets, whatever it means

[legiteum]

Meanwhile, the official website brics-pay.com CBDC BRICS informs that when it is created, blockchain technologies will be used, which are based on decentralization and tokenized assets, whatever it means

I bet it either never sees the light of day unless they change the technology.

Or they use it with extremely low volume, making it no different than using any other asset that banks use.

[NeuroticFish]

In short, from a pure technology and user experience standpoint, using blockchain for a CBDC is bonkers. CBDCs should instead be based on a traditional centralized architecture.

That's 100% correct.
Still, some may try to use blockchain, not necessarily as technology, more as a buzz word for the masses that will not know nor care if a blockchain is actually used or not, but may believe (with enough money pumped into newspapers and other advertising) that those CBDCs "are like bitcoin".

[bte]

Perhaps you and I understand blockchain differently as a technology. After all, it is used by companies such as Microsoft, IBM and many others. They consider this a new stage in the evolution of Big Data. I see no reason why another organization in this case, the BRICS, cannot join hundreds of other companies. Perhaps, when you say "blockchain", you don't mean a specific technology that is written about in Wikipedia, but some kind of specific ideology?

[legiteum]

Perhaps you and I understand blockchain differently as a technology. After all, it is used by companies such as Microsoft, IBM and many others. They consider this a new stage in the evolution of Big Data. I see no reason why another organization in this case, the BRICS, cannot join hundreds of other companies. Perhaps, when you say "blockchain", you don't mean a specific technology that is written about in Wikipedia, but some kind of specific ideology?

Blockchain is absolutely not used by Microsoft, IBM and many others. Some of those companies sold tools to help companies try to build blockchain solutions, but no company has ever built a certified solution with those tools. There was a lot of hype created by Bitcoin, but it was just hype. But with billions of dollars in market cap for Bitcoin, companies blindly signed up for the hype even if it made no technical sense.

There are no documented design wins for blockchain outside of popular cryptocurrencies like Bitcoin. None. Zero. Nada. I have asked for this high and low. I created a whole topic here on this forum months ago, and have asked for proof in many other places as well.

And why is that? Because blockchain has only one clear value-add, which is evading government access to transactions. No established corporation can possibly have this problem by definition. "Enterprise blockchain" is like "vegetarian filet mignon". It makes absolutely no sense.

And by blockchain I mean the software architecture outlined in the original Bitcoin whitepaper, and the technology that thousands of other cryptocurrencies are based on. It is a technology designed to achieve effective governance of a data source (in this case, a ledger) through a popular vote of participants in a network instead a single entity that can be subjected to a government subpoena.

If you aren't trying to avoid a government subpoena, blockchain is an absolutely pointless waste of time.

[bte]

And by blockchain I mean the software architecture outlined in the original Bitcoin whitepaper, and the technology that thousands of other cryptocurrencies are based on. It is a technology designed to achieve effective governance of a data source (in this case, a ledger) through a popular vote of participants in a network instead a single entity that can be subjected to a government subpoena.

Let me clarify once again, do you dispute the description of blockchain technology that is given on Wikipedia  or that as an example Gary Gensler voiced in his lectures for MIT ? This technology can used to create a private rather and a public blockchain, and it does not cease to be a blockchain. Because now your thesis sounds something like "a wheel is only a wheel when used in a horse cart, because it was invented for this purpose", and if it is used for a car, it is no longer a "real wheel".

[legiteum]

Let me clarify once again, do you dispute the description of blockchain technology that is given on Wikipedia  or that as an example Gary Gensler voiced in his lectures for MIT ? This technology can used to create a private rather and a public blockchain, and it does not cease to be a blockchain. Because now your thesis sounds something like "a wheel is only a wheel when used in a horse cart, because it was invented for this purpose", and if it is used for a car, it is no longer a "real wheel".

No, I don't dispute the description of blockchain in Wikipedia.

And yes, blockchain can be used in a non-distributed fashion--but that's absolutely idiotic. You can also, for instance, write a modern 3D shooter in Perl. Or you can run all of your banking software with flat files instead of a relational database. But why would you do that?

The only valid reason to use blockchain is to evade government oversight into transactions. If you are not trying to do that, blockchain needlessly complicates your architecture, reduces security (because of the added system complexity), and needlessly limits performance to mere Bitcoin levels, which is not ever remotely close to the level of performance you'd need to serve even the tiniest of countries with a mainstream CBDC.

If Satoshi wrote his whitepaper and said, "here's a great way to store data in an enterprise" people would have called him an idiot and his architecture would have never been heard from again. Bitcoin took off because it was a way to evade government subpoenas into transactions. That's the only reason you would resort to such an architecture. If you aren't trying to do that, it's a waste of time and resources.